CAR Gives ’86 Forecast a Far More Rosy Twist
Forget impending tax proposals. The California Assn. of Realtors expects this year to be one of the best in a decade for single-family home sales.
The forecast even surprised the association. Earlier this year, it projected that about 395,000 existing homes would be sold in the state. That would have represented a 3% decline from last year’s level.
Last week, the association came out with a new prediction--that an estimated 428,000 homes will be sold, representing a 5.1% increase over sales in 1985.
Why the change? A prepared statement explained: “Interest rates fell more rapidly than initially anticipated, and California’s economy has been substantially stronger than the nation’s as a whole.”
At a press conference last week, Richard J. Rosenthal, CAR president and a Venice realtor, said, “There are some real sick spots in the nation, like Houston and some smokestack areas.”
And California has what Joel Singer, CAR’s chief economist, called a “mini oil-patch problem” developing in the central part of the state. However, both agreed that the California home market is outperforming other states, and they expect it to continue to do well.
“We’re convinced that interest rates and the economic environment will stay stable for the rest of the year,” Singer said.
“As we look at ‘86, we think it will be one of the best years in a decade for California, and we expect this to last into ’87.” This, despite a drop-off in multifamily starts, he added.
The drop-off is in anticipation of tax reforms that would affect the rental market. “The proposed treatment of single-family homes and second homes is quite good relative to current law,” Rosenthal said, but the proposals would change tax deductions for other types of real estate.
The realtors expect that these changes would hurt income-producing properties, particularly those owned by small investors.
“What will occur is a restructuring of portfolios, with land holders getting rid of their properties if they can. Small owners of multifamily properties will have the most difficult adjustment problems,” Singer said.
A result will be extraordinary rent increases, he predicted, “and some people might even be encouraged to walk away from their properties,” which would be returned to lenders through foreclosures.
“This would not be a problem across the board,” Rosenthal stressed, “but there are scenarios that would produce these kinds of results if the transition rules aren’t changed (to affect only real estate purchased after the new law takes effect).” Singer added, “And if there aren’t appropriate cash allowances for landlords’ out-of-pocket expenses.”
The U. S. Senate’s proposal would prevent owners of rental property from deducting more than $25,000 in losses against other sources of income.
Despite the concerns, Rosenthal says that the residential real estate market in California is the healthiest he has seen in the ‘80s. Current tax proposals could even benefit the ownership market, the realtors say, because “deductibility of mortgage-interest payments will be retained, and renting will become less attractive.”
Already, Singer noted, there have been sell-outs and camp-outs at many new-home projects in Ventura, Riverside, San Diego and San Bernardino areas.
“We have a very low inventory by most standards (a 10.8-month supply of homes for sale in the first five months of this year, compared with a 12-month cupply in the same period a year earlier), and given the strength of the market, we would expect a surge in listings,” he said, “but we haven’t seen that yet.” The result is an upward pressure on prices.
The CAR’s latest forecast showed the median price of an existing single-family home as rising to $131,000 this year. That represents an 11.1% increase over last year’s median of $117,930. The original forecast was $125,000, a 6% increase.
“So it doesn’t help to hold out for lower interest rates in buying when the prices are going up,” Rosenthal said.
