By JODI SUMMERS
The numbers just keep growing. At last check, California home sales were down almost a third from a year ago, with numbers falling for the 10th straight month. But, as curiosity would have it, the median existing-home price rose 1.6 percent in L.A. County to $576,360. Those in the know say price levels are reaching a plateau.
“We experienced the greatest year-to-year sales decline since August 1982, when sales fell 30.4 percent,” states Vince Malta, president of the California Association of Realtors. “This is another indication that we’re in the initial stages of a long-anticipated adjustment in the market.”
The most recent round of the UCLA Anderson Forecast notes that the housing market will not crash unless the job market weakens significantly, though home prices are expected to stagnate for at least five years during this down cycle.
Edward Leamer, director of the Anderson Forecast, observed that “the forecast calls for the market prices of homes to hold steady over the next five years, which equates to a drop of about 15 percent to 20 percent in real terms because of projected inflation.”
According to national projections through 2010, the forecast notes that Washington, D.C. could face price depreciation of about 7.5 percent in real terms, while prices in real terms could drop 7.1 percent in California, 6 percent in Hawaii, 5.9 percent in Rhode Island, 5.8 percent in Maryland and Nevada, and 5.2 percent in New Jersey during that period.
San Diego is already feeling the pinch. Home sales are off around 32 percent from the same point last year, while the median home price lost 2.2 percent, to $482,000.
The Anderson Forecast suggests it could take 6.3 years to 16.5 years to work off excess home-price appreciation in California.
“Many view this as a great conundrum: Prices continue to rise, even set records, as sales continue to slow. It happened for two years in San Diego before prices finally fell,” observes Marshall Prentice, president of DataQuick information services. “We view this as the normal winding down of a real estate cycle, where declining demand gradually erodes price growth until it halts or reverses. We expect more markets to see prices flatten or decline a bit in the second half of this year.”
PMI Mortgage Insurance Co., a subsidiary of The PMI Group Inc. notes that the major real estate markets at the greatest risk of a price decline are San Diego-Carlsbad- San Marcos, Calif.; Nassau-Suffolk, N.Y.; Boston-Quincy, Mass.; Santa Ana-Anaheim- Irvine, Calif.; and Sacramento-Arden- Arcade-Roseville, Calif.
The Anderson Report observes that price corrections can be slow affairs that lag behind a drop in sales. Homeowners “hold their homes on their personal balance sheets at the old price levels that applied back when their neighbors sold at the peak of the market,” notes Leamer. “It is only after a couple of years of weak sales, and maybe some job losses, too, that the resolve weakens and home prices begin their very slow march south.”
Unlike the recession of 1990, “manufacturing is not positioned to add to the loss of jobs that will occur in construction and real estate finance, and absent the loss of jobs in manufacturing the housing downturn will be considerably softened — softer, but longer lasting. Instead of a rapid and painful adjustment, expect a slow and aggravating one,” the report states.
In 2005, the construction sector created 61,000 jobs in California; growth in construction employment has slowed this year. The construction sector may lose about 100,000 jobs through 2008, and building permits are expected to bottom out in 2008 “as activity returns to levels seen in 2000.”
California foreclosure activity is rising at the fastest pace in 14 years, but defaults remained below historically normal levels, DataQuick reveals. On average, lenders filed 32,762 notices of default in each quarter over the past 14 years. Last quarter’s 20,752 total was the highest since 25,511 were filed in first-quarter 2003.
“This is an important trend to watch, but doesn’t strike us as ominous,”states Prentice. “The increase was a statistical certainty because the number of defaults had fallen to such extreme lows. We would have to see defaults roughly double from today’s level before they would begin to impact home values much.”
Though some areas of Southern California will have price declines, a separate Anderson Forecast report, “The California Report,” confirms that there is no recession expected for the state. “We are still firmly convinced that the national economy is the primary driver at the state level: statewide home prices (in California) are unlikely to decline significantly unless there is a recession,” according to that report. “Real estate sectors will continue to decline, but without significant declines in another sector the net result will be a slowdown, not a recession.”
About 23 percent of first-time home buyers in California are able to afford a median-priced home in 2006, compared with 30 percent a year ago, according to the California Association of Realtors.
The minimum household income first-time buyers needed to purchase a home at $482,000 in California was $98,720, based on an adjustable interest rate of 6.48 percent and assuming a 10 percent down payment.
In summary, real estate analysts and pundits conclude, “The economy is about to enter a period of several quarters of sluggish growth with inflation above the comfort level. The Fed will respond by gradually cutting the funds rate to 4.5 percent. Although not a recession, the unemployment rate will modestly increase and those sectors of the economy tied to residential construction will be in a cyclical decline.”
Jodi Summers is Director of the Investment Division at Boardwalk Realty. or call (310) 309-4219.
Originally published in the Santa Monica Daily Press print edition on October 4, 2006. Read the original PDF.