Torrid Home Sale Pace Poised for Slight Cooling

California’s hot real estate market is expected to cool slightly this year as home sales take a breather from last year’s torrid pace, and construction of apartments and office projects drops sharply.

Experts say home prices in the state should rise about 6% this year--almost twice the expected inflation rate, but less than the 9% increase posted in 1986.

“This is going to be another good year for home resales, but I just can’t see it topping 1986,” sums up Joel Singer, chief economist of the California Assn. of Realtors.

Although final numbers are still being tabulated, Singer says about 470,000 existing single-family homes were sold in California last year--the highest sales level since 1979.

Mortgage-Rate Outlook

But much of the pent-up demand from the high-interest days of the early ‘80s has been satisfied, so the economist expects sales to ease about 7% this year to 435,000.

The modest drop will come despite further declines in mortgage rates, Singer and most other economists say. The consensus calls for rates on fixed-rate, 30-year mortgages to fall to between 8 1/2% and 9% from about 9 1/2% today. Initial rates on adjustable loans could drop as low as 6% from about 7 3/4% today.

The benefits of the lower rates, however, could be wiped out by higher home prices. If Singer’s predictions are correct, the median price of a single-family home in California will rise to about $140,000 this year from $131,000 in 1986.

While sales in the Southland are expected to be particularly brisk, certain areas of the state will continue wrestling with their own unique, ongoing problems.

Legislation Lags

In the Bakersfield area--where homes sales and prices have been depressed because of layoffs in the slumping energy industry--residents hope the recent upturn in the oil business will put more people back to work.

In the San Francisco Bay Area, where the median price of a home is more than $160,000 and rising steadily, the affordability crisis is expected to become even more severe.

Unfortunately, political observers say the New Year holds little promise that local and state legislators will do much to ease the affordability problems plaguing most areas of the state, although it’s a topic to which they’ll undoubtedly continue to pay much lip service.

Nor are they expected to make a significant amount of headway in housing California’s growing number of homeless people--a group that is believed to already number more than 30,000.

Bond Sale Restrictions

Cutbacks in federal aid, coupled with restrictions that the new tax law places on bond sales used to build or buy affordable housing, will make the task of providing decent shelter at a reasonable price even more difficult.

Nationwide, sales of existing single-family homes are expected to rise 2% this year to 3.6 million units from an estimated 3.5 million in 1986. Softness in states with economies closely tied to the slumping energy and agricultural industries will be offset by the strength of sales in the Southwest and Northeast, NAR economists said.

Builders of single-family homes will almost be as active this year as they were in 1986. The National Assn. of Home Builders predicts that 1.12 million houses will be built in the United States over the next 12 months, down slightly from the 1.18 million built last year.

California’s builders will be among the busiest in the nation. The NAHB says 148,000 single-family houses will be built in the state this year, a 10% increase over the 135,000 built in 1986.

Expects New Record

Golden State builders confirm the NAHB’s optimism.

“We expect another record-breaking year in 1987,” says Bruce Karatz, president and chief executive of Los Angeles-based Kaufman & Broad Inc.’s home-building subsidiary.

Karatz expects his firm will deliver more than 5,000 homes this year, compared to about 4,300 in 1986. If that goal is attained, it’ll be the fifth consecutive year in which production--as well as revenue and profits--shattered company records, the executive said.

The outlook for builders of apartments, however, isn’t nearly as bright. Only 336,000 new apartment units are expected to be built in the U. S. this year, compared to 463,000 in 1986. The projected 27% drop stems from overbuilding in most cities, plus the fact that tax reform has scaled back or eliminated many of the tax breaks developers had enjoyed.

“It’s the loss of tax benefits that hurts the most,” says Robert Villanueva, the NAHB’s director of forecasting. He says a 21% drop in apartment construction in California will offset the increase in new single-family homes, pushing total housing starts in the state down 6% this year to 262,000 units from 279,000 in 1986.

Outlook for Renters

Real estate experts disagree over how renters will be affected by the changes confronting apartment builders and owners. One side believes rents will rise by 10% or more over each of the next few years, as landlords try to make up for lost tax breaks.

But others contend that it is renters who have the upper hand. Overbuilding and high vacancy rates will moderate rent hikes in most cities, while rent control will limit increases in many areas. Also, thousands of people this year are expected to give up renting and buy their first home--and that, too, should add further softness to the rental market.

Overbuilding and the loss of important tax benefits is also expected to lead to a sharp drop in the construction of new office buildings. Vacancy problems that have long plagued Houston, Dallas and Denver have spread to other parts of the country, and things could get worse before they get better.

The Irvine Co., one of the biggest commercial developers in California, laid off one-fifth of its work force last year. Thomas Nielsen, the company’s vice chairman, says there’s a three- to four-year supply of office space in Orange County.

High Vacancy Rate

According to a new survey by commercial broker Grubb & Ellis Co., vacancy rates in Orange County’s office buildings will remain above 20% throughout the year as new projects open and absorption levels fall.

Even San Francisco’s vacancy rate has been rising, and effective office rents there have fallen by about one-third over the past two years.

The outlook for downtown Los Angeles, however, is much brighter. Raymond Lepone, senior marketing consultant for Grubb & Ellis’ downtown office, says the central business district’s office vacancy rate should drop below 10% by the end of the year from 15% today.

Lepone cites several reasons for his optimism. He notes that a large number of firms based on the East Coast are continuing to open offices in Los Angeles, and many accounting and law firms are leaving Century City and mid-Wilshire to move downtown.

One of Few Bright Spots

“There are also a lot of firms already in downtown that want to expand,” Lepone says. “If you were a large tenant who needed 100,000 square feet of space in the central business district, you’d have trouble finding it.”

But Los Angeles is one of the few bright spots in the nation’s office market. Tax reform and a glut of unleased space will push nationwide office construction down 21% from last year’s level, according to F. W. Dodge, a company that specializes in providing real estate information.

But while some say the climate for investing in new or existing projects will worsen this year, others say it has bottomed out and is ready to rebound. Some of these optimists are putting their money where there mouth is by investing in so-called “vulture funds.”

The vulture funds are “real estate birds of prey” that circle financially distressed properties and then snatch them up at deep discounts--sometimes just pennies on the dollar.

New Funds Anticipated

Millions of dollars poured into new fund offerings last year, and a whole flock of new funds is expected to start raising cash in 1987.

The new funds, however, may find that it is harder to garner money this year than it was in 1986.

“A lot of money went into the funds last year because investors thought they’d be getting property at deep, deep discounts,” says Stan Ross, co-managing partner of Kenneth Leventhal & Co., a real estate accounting and consulting firm. “But the deep discounts they thought they were going to get haven’t really materialized.

“This year, I think investors are going to want some kind of guaranteed return on their investment,” Ross added. He says one way sponsors of the new funds may be able to attract money is by promising to forgo their management fees if the fund doesn’t live up to expectations.

Industrial Properties

The outlook for industrial property--such as warehouses and distribution facilities--is far better than it is for office buildings and apartments. A recent survey of real estate professionals by the Liquidity Fund, a real estate securities investment firm in Emeryville, Calif., said prices and rents for industrial space could rise as much as 10% this year. Rents and prices of office projects could drop as much as 10%, the survey said.

Richard M. Cannon, president of Carson-based industrial developer Watson Land Co., said a strong aerospace industry and the growing number of Pacific Rim companies doing business in California should buoy demand for space at industrial projects.

But some of that demand will be offset by the sluggishness in the high-technology business, another industry that rents a lot of industrial space.

“It’ll be a sound but unspectacular year,” Cannon says.