State Stung by Slump in Housing : Everyone from homeowners to carpenters to builders is feeling the pinch.

Mayo Gonzales’ biggest fear since losing his job as a carpenter two months ago is not the money (his wife works) or the kids (they’re grown) but the loss of his health-care insurance.

If he does not work 250 hours in the final three months of 1990--an unlikely prospect now--Gonzales stands to lose his union health benefits, leaving him vulnerable to horrendous medical bills in case of a serious illness or accident.

“That’s what worries me more than anything else,” said the 57-year-old Ontario resident who has toiled in construction for 32 years.

Gonzales has plenty of fellow worriers. The slowdown in California’s housing industry, which has worsened markedly in recent months, is sending spasms of fear and alarm through virtually every corner of the state’s real estate market.

From carpenters and interior decorators to architects and homeowners, it has hit a broad cross-section of California’s population and has now virtually enveloped the entire state. Building layoffs are rising, residential property values are falling and new-home construction is plunging.

The real estate downturn has developers scrambling to survive and experts worried about possible major damage to the rest of the economy. Widespread layoffs in the defense industry, another pillar of the California economy, only worsen matters.

The slump in housing has been particularly traumatic in a state where real estate occupies a special niche in the economy and where skyrocketing property values in past decades have turned many middle-income homeowners into a new class of landed privilege.

“You just identify California with real estate,” said David Hensley, acting director of business forecasting at UCLA. A typical California house once cost more than $200,000, double the national average, but median resale prices have been dropping for several months. It’s a market whose financial health is measured primary by construction, sales and prices. New construction is especially important for the economy because of the jobs it creates in related fields.

As home sales have fallen sharply this year, more than 50,000 fewer houses have been built. That has led to steep layoffs in related businesses and a decline in housing prices, which had been rising sharply until the middle of last year. So far, median resale prices in California have fallen about 5% from last year, while new-home prices have been slashed up to 25%.

The drop in home values has forced property owners to tighten their belts and hold spending down. “If there is deflation of their primary asset, then it’s going to affect how much they spend on other big-ticket items,” said Sanford Goodkin, a real estate consultant in the San Diego office of KPMG Peat Marwick.

Most experts believe that the problems will worsen next year before a recovery begins. The slide has accelerated in recent weeks due to consumer uncertainty about the economy and possible war in the Middle East.

“People are . . . nervous,” said Carole Eichen, a well-known interior decorator in Orange County. “They don’t know what the hell to do.”

Prudential-Bache Securities recently predicted that California housing prices could fall 25% or more by the end of 1991 from their peak in mid-1989. The price decline “could be the greatest percentage drop ever seen in the land of skyrocketing real estate values,” the brokerage house said.

Such talk raises the possibility of a repeat of 1981-82, when California real estate took a terrible pounding. The construction of single-family houses in 1982 was less than a third what it was in 1989.

Property defaults have been rising since last fall in Los Angeles and Orange counties, a trend that is expected to continue, according to T. D. Service Co., a foreclosure specialist. “We see foreclosures rising 20% to 25% in the next 18 months,” said Thomas Randall, a company vice president.

Some once-thriving real estate brokers and sales agents are teetering on insolvency because their commission incomes have shriveled. “Some of them haven’t made a sale in months,” said Scott C. Clarkson, a bankruptcy attorney in Torrance for Finer, Kim & Stearns.

One 29-year-old real estate broker in Orange County, who asked not to be identified, moved his office into his home to cut expenses because he has suffered such a steep drop in income in 1990. “I’ll make about half what I made in 1989,” said the broker, who lives in Costa Mesa.

Robert O. Bach arrived in California from Omaha just 18 months ago, but already he has lost two jobs in the real estate business. The latest came last month. He was one of 39 people laid off when Great Western Real Estate fired its new-home sales force in Yorba Linda.

“Looking for another job is not my favorite activity,” the 39-year-old Torrance resident said.

The effects of the slowdown have even rippled beyond state boundaries to towns in the Pacific Northwest that were stampeded in the late 1980s by urban Californians seeking an escape from growing congestion and crime.

Real estate boom towns such as Bend, Ore., have seen growth fall off sharply because the exodus has slowed. “There are fewer buyers here because homeowners (in California) are unable to liberate the equity in their homes,” said Frank Ruegg, a real estate broker in Bend.

Others hard hit have been architectural firms that specialize in residential development. Richardson Nagy Martin, a large architectural firm in Orange County, recently laid off 20% of its staff, according to partner Ralph Martin.

Others hurt include tradesmen--painters, carpenters and plumbers--who have seen a demand for their services dwindle with the drop in new-home building. The construction industry has lost more than 26,000 jobs since February and is expected to lose another 52,000 by next year, according to the Construction Industry Research Board, a private group.

