Q & A : What Led to Lag and When Will It End?
At the height of the building boom in 1988, party chatter in Orange County centered on how much the price of housing had gone up that day and the huge profits everyone seemed to be making from appreciation.
Homes are still a major topic of conversation--after all, a house is the biggest investment most families ever make. But now, cocktail chit-chat is about falling prices, how long homes sit without selling, the latest giveaway incentives by desperate builders.
The local housing industry is in its worst slump since the 1982 recession and in a community where real estate has been king for decades, people are understandably nervous. What follows are some answers to frequently asked questions about the current housing market:
Q. What led to the downturn in the county’s housing market?
A. There are many technical and intangible factors: the loss of consumer confidence linked to the Persian Gulf War, the recession, the credit crunch brought on by the S&L; and bank crises, interest rates and government monetary policy. But basically, local housing prices just got higher than most buyers could afford or were willing to pay. This happened as investors, builders, landowners, lenders, government regulators and existing homeowners with huge amounts of equity tried to cash in on the boom. The bust then fed on itself, forcing builders to stop construction, sellers to lower prices and lenders to carefully scrutinize loans. These events will help bring supply and demand back into balance, leading again to an improvement in the market.
Q. How far are house prices likely to fall?
A. This is difficult to predict, but most real estate experts do not expect a free-fall. With the exception of some lingering distress sales at the higher end of the market, new home prices probably are as low as they will get. The reason is that sales have started picking up, and builders are offering incentives only on homes that are already built. When the current inventory is gone, so are the price cuts. Unless, of course, the recession worsens. Then all bets are off. And keep in mind that the average price of a home in the county dropped only 1.6% last year. Still, to sell an existing house, it needs to be priced sensibly.
Q. There is a lot of talk about the credit crunch. What is it and what caused it?
A. Basically, the savings and loan industry has all but collapsed after an era of excesses and freewheeling deregulation. The nation’s thrifts provided much of the money used to finance home construction, and with renewed regulatory zeal has come a crackdown on lending. Government regulators generally consider land acquisition and real estate construction loans to be highly speculative and no longer allow thrifts to make such loans. The tough thrift regulations have also spilled over into commercial banking, putting a big crimp in another potential source of construction money. Thus, a credit crunch is born.
Q. How will home builders make houses in Orange County more affordable?
A. By using a cookie-cutter approach, doing away with a lot of the architectural and interior design frills that put Orange County on the cutting edge of residential design. They will also build smaller units in higher-density developments.
Q. When can we expect things to improve?
A. The experts say home sales already are picking up a bit. They track the improved pace back to Jan. 16, the day the U.S.-led coalition forces in the Persian Gulf launched the air attack on Iraq. That positive movement, we are told, relieved consumers’ anxiety about the future and started unlocking their pocketbooks. At the same time, builders have managed to cut down on the inventory of unsold homes in the county and have all but stopped acquiring permits to build new units. As a result, many builders and industry analysts now talk about a shortage of new homes that could begin developing by the third quarter. And a shortage typically drives prices up and creates a sense of urgency in the market that creates more demand, resulting in more pressure on prices. Local economists now predict improvement by year’s end.
Q. What is the outlook for mortgage rates?
A. Most economists believe that the interest-rate situation will remain relatively stable this year with fixed-rate mortgages dropping slightly, perhaps as much as one-quarter of a point, between now and the middle of the year, and then edging back up to about current levels by year’s end. Because short-term rates are more volatile, the introductory rates on adjustable mortgages could drop even more than that by the middle of the year, some economists believe.
Q. There have been lots of auctions and incentives offered. Are these really good deals?
A. If you shop carefully, you can get a deal. Some builders are still cutting prices to move standing inventory, but the number of homes affected is shrinking rapidly. And most incentives don’t actually lower the cost of the home, they just make it easier to move in by cutting interest rates or slashing the cost of drapes and carpets and landscaping. And if you are interested in an auction, find out what the houses actually sold for--not just what they were listed for--before the auction was slated. And remember that an auctioneer gets a percentage of the final selling price and isn’t in business to give things away. The whole purpose of an auction is to whip up a frenzy of interest where one didn’t exist in order to push prices as high as possible.
Q. Why are houses in Orange County so expensive?
AThe fees and land donations required by government are part of the reason homes in the county cost so much. New home buyers are paying in part for the roads and sewer systems and schools and parks and fire stations that they create the need for. But Orange County is also a place where people want to live, and that creates demand, enabling landowners to put a premium price on their property. High land prices are a big part of the price of a new home here. Orange County home buyers have also demanded a lot of frills and costly design treatments in their homes.
