Dealing With the Downturn : Housing: In response to the sales slowdown, many realtors, builders and lenders are downsizing their operations.

It was the end of yet another long day in the real estate business.

A few realtors were sitting around Jon Douglas Co.’s Santa Monica office, shooting the breeze about the slowdown in home sales.

After a while, veteran realtor Betty-Jo Tilley had an idea: All the agents in the office should gather for a party to talk about the housing slump and ways to overcome it.

And as a joke, they could hand out mock awards to agents who had the worst real estate war stories--a prize for “the worst escrow horror story,” a “medal of valor for courage in the face of a difficult client” and the like.

By all accounts, the potluck party went just fine--but the mock awards ceremony was never held. “The idea just sort of fizzled,” Tilley said.

Indeed, there just isn’t much to joke about in the slumping real estate industry these days, no matter what segment of the business you’re talking about.

Thousands of realtors are expected to quit by the end of this year and, in some cases, entire offices are closing. More than 30 Century 21 offices in the Southland have been shut down over the past several months, and Jon Douglas Co. recently announced that it could soon fire as many as 500 agents.

New-home builders, unable to entice buyers even after slashing prices, are cutting staff and downsizing construction plans. Housing starts in California are down about 35% from a year ago, and another decline is forecast for next year.

More than 26,000 construction workers have lost their jobs in the past eight months, and another 65,000 are expected to be thrown out of work next year.

Many lenders, with profits plunging, also have closed offices and laid-off workers. Skittish about the future of California home values, some have reduced their lending activity and made it tougher for new borrowers to get loans.

The real estate slump has brought some good news and some bad news for consumers. Home buyers have benefited from sellers’ price cuts, and they’re getting better service from realtors and lenders.

On the downside, sellers’ dreams of reaping huge windfalls from a quick sale have been replaced by nightmarish months of waiting for a buyer to materialize.

Here’s a detailed look at how workers in the real estate industry are coping with the soft housing market, and how the slowdown is affecting consumers.

Realtors

A year ago, when the real estate market was humming along, bowls of popcorn and candy were scattered about the busy Woodland Hills office of veteran broker Tom Carnahan.

But those bowls are gone now--not because his 26 agents have lost their taste for snacks, but because sales in the San Fernando Valley have plunged nearly 30% from a year ago.

“Cost-cutting is the rule now, not the exception,” Carnahan said.

“We’ve cut down on advertising and phone calls, and I’m not taking out as many people to lunch or having it brought in. If we have a choice of buying candy or buying a little more advertising, we’ll take the advertising.”

Indeed, the heady days of the late ‘80s--when prices in many Southland communities soared more than 20% a year and homes often sold the day they were put on the market--are long gone.

In Los Angeles, resales are down 22% from their year-ago levels. Sales are off 32% in both Orange and Ventura counties and 21% in San Diego County.

Even in the once-strong Inland Empire, home resales have plunged nearly 23%.

Prices in most parts of the Southland have also dropped.

The median-priced home in Los Angeles County now sells for $210,240, down nearly 4% from a year ago.

Values in some of the city’s most expensive areas--such as Bel-Air, Brentwood and some other parts of the Westside--have dropped more than 10% from their 1989 levels, realtor statistics show.

Those same statistics show that home prices are down about 5% from year-earlier levels in Orange, Ventura and San Diego counties.

Realtors in the Inland Empire of Riverside and San Bernardino can sadfully boast that they’re in the Southland’s strongest market: Although prices there haven’t gone up over the past 12 months, they haven’t gone down, either.

“The market has obviously declined from its levels of ’88 and ‘89, and it’s going to keep cooling down next year,” said Leslie Appleton-Young, an economist with the California Assn. of Realtors.

She predicts that sales next year will drop another 15%. And perhaps more important, the value of a median-priced home won’t go up at all.

One sure sign of the slowdown is the number of homes for sale. There are about 13,000 homes on the market in the San Fernando Valley, up 14% from a year ago and more than 50% from 18 months ago.

The Los Angeles Board of Realtors, which represents many parts of the pricey Westside as well as other areas close to downtown, reports that there are about 8,000 homes now for sale--up more than 30% from last year.

Double-digit increases are also being reported by individual boards from Santa Barbara to San Diego.

On the business side, the most visible casualty of the market slowdown was the failure of Mike Glickman Realty last spring.

Just two years ago, the firm’s 1,800 agents dominated sales in the San Fernando Valley, and founder Glickman was brashly predicting that he’d have offices in every major U.S. market by the end of the century.

But the sudden slowdown in sales toward the end of last year--coupled with lavish spending that included valet parking and expensive gifts for Glickman agents--proved too much for the company to handle.

