Viewpoints : What's Ahead for the Housing Market? : Real estate: Some say home prices and sales in California are due for a fall. Others say there is still room for growth.

C alifornia's feverish housing market recorded a big temperature drop last fall, a change so abrupt that it prompted speculation that the chill was here to stay. As other regions of the United States succumb to falling prices, observers, realtors and homeowners argue and worry about whether the Golden State's housing market is frozen or just a little cool.

Free - lance writer Sharon Bernstein interviewed two analysts with widely differing views on the prospects of our continued status as a hot property.

On the bullish side was Joseph Wahed, chief economist for Wells Fargo Bank in San Francisco. Taking a dimmer view was Michael Aronstein, a financial analyst with Comstock Partners, a New York-based investment group. In separate interviews, each was asked similar questions and allowed to respond to the other's views:

- Is the California housing market going up or down?

Wahed: The California housing markets have no way to go but up in the next several years. The California economy is a very strong and diversified economy. It's true that prices went down about 4.5% over the summer, but that was just a brief correction. Home prices are already starting to go up. Numbers in November show that sales have improved and prices are moving up again. We don't expect this to continue every month, but we are going to see improvement.

Aronstein: I disagree. I think you've reached the point in California this year that you reached in New York two years ago, when the cost of shelter outran the wherewithal of the pool of potential buyers.

I think activity in the housing markets will be fairly active in the coming year, but I think prices will come down. They'll come down in the parts of the country where they're most out of line, on both coasts.

You'll see it first at the entry level, because there you're dealing with people who don't have any play money.

- But isn't the economy in California different from most other regions?

Wahed: That's right. The economy is very large and very diverse and still growing. Other areas, where the economy is not as strong, have had problems with their housing markets. Texas is not growing very much, New England is in trouble, Arizona is in trouble. But we are growing. We are adding 300,000 more jobs this year alone. No sector of the economy is strong enough to drag us into a recession, and it would take a recession for people to stop or slow down in buying houses.

Aronstein: Every area of the country believes in its own uniqueness. I talk to people from Washington and I hear Washington is very different. And Palm Beach is very different, and Boston is very different, and Southampton is very different, and Beverly Hills is different, and the Valley is different, and Hawaii is very different, and Palm Springs is extremely different, as are Tucson and Phoenix. And you know what? Everybody's right. The places we live are all unique, and they mean a lot to us. But that has nothing to do with the price of houses.

- What factors are at work in the market's rise or fall?

Aronstein: First of all, the market has simply out-priced potential buyers. I can't quite see the wealth existing in the potential pool of new buyers to accommodate the prices that people are asking. I look around the suburbs of New York and I see the average three-bedroom ranch house selling for about $400,000. And they look like starter houses for a small family. And you have to think who on a starter salary could afford that. You have to look at the pool of buyers other than people who have already been successful in selling an existing property.

And the idea that buyers could also make a speculative killing is starting to wane. So that makes people a little bit less bold in their bidding.

Wahed: The statement that first-time buyers won't be able to purchase a house is nonsense. First-time buyers don't buy the median-priced house. They buy a small one-bedroom house and then they move up. When I bought my first house, it was a dump. I didn't expect to have as nice a house as my boss.

Besides, the real movement in California housing will be those who upgrade. These are people who want gourmet kitchens, three-car garages, carpeting and a quarter of an acre. And they get it. They're willing to pay for it.

Aronstein: Another point to examine is history. If anybody would take the time to just look at the precedents, they'd see that real estate is just as cyclical as any other asset category.

You have to trace this whole cycle back to the Great Depression. Before the crash, real estate was a spiraling, speculative investment like it is today.

Following that, you had a generation of Americans so frightened of anything that even suggested financial risk that they wouldn't even take out a small mortgage on a home selling at 10 cents on the dollar compared to what it sold for in the late '20s.

That kept prices down, and even as late as the '50s and early '60s there were houses all over that could be afforded by somebody working in a normal job. These homes were selling for $10,000 or $12,000 and mortgage rates were 4%, kept artificially low by a complete lack of demand for credit.

Houses that were built for three-quarters of a million dollars in the 1920s were going for $55,000 in the 1950s.

People then had heard stories about how property prices were spiraling during the '20s and how you could really make a lot of money back then, but that was ancient history. Just like it's ancient history now how people lost money in real estate for many, many years during and after the Depression.

Wahed: It is idiotic to suggest that we're in the '20s. I mean that's 70 years ago. I wasn't even born then. He wasn't even born. America was a different country then. California was different. We have an economy that is the seventh largest in the world, and he's talking about the 1920s. I think this doom and gloom is very short-sighted and doesn't look at the facts.

Aronstein: I don't think we'll have the same kind of acute problem as in the '20s. But I do think people are going to be disappointed that the promise of easy money was not kept.

- Are recent home buyers going to lose money in the coming months?

Aronstein: People who recently bought--I think they will lose money. If they bought it six months ago, there's an even better chance.

Homes serve a perfectly good purpose, both practically and emotionally, but once people started talking about them as investments, part of the purchase price reflected a speculative premium. Just the fact that people are talking about their homes in terms of profitability is a sign that what's really going on is speculation. And that makes me think things could get even worse than I thought before. They might as well save themselves the trouble of all the closing costs and do it with baseball cards.

This whole idea of living in seven or eight homes during your life is probably going to be a thing of the past. It will be much more like our grandparents who would buy a home and that's where they lived.

Wahed: The only people who might be in trouble are those people who may have bought at the peak of the cycle last year at a very exorbitant price and they're in a hurry to sell again.

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