Around U.S., a House Is a Home but Not a Bonanza

August 6, 2003

FORT WAYNE, Ind. - On a tree-filled boulevard known as
Doctors' Row, the four- and five-bedroom brick Tudor homes
that are the jewels of this city's housing stock were
selling for about $150,000 two decades ago. At the time,
some homes in the nation's most desirable suburbs, like
Brookline, Mass.; Sausalito, Calif.; and Great Neck, N.Y.,
cost the same.

Over the last 20 years, however, the nation's housing
market has been cleaved in two, and the break has helped
create two very different economies in one country.

Homes in the areas that were already the most expensive -
California and the Boston-to-Washington corridor - have
often doubled or tripled in value, even after adjusting for
inflation. The increases have created nest eggs for
longtime owners and allowed them to borrow billions of
dollars against their equity, financing new kitchens and
college educations and keeping the current economic malaise
from being far worse than it might have been.

But while the boom has become the subject of daily
conversations among the middle class and affluent in New
York, San Francisco and Los Angeles, people in much of the
country have little housing bounty to tap for home
improvements, retirement or other needs. From Fort Wayne to
Rochester to Salt Lake City, the prices of typical homes
across most of the country's vast middle have risen just
ahead of inflation - and more slowly than incomes. The cost
of homes in the most expensive cities is now about six
times that in the least expensive, up from a ratio of three
to one two decades ago.

Here in Fort Wayne, the homes with elegant porticoes and
broad lawns on Doctors' Row sell for about $300,000 today,
roughly the same as they did in the early 80's, after being
adjusted for inflation.

Not a single house in Fort Wayne - a small,
manufacturing-heavy city halfway between Chicago and
Detroit, with a jobless rate below the nation's - has sold
this year for more than $800,000, according to real estate
industry data. That is roughly the average price of a
two-bedroom apartment in Manhattan.

"The real housing boom is fairly concentrated," said Mark
M. Zandi, the chief economist of Economy .com, a research
firm. "And at the moment, it is clearly keeping the economy
afloat in those areas."

There is no such cushion throughout much of the nation's
interior. Some economists argue that the Federal Reserve's
aggressive interest rate cuts might have been more
effective at ending the economic slowdown if the gains in
house prices - and the potential they create for consumer
spending - had been more broadly shared.

Last year, Tom and Judy Auer sold the four-bedroom Fort
Wayne house where they raised their three children for
$107,900, or slightly less than the $34,000 they bought it
for in 1974, after adjusting for inflation. Without a
bonanza from the sale, the couple now live in a smaller
house in Fort Wayne, relying on the pension from Mr. Auer's
job as a hardware salesman at Sears, Roebuck and Social
Security, which they began drawing early.

Marva and Bill Herx, on the other hand, left Fort Wayne in
1998 to move to the Philadelphia suburbs for his job. When
they returned last year, they had made enough profit
selling their Pennsylvania house - for about 40 percent
more than the purchase price - that they were able to move
into a house in Fort Wayne noticeably bigger than the one
they had left.

"The home costs in Fort Wayne have stayed pretty much the
same," said Ms. Herx, who is in her 50's. "In Philadelphia,
we made a good profit in just four years."

The dynamic is reversed for younger adults, who are
struggling to afford houses on the coasts while their
counterparts elsewhere in the country are taking advantage
of low mortgage rates to buy bigger, better homes than in
the past.

"All my friends in Fort Wayne have houses. I think the
biggest thing in the world I own is a cellphone," said
Michael Korte, a 28-year-old Fort Wayne native who works
for the City Council in New York and rents a two-bedroom
apartment along with his sister, brother-in-law and nephew
on the Lower East Side. "It blows my mind."

For $102,000, Brady Gerding, a high school classmate of Mr.
Korte, recently bought 27 acres of land outside of the city
where he and his wife will build a house. It will be the
second house owned by Mr. Gerding, who, unlike Mr. Korte,
did not graduate from college.

