In era of low interest rates, choices abound for prospective homebuyers


With long-term mortgage rates dipping below 7 percent for the first time in 25 years, you would think the housing market would be percolating. And it is.

In fact, the current economic outlook from the National Association of Realtors predicts that there will be more than 3.6 million sales of existing single-family homes in 1993, making this the best year for resales since 1979, when just more than 3.8 million units changed hands.

New single-family housing starts will be far stronger this year as well, with 1.1 million units predicted to go in the ground, up from 1 million in 1992 and just 840,000 in the recession year of 1991.

Lower interest rates have the happy consequence of making housing more affordable for everyone, allowing some people the ability to purchase homes who otherwise would be shut out by the required higher monthly payments that higher rates bring.

But lower interest rates also allow prospective homebuyers to purchase more expensive housing for the same monthly payment, meaning that many recent buyers are able to get bigger or newer houses than they might have otherwise.

The point is, in a low interest rate environment, housing consumers have more choices than they do when rates are so high they must take only what they can afford.

And that is altering some of the tried-and-true wisdom that real estate gurus have been dispensing for two decades now.

One of the most profound changes is the narrowing of the gap between the affordability of new homes and existing homes. Where once it was a foregone conclusion that a resale house would provide better value, new statistics show that new homes can be bought with little additional impact on the budget.

U.S. Housing Markets, in its annual report on costs of housing in America, reports that the typical home-buying household is disbursing 25 percent of its income each month for housing payments.

But last year the typical new home payment was taking 27 percent of the buyer's income, while an existing home cost 24 percent of income.

That 3 percent gap is as small a difference as has existed between the two housing types since 1982.

Although rising lumber prices and limited homebuilder inventory have driven up new home prices recently, the gap has not widened significantly, said Laura Sutherland, vice president of marketing for Lomas Mortgage USA.

U.S. Housing Markets is a publication of Lomas Mortgage USA, the Dallas-based financial firm that handles home mortgages for more than 600,000 households nationwide.

The cost of housing is only one of the things that prospective buyers analyze when deciding between new and existing homes.

New homes, for instance, often offer more modern layouts, new appliances, fewer initial maintenance headaches, the chance to

customize rooms or designs and other features that existing homes cannot.

Buying a resale home, though, has its own advantages, often offering an established neighborhood, mature landscaping, classic architecture or style and location close to the city or inner suburbs.

But for many, the decision comes down to price. Just a decade ago, the average new home cost 33 percent more than the typical existing home, a difference that has driven a decade's worth of younger and first-time purchasers toward existing housing.

As the gap has narrowed, that trend is being reversed. Housing consumers now may consider new and existing purchases on an almost equal financial footing, a fact that means homebuilders and existing home sellers are free to concentrate on the other advantages of their product type.

While the scenario looks pretty rosy from the standpoint of housing costs for those who already own or are just buying homes, the U.S. Housing Markets report also shows a flip side that is not very pretty: the continued inability of many would-be homebuyers to surmount down payment and closing cost hurdles.

Last year, the initial outlay for a housing purchase, which included down payments, closing costs and other fees, was $31,590 for an average home with a 20 percent down payment.

That was just $80 less than in 1991.

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