Housing Sales in State Will Slow, B of A Says

Sales of new and existing homes in California will decline slightly this year, paralleling a slowdown in the state’s overall economic activity, according to a Bank of America study released Wednesday.

Bank economists predicted a state economic growth rate of 6% in 1985, compared to last year’s 9%, the most vigorous expansion pace in 30 years. The U.S. economy is expected to grow at a rate of about 3% this year, economists say.

Accordingly, the state housing industry will show a modest decline from a “stellar” 1984, Bank of America said. It forecast housing starts of 185,000 units, down 9.3%, and sales of 350,000 existing homes, down 8.4%.

“Even though things will slow down in the housing industry, we’re still looking at a very solid year,” said Bank of America economist Duane Paul.

Demand for mortgage money will ease and funds should be readily available and cheaper than last year, the bank said. Rates for both fixed-rate and adjustable-rate mortgages should be 1% to 2% lower than in 1984.

In 1984, fixed-rate mortgages averaged 14.5% and adjustable-rate mortgages averaged 13%. Bank of America predicted that this year fixed-rate mortgages will cost 13% to 13.5% and adjustable-rate mortgages 11.5% to 12.5%

But the bank cautioned that two factors could adversely affect the state real estate market. Larger-than-expected increases in U.S. interest rates could choke off construction and make existing homes more costly. And passage of a tax reform package doing away with some of the current tax advantages of home ownership and investment in rental property also could cool the California market.

Paul said the tax reform plan written by the U.S. Treasury Department would make owner-occupied housing 10% more expensive and increase the cost of owning and operating rental property by as much as a third.

California housing prices will rise 2.2%, compared to a national inflation rate of 4.5%, Paul said. The median home price in California will be $115,000 this year, up $2,500 from a year ago.

Bank economist Michael Salkin said down-payment requirements have dropped from 20% a few years ago to as low as 5% now, but it still “takes a lot of financial firepower to buy a house in California.”

The average home purchase requires an annual income of more than $50,000, and “that’s not a large percentage of the California population,” he said.

More than half of all home purchases will be financed by adjustable-rate mortgages, continuing the trend of the last two years, according to the bank’s forecast. And nearly 70% of all mortgages will be sold into the secondary market to be bought by institutional investors.

Record levels of delinquencies and foreclosures will continue, the bank said, although California’s rates will be slightly below the national average. Currently, 1.79% of U.S. mortgages are delinquent 60 days or more, while the California figure is 1.72%.