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novahomesick

Thomas Jefferson Was a Failed Real Estate Investor?

novahomesick
16 years ago

Who Knew? Here's a reminder that real estate cycles. Flashing back to 1991, it may get worse BUT it will get better one day.


"REAL ESTATE CYCLES: HISTORY'S WILD ROLLER COASTER RIDE

The Washington Post .

Author: Jacqueline L. Salmon

Date: Mar 9, 1991

Section: REAL ESTATE

Text Word Count: 1207

"In today's world, most people would be happy just to have things not get worse."- area banker in 1981 "I don't see this boom ending."- area real estate agent in 1988

From the depths of the slump to the giddy days of 20 percent annual appreciation. And back to the depths again. That's the roller coaster ride through which the 1980s sent the real estate market here.

Much comparison has been made between the latest slump and past residential real estate downturns. Each time, there have been predictions of doom and disaster. And each peak following the bust has brought confident assumptions that the good times would never end.

In reality, the real estate cycle - the gut-wrenching lows when home buyers are scarce, and the highs, when home buyers bid prices up - is a fact of life, just as much as the overall economic cycle.

And, while the Washington area housing market has a reputation for being a steady climber, it actually has mirrored the national picture, suffering through the same bumps and jolts as other areas, albeit without the wild swings of, say, Texas during the 1980s.

Even such historical figures as George Washington, Thomas Jefferson and James Madison were caught in one local downturn, according to real estate historian Marc A. Weiss of Columbia University. Hoping to cash in on growth in the nation's capital, the three bought lots in 1791 from the federal government when it sold land to fund the city's development. Shortly thereafter land prices collapsed, leaving the three with virtually worthless investments. It took decades for the city's real estate market to recover, Weiss said.

For the next 150 years, American real estate booms and busts tended to be confined to land, instead of individual homes, Weiss said. In the 1920s, for example, a feverish rush to buy land in Florida culminated in a collapse of prices.

But after World War II, when more Americans began to buy their own homes, the cycles belonged to housing. Since World War II, there have been seven housing cycles, said housing economist Michael Sumichrast.

However, despite downturns in the number of homes constructed and sold during each trough of the real estate cycle, prices have never taken a similarly downward spiral. In fact, only five times in the post-World War II era have prices failed to rise faster than inflation, according to Michael K. Evans, president of Evans Economics, a D.C. consulting and forecasting firm.

David Seiders, economist for the National Association of Home Builders, said, "Each cycle ... has its own key features," though when viewing them all together, it "looks like a fairly regular roller coaster."

"It's like a hurricane," said Bo Young, president of Miller & Smith Homes Inc., who has been in the home-building business in the Washington area for the last 20 years. "Each (slump) has its own little path that it takes. But it's always deadly and it's always devastating."

Before the current downturn, the most recent slump was in 1981-1982, when soaring interest rates crushed would-be home buyers' hopes of purchasing homes and pushed the number of housing starts down nationally to 1.07 million units. That slump was called "the worst housing market since the Great Depression." Builders and realty firms went broke and entire subdivisions stood idle.

The market rebounded, however and hit its peak in 1986, when construction was started on more than 1.8 million houses and apartment units. A rush to buy homes hit both coasts of the United States, boosting construction and housing prices.

Then, almost imperceptibly, the market began a slow descent. Multifamily-home construction went first when tax-law changes made it less advantageous to build apartment and condominium buildings. In 1988, construction of single-family houses began to sag. The decline accelerated in 1989 and 1990. Nationally, construction was started on only 1.2 million units last year. That's the lowest level since the 1981-82 slump.

The Washington area mirrored the national trend. The market peaked in 1986, when 42,707 housing permits were issued, then began a slow descent that also picked up speed in 1989. By last year, housing permits had plummeted 42 percent to 24,687, according to economist Robert J. Sheehan of Regis J. Sheehan & Associates, which tracks building-permit activity.

"The signs were all there that trouble was coming," Sumichrast said. "but nobody looked at them."

What makes the current U.S. downturn unique, economists say, is that soaring mortgage rates have not been a major factor in slowing sales. Rather, it was a combination of factors.

First, tax-law changes slowed multifamily-housing construction. Then, too much construction, caused when builders rushed in to meet then-booming demand, overwhelmed housing markets with too many higher-priced houses and too few qualified buyers. And economic weakness, which spread from the Northeast to the South and the West, slowed job growth, leaving fewer workers to soak up the excess housing under construction.

"This is really the first in recent periods of downturns that came from the weight of overbuilding without any interest rate peak that caused the overbuilding to become apparent," said Susan Wachter, an economist at the Wharton School of Real Estate.

The Iraqi invasion of Kuwait, which sent oil prices soaring and shook consumer confidence, dealt the housing market another blow last August.

The good news, say economists, is that the glut of housing is not nearly as severe as the excess of office and industrial space.

"We just don't have that much of an overbuilding (problem). It's nothing like commercial, which has 20 percent vacancy rates," Wachter said.

When will the housing market make an upturn? There is a growing sense among economists and other analysts that the downturn has hit bottom. Climbing out of the current trough, however, will take time, they said.

"Theoretically, at least, we can have a big bounce (back), but we won't," Evans said, . citing such economic problems as slow wage growth, flat productivity, the cost of paying for the many failed savings and loan institutions and the growing federal budget deficit that will put the brakes on a fast economic recovery.

"The basic fundamentals for the 1990s show slower growth than in any decade since 1945," said real estate economist Anthony Downs of the Brookings Institution.

Downs said he is particularly concerned that the credit crunch will inhibit a recovery in the housing market. It is extremely difficult these days for builders in most areas of the country to borrow money from their traditional lenders - commercial banks and savings and loan institutions - to fund land purchases and home construction.

And Downs fears that when housing demand picks up, builders won't be able to satisfy it. While the resulting shortfall in demand could drive up the prices of existing homes, it also dampens higher levels of housing construction, which help lead the country out of a recession.

Sumichrast foresees modest growth in the real estate market as the industry works off its overbuilding. Nationally, he expects housing starts to stay at recessionary levels of 1.1 million units annually in 1991 and 1992."

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