2006 is a mixed bag for real estate trends
By JODI SUMMERS
Two prestigious real estate schools have different predictions for the real estate market. In their second quarter market wrap up, economists for University of Southern California’s Lusk Center for Real Estate noted that unless there are substantial job losses, the real estate market appears on track for a soft landing.
“We don’t believe the housing market is going to fall off a cliff,”said Stuart Gabriel, Lusk Center director in San Francisco last week.“We don’t really subscribe to the hard-landing story.”
Meanwhile, the second quarter Anderson Forecast, a product of the University of California-Los Angeles observed, “The risk of a housing crash rather than a slowdown is far greater than what most people think.”
David Schulman, a senior economist for the UCLA Anderson Forecast in his report titled, “Housing, Inflation and the Fed,” wrote that “History is on the side of a crash. Every major housing cycle of the past 45 years ended with activity declines in excess of 50 percent. Because the current cycle was so powerful, why should we expect any less?”
The latest National Association of Realtors (NAR) forecast predicts existing-home sales to drop 6.8 percent in 2006. That is down from NAR’s first quarter forecast, which called for a 6.4 percent drop in existing-home sales this year.
USC’s Lusk Center spokesperson Gabriel felt that it’s “unlikely that there will be a major shrinkage in house prices, given the strength of employment numbers. Interest rates, though marching up,are not high by historic standards.”
The Lusk Center report confirmed that the housing market has entered a time of “stagflation,” or “economic stagnation coupled with inflation... And the real estate market is losing steam — with a general slowing in price-appreciation and sales.”
The Anderson Forecast offered the opinion that the housing market is hindering the national economy.
“The driving force behind both the slow-er growth and the rising inflation is the housing market,” Schulman noted. “The great housing boom of the past five years is unwinding under the weight of higher interest rates and unsustainable home prices.”
The Lusk Center cited higher interest rates and energy costs, and reduced refinancing activity as reducing consumer spending, which has dropped from 3.9 percent in 2004 to its current 3 percent.
The Anderson Forecast supports the growing rumor that there are some markets that are having real estate bubbles, and this may fall on the Federal Reserve Board.
“There is some truth to the notion that the Fed created the housing bubble to prevent the deflationary forces of collapsing stock prices to take hold in the real estate economy,” the report states.
The UCLA report hints that the Fed “is in a box” because it needs to deal with rising inflation and a decline in housing activity. Ultimately, the housing market could be a casualty as the Fed works to curb inflation.
“Central banks lose their credibility for failing to fight inflation,” said Schulman, who expects the Fed to raise the federal funds rate at least one more time, with “a long wait before the next easing.”
The Lusk Center report did not liken the current market conditions to those in Southern California in the early 1990s, when job losses contributed to a major downturn in the real estate market. Gabriel cited that the impact of job losses in the aerospace sector hit Southern California’s real estate market hard during that period.
“Barring that sort of event we don’t expect significant fall off in house prices,” he summarized.
Gabriel’s forecast calls for the economy to slow to between a 3 percent to 3.5 percent rate of real gross domestic product growth for the remainder of the year, after a rate of about 5 percent in the first quarter.
Edward Leamer notes in the UCLA Anderson Forecast that globalization and automation may have something to do with the unimpressive employment numbers in the national manufacturing sector.
“We do not expect manufacturing jobs to suffer as much as in earlier housing-related downturns,” he said. “It appears as though construction is ready for a tumble.”
Historically, cycles in manufacturing paralleled construction “with peaks and troughs occurring very close in time.”
Leamer concluded that after the 2001 recession, job cycles for those two industries became disconnected — construction jobs recovered and made substantial gains, while manufacturing jobs fell by 3 million from 2000-03, and as the Anderson Report states, “have been drifting sideways ever since.”
Raphael Bostic, director of the master of real estate development program at USC and a Lusk Center expert, noted that job losses in construction and real estate-related industries during this slowing period should not cripple the housing industry.
“Problems in housing have almost always led into recessions and attendant increases in unemployment that has amplified the housing adjustment,” affirmed Leamer on behalf of the Anderson Forecast. “Our best guess is that this time, unlike all the other times, the problems will be mostly in real estate and will not produce a national recession.”
In conclusion, the second quarter Anderson Forecast Report noted, “both prices and volumes (got) out of control in the last several years. Prices... are starting to fall back to the normal band, but have another 10 percent to get back into the normal range.” (Jodi Summers is director of the investment division at Boardwalk Realty Santa Monica. For your real estate needs, , or call (310) 309-4219, or visit www.santamonicalandmarks.com.)
Originally published in the Santa Monica Daily Press print edition on July 12, 2006. Read the original PDF.