A GROWING anxiety has gripped urban and suburban America. A
fraying social fabric - evidenced by gang violence, hour-long
commutes on endless freeways, and the environmental degradation of
the nation's large metropolitan centers - is kindling a new wave of
If current homeowners can afford to escape, the coming flight
from suburbia will have enormous economic impact far beyond the
temporary effects of the current recession. But middle-class
homeowners are boxed in by the curious logic of speculation and the
Throughout the speculative 1970s and 1980s, California was the
peerless paradise for players of the real estate trade-up game. The
median California home price had appreciated from $23,100 in 1968
to a whopping $194,010 in 1990, the peak year - an increase of more
than 800 percent. Homeowners enjoyed similar gains in the
Northeast. But in 1992, the outlook is radically different.
Consider the situation of a Los Angeles couple I know. In 1971
they began their climb to suburban affluence by purchasing a modest
home for $38,000. Rapidly rising property values allowed them
steadily to trade up to more spacious residences. By 1990 they had
parlayed their initial investment into $475,000, the peak value of
their present home.
My friends would love to cash out, purchase another house in a
more remote and more satisfying location, then invest the remainder
of their profits to pay off long-accumulating debts. In fact,
they've made a small down payment on an idyllic lot in Washington
state as a first step toward their eventual escape to fresh air.
Trouble is, they can't afford to sell. After taking all
allowable deductions, and after buying a less expensive house,
their total taxable gain would come to over $150,000, requiring a
tax payment of at least $45,000 - in cash. That's money they don't
have. Like too many Americans, they borrowed against the
prospective gains tied up in their home and spent the proceeds on
great vacations in Europe, fancy parties, new cars. The good life.
They thought the music would go on forever.
But the tune has changed. The precipitous fall of California
real- estate values since 1990 cut the value of my friends' house
from $475,000 to $380,000. They "lost" $95,000 in capital
appreciation. If that mini-crash hadn't occurred, they would have
paid $28,500 in additional taxes on the lost appreciation, but
$66,500 of it would have been left over. …