"You can still live like a king in Fort Wayne for
$200,000," said Linda Duesler, who has been selling houses
here since 1977. "And you can live pretty well for

Beyond determining many families' wealth and standard of
living, the two-tier housing market has begun to create
difficult questions for government officials trying to
create policies that apply to the entire nation. For
example, when designing pensions, it becomes very difficult
to judge the ability of people to retire because their
finances might be in much better shape than their income

Some top universities, meanwhile, recently announced that
they would no longer consider the entire value of many
homes when determining financial-aid awards. University
officials had become concerned that the values exaggerated
some households' abilities to pay tuition.

If the price boom in some cities is a result of a bubble,
as some economists warn, many of the people who borrowed
against their homes might come to regret it. If mortgage
rates were to continue rising and prices on the coasts were
to drop, many people could end up with loans they could not
repay by selling their houses.

So far, however, the housing boom has been an important
economic salve for the regional economies of the Northeast
and California.

In the San Jose, Calif., area, home to the slumping Silicon
Valley, households have raised about $10,000 on average
since the start of 2002 simply by taking additional equity
out of their homes when refinancing a mortgage, according
to Economy .com. In Boston and Washington, they have taken
out about $4,000. In much of the Midwest, they have taken
out less than $2,000.

In fact, households in the middle of the country that fall
behind on mortgage bills cannot rescue themselves by
dipping into their rising home equity and making up for a
series of missed payments in one swoop. The states where
home foreclosures have spiked most sharply since 2000 -
including Indiana, which tops the list - are in the Midwest
or Southeast.

"The only reason that mortgage delinquencies aren't soaring
in the entire country is that house prices are still
rising," Mr. Zandi said.

The housing gulf stems in part from the relative open space
and lack of building regulations away from the coasts that
allow builders in Fort Wayne and elsewhere to put up new
homes as soon as there is demand for them, and sometimes
even before. Prices in Austin, Tex., and Las Vegas, two
fast-growing areas, have risen only moderately, for
example, as high-ceilinged houses with room-size closets
have sprung up over the last decade.

The gulf is also a byproduct of trends that have drawn
educated, highly skilled people to the coasts. The surge of
global trade and the growth of finance, health care and
other white-collar industries have led the Northeast's and
West Coast's share of the nation's economy to grow to
almost 45 percent, from 39 percent in 1980, according to High-earning workers have followed the jobs,
and not even an economic downturn that has hit Wall Street
and Silicon Valley particularly hard has reversed the

"We are seeing a migration pattern of talented, creative
people that we may never have seen before," said Richard
Florida, a professor of economic development at Carnegie
Mellon University in Pittsburgh. "More and more people are
demanding what's found in New York and Boston and San
Francisco, and there's not enough space to accommodate

The executives at the Lincoln Financial Group, a
money-management and insurance company, moved the company
headquarters to Philadelphia after almost a century in Fort
Wayne, in part to have an easy time recruiting talented
employees, the executives said. But the workers who moved
with the company were so vexed by the gap in housing prices
that they began having dinner together, along with their
spouses, to talk about strategies for buying in the
Northeast. In the end, their main strategy consisted of
making a lot of sacrifices, they said.

"I now have half the house and twice the mortgage," said
Priscilla Brown, a vice president at Lincoln. "We just
weren't quite prepared for the sticker shock."

Over the long term, house values tend to increase at
roughly the same rate as incomes in any region, economists
say. Because prices have outgained incomes on the coasts
the last two decades, many analysts expect the housing gap
to narrow eventually - but they were saying the same a
decade ago.

"It takes generations for people to react to economic
realities," said Patrick Lawler, chief economist at Office
of Federal Housing Oversight, which oversees Fannie Mae and
Freddie Mac, the mortgage companies. "But it's remarkable
that prices could have moved so differently over an
extended period of time without more correction occurring."

It will begin to occur, real estate agents say, only when
people decide that a mansion in Fort Wayne is more
appealing than a small apartment in New York or San


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