Glickman filed for bankruptcy last June, listing assets of $2 million and debts of $4 million.

“Anyone can make money when the market is red hot, but it’s a whole new ball game when sales slow down and your revenue drops,” said Paul Yoder, a district manager in the San Clemente office of Grubb & Ellis.

Although the fall of Glickman’s empire was the most dramatic evidence of the sluggish real estate market, it’s certainly not the only sign of a slowdown.

In addition to Century 21’s 30 offices, Coldwell Banker has shuttered a half-dozen branches. Some small companies have shut down completely.

And for the first time since the recession in the early 1980s, the number of people getting out of real estate sales apparently exceeds the number of people getting in.

There were about 284,000 licensees in the state in 1985, the eve of the late-’80s real estate boom. But that number had swelled to nearly 360,000 by the end of last year, as thousands of people got their sales license in an effort to cash in on the hot housing market.

Now that sales have cooled, so has interest in becoming a realtor.

“We’ve already seen a slowdown in licensing requests, and it’ll go down some more next year,” said Tom Hensley, who runs the licensing program for the California Department of Real Estate.

The California Assn. of Realtors, which primarily represents full-time agents, predicts that its membership will drop about 5% in 1991. A much greater decline is expected in the ranks of part-timers, most of whom don’t belong to the trade group.

Many realtors who are staying in the business have resorted to some offbeat tactics to sell slow-moving homes.

Some are even buying small statues of St. Joseph--the patron saint of home and family--and burying them in the yards of properties that they’ve listed in the hope that it will help the home sell faster.

“We had one agent who buried a St. Joseph, and the property sold a few days later,” said Chuck Lamb, co-owner of four Century 21 offices in the Southland. “Within a week, I had 10 other agents doing the same thing.

“The funny thing is, the agent who started all this isn’t even Catholic.”

Home sellers are growing desperate too.

“I’ve had my house up for sale for five months, and I still haven’t gotten any takers,” said Sharon Bernson, who has cut the asking price of her three-bedroom home in south Orange County to $329,500 from $369,500. “I’m totally frustrated.”

Realtors say anxious sellers aren’t just slashing their asking prices: They’re also more willing to enter lease/option deals, finance some of the sales price by carrying back a second mortgage, or take part in other so-called “creative financing” arrangements that were popular when the housing market was mired in the slump of 1981-82.

“We’re not seeing a lot of creative financing, but we’re definitely seeing more than we were a couple of years ago,” said Tilley, the Santa Monica realtor.

The slow market has also put a damper on the growth of “Help-U-Sell” and other so-called “discount” brokerage firms that offer to sell homes for a flat fee of a few thousand dollars.

“It’s tough for any real estate company to expand in a soft market, and we’re no exception,” said Help-U-Sell President Jack Andrews, whose company just 18 months ago was boasting that it was opening a new office somewhere in the nation every 40 hours.

The bad news for realtors and sellers is great news for buyers. “I just paid $220,000 for a house that was listed for $250,000,” said Chinaqua Williams, one of the newest residents of Leimert Park in Los Angeles.

Builders

Perhaps no one has been hit harder by the downturn in Southern California’s housing market than home builders.

Sales of new homes in the six-county Southland area have tumbled 67% from year-ago levels, while the 23,059 new homes for sale is more than twice the number that was available at the same time last year.

It’s hard to find any builder who hasn’t been forced to lay off workers. Employment in the California construction business, which hit an all-time high of nearly 665,000 in February, has dropped by more than 26,000 since then.

Some of the layoffs have been massive. Watt Enterprises, one of the Southland’s biggest builders, has furloughed almost 250 workers since April--nearly 30% of its work force.

“Our sales volume is about half of what it was a year ago,” said Ted Cox, Watt’s president. “We hated to let all those people go, but it was a matter of the company’s survival.”

Just last month, the Irvine Co.--which owns one-sixth of Orange County--said it would lay off 11% of its work force in preparation for a lengthy economic downturn. The size of the layoffs was tempered because the company dumped 1,000 workers from its payroll a few years ago.

Not surprisingly, builders are postponing or even canceling new projects. About 174,000 homes are expected to be built in the state this year, down 37% from last year’s production levels.

Housing starts across the nation plunged 6% in October, and analysts blamed it primarily on weakness in the California market. It was the ninth straight monthly drop and the most sustained decline since the government began tracking new construction 31 years ago.

Another 5% decline is forecast for the state next year, which would make it the worst year for housing since the 1981-82 recession.

The recent slowdown, coupled with next year’s cuts, are expect to cost another 65,000 construction jobs in the state.