New-home construction in California, including houses and apartments, is likely to fall to 174,000 units this year and 166,000 next year from 238,000 in 1989, the research board said. New-home building hit a low of 85,700 units in the last recession.

“This is not like 1982, but it is still a strong contraction,” noted Stephen Levy, economist for the Center for Continuing Study of the California Economy.

The slowdown has been particularly sudden in the Antelope Valley and Inland Empire, among the last bastions of affordable housing in Southern California. “There is virtually no work,” said John Richardson, special programs coordinator for the carpenter’s union in Los Angeles.

Projects have been halted in midstream in some cases, Richardson said, leaving only foundations in place. “They have poured the slabs and nothing else,” he said. “It’s just dead.”

The contraction is forcing affluent Californians to think twice about their spending habits. “A lot of people are cutting back,” said Joan Wilson, a real estate agent for Grubb & Ellis in Mission Viejo. “They’re getting rid of all the frills.”

If home prices do actually plunge 20% to 25%, it could cause what Prudential-Bache termed a “reverse-wealth effect” that could do serious harm to the rest of the economy.

Such a plunge would be traumatic for property owners counting on their equity to “renovate their home, supplement retirement, send kids to college, borrow on or simply feel good about,” the Prudential-Bache report said. “If this reverse-wealth effect develops, the potential for a serious recession exists in California.”

Most economists and real estate experts in California are not that bearish--at least yet. Few housing analysts believe that property values are poised to collapse 20% or more, as Prudential-Bache suggested.

“For housing prices to fall 20%, the whole economy would have to collapse,” said Randall J. Pozdena, vice president of banking and finance for the Federal Reserve Bank of San Francisco.

According to Kenneth Rosen, head of the Center for Real Estate and Urban Economics at the University of California at Berkeley, the general economic downturn statewide is in line with retrenchments in the 1970s and early 1980s.

“It’s a typical recession so far,” Rosen said. “Nothing new about it. We’re in the first stages of it. Nothing to be alarmed about it.”

Yet, some veteran real estate watchers say the 1990 downturn is more unnerving than the last recession because today’s problems may be tougher to solve. In the early 1980s, high interest rates alone choked the market, and it recovered in 1983 after rates dropped.

Today’s woes are a complex weave of general consumer uncertainty about the economy, concern about war in the Middle East and a shortage of development capital sparked by lender unease about building loans.

Savings and loans, as well as commercial banks, have been badly hurt by development loans in recent years. “It’s a different kind of recession this time,” interior decorator Eichen said. “It’s more frightening.”

Many builders and developers, facing possible insolvency, are in the grip of a severe cash squeeze. “Developers are not paying their bills at all,” said Joseph Donahue, a real estate attorney and developer in Southern California.

Builders have resorted to auctions to get rid of unneeded inventories. “They’ve got to do it,” said Pozdena at the San Francisco Fed. “They don’t have the dough to keep them.”

Some builders are turning from high-priced homes to ones costing less than $150,000. Customer demand for the more affordable houses remains strong.

“This is the call I hear from builders all the time,” Eichen said. “ ‘Carole, we’re dumping our old plan and going for the more affordable package.’ ”

At Marchetta’s Custom Design in Santa Ana, the business slowdown has forced the family-owned firm to cut its 20-person staff nearly in half. The firm specializes in woodworking for new homes.

Business was good until mid-August, said James Marchetta, “when it went from hot to cold. It just hit a wall.” He added: “The last time around (in 1981-82), we were still busy. We laid off one person.”

The housing slump may have its greatest impact in Orange County, where nearly 6% of employment is directly related to construction, compared to less than 4% in Los Angeles County.

“When we have downswings in the housing cycle, it hits Orange County much harder,” said James Doti, director of business forecasting at Chapman College in Orange.

The real estate downturn has also coincided with widespread layoffs in Southern California’s defense industry, a double-whammy that did not exist in the last recession, when the military was at the beginning of its Reagan-era buildup.

Henry B. Wallace, a programs administrator laid off by McDonnell Douglas in July, is worried both about finding a new job and the market value of his Huntington Beach condominium, on which he has a $1,400 monthly mortgage.

“If I’m not working by the spring, I’ll have to get rid of the condo,” the 55-year-old Wallace said. “Or I guess I should say: I’ll attempt to get rid of it.”

A BIG DROP IN HOUSING CONSTRUCTION

New-home construction in California, a key part of the state’s economy, has fallen sharply this year and the slide is expected to continue in 1991. More new houses were built in 1989 than at any time since 1977.

* NEW TACTICS

Realtors and others in thehousing industry find different ways to cope with tough times. K1.