By Jodi Summers

The word on the street is out — the housing boom has waned. California existing-home sales tumbled 15.5 percent in February compared to a year ago, yet the median price of an existing home increased 13.8 percent, reports the California Association of Realtors. Hold the thought of double-digit real estate appreciation rates, because that is what double-digit appreciation is about to become — a dream.

According to the first quarter 2006 report from UCLA Anderson Forecast — one of the most widely watched economic outlooks for California and the nation — first quarter unit sales of single-family homes across the state have fallen from 140,000 to 100,000. New residential construction permits number 170,000, 10 percent lower than last year. Inventory levels are rising — unsold inventory in February increased to a 6.7 percent month supply, up from a 3.2 percent month supply a year ago. Residential property growth is predicted to be 6 percent in 2006 and flat in 2007. If the forecasters are correct, double-digit appreciation will become simply a dream.

“Things are still hot, but the trend is clear,” writes Christopher Thornberg, senior economist on the Anderson Forecast. “The only debate now is how hard a landing there will be and what it will mean for the general economy. The good news is that the non-housing-driven portions of the economy are starting to improve.”

Americans spent an estimated $210 billion on residential remodeling in 2005, reports the National Association of Home Builders. Between fewer new units being built and a drop in remodeling costs, the forecast predicts that more than 200,000 jobs will be lost in the construction section over the next few years as the market slows.

Additional slowing will be noted in the real estate and mortgage markets. Reduced appreciation is expected to slow taxable sales growth.

“As expected, year-over-year sales continued to decline from the robust levels of a year ago,” said Vince Malta, president of the California Association of Realtors. “The decrease was intensified by interest rates crossing the key psychological threshold of 6 percent in the last quarter of the year, and by weakness in consumer confidence due to the residual effects of Hurricane Katrina.”

Thirty-year fixed mortgage interest rates averaged 6.15 percent during January 2006, compared with 5.7 percent in January 2005, according to Freddie Mac. Adjustable mortgage interest rates averaged 5.17 percent in January 2006 compared with 4.12 percent in January 2005. The percentage of households in California able to afford a median-priced home stood at 14 percent.

Housing market aside, the overall picture in California is pretty bright. It is forecast that we will create 300,000 new payroll jobs, making the Golden State the 19th fastest growing state, with an impressively low unemployment rate of 5 percent.

“We have only seen prices decline during and after a major recession,” observes Ryan Ratcliff of the UCLA Anderson Forecast. “One is not predicted in the next 12 to 18 months.”

There have been legitimate reasons for the impressive increases in prices Southern Californians have enjoyed in recent years. The late ’90s saw a steep rise in rental rates, caused by a growing gap between production and demand. We saw a shift in tax liabilities on the sale of certain properties. Mortgages prices hit a 40-year low between 2001 and 2003. Sales in LA County hit a peak in 2004 and have been gradually falling since.

“Complaints about high home prices were voiced by more consumers in February than any other time during the past quarter century,” noted Richard Curtin, the director of the University of Michigan’s Surveys of Consumers. “Favorable home-buying attitudes fell to their lowest level in 15 years.”

“The California real estate market is beginning to experience the soft landing that we expect to be the underlying dynamic driving the housing market this year,” said California Association of Realtors Vice President and Chief Economist Leslie Appleton-Young. “We expect the pace of price appreciation to slow from the 13 to 17 percent range of 2005 to 10 percent this year as rising inventory levels mitigate some of the upward pressure on home prices. The higher-priced coastal areas will see price gains in the mid-single digits while the inland areas will see increases in excess of 10 percent.”

Meanwhile, the February 2006 median price of an existing home in the state decreased 2.9 percent to $535,470, compared with January’s $551,300 median price.

The Anderson Forecast projects that sales of existing units will drop from 530,000 units today to 390,000 in 2007 and perhaps lower in 2008. New construction is expected to be down 25 percent by 2008. Additional brokerage and commission fees will fall. The change in the real estate business will slow employment growth to 1 percent and taxable sales growth to 4 percent.

Keeping the real estate dream alive in Southern California metro areas is office space and industrial property sales. Office-related businesses have experienced stronger-than-average growth on their need for office space — 2 percent last year in LA County, bringing vacancy rates to about 15 percent — still above the 7 percent lows they experienced around the turn of the millennium.

Manufacturing jobs may be moving out of the county, but industrial properties remain highly desirable. LA’s proximity to the country’s largest port and a major cargo airport keeps manufacturing properties with a vacancy rate expected to drop below 12 percent.

If you’re still dreaming about double-digit growth in real estate prices, you need to look in the commercial sector. If your focus is on residential … dream on.

(Jodi Summers is director of the investment division at Boardwalk Realty Santa Monica. Contact her at jodis@boardwalkrealtycom, or call 310-309-4219. Visit her Web site at www.santamonicalandmarks.com.)