What's Ahead for Home Prices Our table indicates that most areas will enjoy slow but steady appreciation -- a welcome mat for buyers, sellers and homeowners.
By KERRY HANNON

(MONEY Magazine) – Trying to figure out whether your home's value is about to rise or fall can be devilishly confusing these days. First, the National Association of Realtors suggested that boom times were back, reporting in May that existing home prices were 6.7% higher in the first quarter of 1992, on average, than they had been a year ago. A few weeks later, though, the Commerce Department announced that home-building starts had dropped a steep 17% from March to April, down to an annual rate of 1.1 million, a decline that led some gloomsters to yell: ''Bust!'' The truth is that home values will probably edge out inflation for the next several years in most areas. Exclusive projections made for MONEY by the WEFA Group, an economic forecasting firm in Bala Cynwyd, Pa., show U.S. median home values rising 2.52% after inflation between now and 1995 (assuming annual inflation averages 3.66% during that time). Such modest price gains would be down sharply from average yearly after-inflation increases of 10% in the 1970s and 4.4% in the '80s. As the table on the preceding page shows, among the 50 biggest U.S. cities, which are home to about 45% of the U.S. population, Chicago residents may get the best after-inflation run-up, 4.84% through March 1993. Helping Chicago: its 16,000 manufacturing firms, many of which are enjoying an export bonanza and hiring again. The WEFA runners-up: Baltimore (2.95%), Cleveland (2.84%) and San Antonio (2.84%). The longer-term projections in WEFA's home-price survey range from Chicago's 7.32% '92-'95 after-inflation gain to a not-so- scary drop of 2.58% in Salt Lake City, where slow population and job growth will cap housing demand.

While the real estate speculators may be disappointed, slow but steady housing appreciation can be a help to buyers, sellers and homeowners. Buyers need not rush to bid just to beat price spirals. And sellers and owners need not worry about sudden devastating losses, such as those absorbed by Boston residents in 1990 when prices plummeted 10.7%. Boston's woes stemmed from job losses at high-tech, construction and financial service firms, among other factors. Steady home appreciation could also buoy the U.S. economy. According to a recent Federal Reserve Board report, national home equity (the market value of all homes minus their mortgage debt) tumbled by 16.6% in 1990, an average of $6,300 per home. That decline, in turn, deepened the recession. ''Since a family's home is its biggest asset, a fall in wealth -- even if it is only a paper loss -- can scar consumer confidence and the economy in general,'' says Michael Wilson, director of research for the U.S. League of Savings Institutions. But rising prices, Wilson says, encourage spending and pump up the economy. WEFA's forecast provides much needed relief from the head-spinning statistics making the evening news lately. It is true, as the National Association of Realtors reported, that some small cities had big gains -- for example, median existing house values rose 26% from a year ago in Spokane and 19% in Cedar Rapids, Iowa. But ''the numbers are deceptive,'' says Lyle Gramley, chief economist at the Mortgage Bankers Association. ''Price increases look big because they're coming off a real low in 1991 during the recession. This is not a housing boom.'' On the other hand, April's sharp decline in housing starts was probably an aberration. The February and March starts figures were artificially high, thanks in part to unusually warm weather.

Among the forces driving up home prices are falling mortgage rates and a stabilizing unemployment level. The average 30-year, fixed-rate loan goes for 8.73%, down from 9.1% in late March, and most economists believe the average rate will stay below 9% at least through year-end. And new buyers may enter the market if the unemployment rate declines from 7.2% to 7% by December, as expected.

While national trends set the tone of the housing market, home values in your area depend primarily on local conditions -- as always. For example, WEFA projects that Miami will see a welcome 12-month home-price rebound of 2.54%, after inflation. Prices slid almost 6% from mid-1990 to early '91, when the collapse of Eastern and Pan American airlines cost the city nearly 10,000 jobs. But a fresh influx of immigrants -- and investment money -- from Latin America has begun to revive real estate there. Alfred Fernandez, the chief financial officer of a biotech company, and his wife Donna, a homemaker, have taken advantage of the boon over Miami. In May, after two years of trying, they finally sold their three-bedroom, 2,700- square-foot home in suburban Coral Gables for $310,000, about 20% less than their original asking price of $390,000. Acting quickly, Alfred, 43, and Donna, 40, traded up, snagging a 3,100-square-foot, four-bedroom, Spanish- style house with a swimming pool in Coral Gables for $335,000, 14% less than its $389,000 list price. ''I feel like I've hit the lotto,'' says Donna.

By contrast, Los Angeles was among the nation's weakest housing markets even before April's tragic riots (see ''Where Dreams Went Up in Smoke'' on page 132). Hit by staggering job losses in military contracting and banking, the area's inflation-adjusted home values are expected to decline 0.36% in the next year and fall 1.38% by early 1995, according to WEFA. ''Los Angeles' future is now even grimmer in the aftermath of the riot and looting,'' says analyst Mark Zandi, managing director of Regional Financial Associates, a West Chester, Pa. research firm. % To judge how much your home is worth today, call your local Board of Realtors. Ask for recent sales prices of three houses in your neighborhood that are about the same size, age and condition as yours, plus the number of days it took to sell them. Find out too how many local houses were first listed last month and how many sold. If there has been a steady decline in the average number of days houses have stayed on the market, chances are prices are on a rebound. But when more than six houses are coming on the market for every one sold, prices are not likely to climb soon. People looking to buy a house shouldn't count on snaring one at a huge discount of 25% or more off the asking price as they might have last year. Real estate agents say sellers are far less likely to accept wild lowball offers. In fact, negotiators on both sides of the table seem to be taking a more realistic attitude. The reason: It's far easier to agree on the right price now that prices have stopped jumping around so much.

CHART: NOT AVAILABLE CREDIT: Sources: the WEFA Group, projections; National Association of Realtors, median prices CAPTION: The hopeful outlook in the 50 largest cities