Some of those thrown out of work are having a tough time landing another job; competition is fierce.

“We ran an advertisement for a business consultant recently, and we got 450 applicants,” said Eric Brown of the Meyers Group, an Encino-based real estate consulting company.

“We even had laid-off Harvard grads applying for the job. It’s a lousy time to be out of work in this business.”

The weak job market has had a surprising effect on USC’s Lusk Center for Real Estate Development, one of the few college programs in the nation that teach people how to become developers.

“We thought that enrollment this year would be on the low side because of the industry downturn,” said Richard Peiser, the program’s director. “But instead, we’ve got about half again the number of students that we usually have.

“I guess a lot of people in the business figured that, with the market slowing down, they might as well take a year off and learn the details of the development business. That way, they’ll be able to jump back in when the market turns around in a year or so.”

Builders’ woes are buyers’ bounty.

Developers are offering everything from huge cash discounts to luxury autos to anyone willing to buy a new home in their projects.

Presley Homes of Southern California, for example, recently offered a new Mercedes 420SEL--valued at about $60,000--to anyone who would buy a home in its Las Posas North development in Oxnard, where prices start at a relatively modest $333,000.

The soft resale market has given rise to another marketing gimmick: Some builders are willing to purchase people’s current homes to induce a sale at their own new tract.

For example, builder Whittier Isles Ltd. is running what it calls an “Instant Home Exchange Program” at its new community in Whittier. “If you agree to buy one of our houses, we’ll buy yours for 100% of its appraised value,” explained Beverly Smith, who runs the development’s sales office.

But such innovative ideas don’t always work in this type of sluggish market.

In the Trade Mart program, for example, if a builder had a customer who couldn’t sell his current home, Trade Mart would guarantee to either sell the property through Coldwell Banker or buy the house itself. Builders paid the company a fee to join the program.

Unfortunately, Trade Mart started up just as the market was topping out. It had to buy all the homes that Coldwell Banker couldn’t sell and finally ran out of cash and suspended operations a few months ago.

Despite such novel ideas, many builders still can’t move their standing inventory. And the carrying costs can run as high as $75 a day for each home they have empty.

More and more developers have begun to auction their houses to the highest bidders.

“We’ll probably triple our business this year,” said Leslie Manabe, a spokeswoman for the Santa Monica-based auction house of Kennedy-Wilson.

“It has always been expensive for builders to pay all their marketing and carrying costs, and the slowdown has made it a lot worse,” she said.

“With an auction, they can get all these homes off their books in a single day instead of waiting several months for the project to sell out.”

At some recent Southland auctions, homes have sold for 90% or even more of the builder’s last asking price. That doesn’t sound like much of a discount.

But builders often slash their asking prices once, twice or even three times before going the auction route. By the time a home is sold on auction day, it could be more than 30% below what the developer had originally expected to get for the home.

Lenders

Virtually all lenders are feeling the effects of the real estate slump.

On a single day recently, Great Western and Citicorp reported sharp declines in their quarterly earnings and First Interstate said it was setting aside $68 million to cover possible losses on loans it has made in the state.

Many lenders have laid off workers, closed branch offices or both. Just last month, New York-based Citicorp announced it would furlough 2,000 workers by 1992; San Diego-based HomeFed Bank recently lost more than $100 million in a single three-month period and laid off more than 300 people earlier this year.

“We think that the worst is over,” said Dennis Casey, a HomeFed vice president. “At least, we hope it is.”

Even the few lenders who are reporting revenue gains say they’re being forced to do business a bit differently than when the market was red hot.

“We’re advertising more, and our loan officers are making a lot more visits to realty offices to drum up business,” said Richard H. Deihl, chairman of lending giant Home Savings of America.

“You can’t sit around and wait for the phone to ring. You have to get out there and hustle.”

Borrowers have generally benefited from the slowdown.

“I think that service has improved all across the board,” said Steven McGough, a senior vice president at Glendale Federal Bank.

“Loans are getting approved faster, and there’s much more personalized service than there was before.”

On the downside, many lenders are giving more scrutiny to loan applications and rejecting marginal borrowers who might have gotten a loan a year or two ago.

In addition, most lenders have stopped offering adjustable-rate mortgages with unusually low introductory rates, in part because they’re worried that borrowers won’t be able to handle the monthly payments when the rate is adjusted upward.

“Those ARMs with real low initial rates are pretty much a thing of the past,” said Sam Lyons, a senior vice president with Great Western Bank. “A lot of the institutions that were making those loans have gone out of business, and the rest of the industry has learned from their mistakes.”