The nation's beleaguered real estate market last month seemed suddenly reborn on Wall Street, where the stocks of home builders Kaufman & Broad Home Corp. and PHM Corp. spurted to yearly highs after the Federal Reserve Board cut interest rates sharply.
But on Main Street, where many office buildings and homes continue to languish unsold, the ravages of last year's real estate slump won't so easily disappear, experts say.
"I don't expect an upturn in real estate for several more months," said Richard Peiser, director of the Lusk Center for Real Estate Development, a nonprofit study organization.
"A year from now, the outlook should be a lot more positive for residential real estate than it is now," he said. "But the industry will continue to experience some sluggishness."
After a decade of growth, the nation's real estate market ground virtually to a halt last winter and, despite a brief upturn after victory in the Persian Gulf, hasn't moved much since. That's especially true in California and the Northeast, where widespread layoffs and a sluggish economy have chilled a decade of speculative fever that turned more than a few middle-income homeowners and shrewd real estate developers into a wealthy new class of landed privilege.
The effects have rippled beyond U.S. borders to foreign developers who bet heavily on U.S. real estate. Maruko Inc., the Tokyo-based owner of such prominent Southern California hotels as the Hollywood Roosevelt and Hyatt Grand Champions in Indian Wells, last year became one of the largest Japanese companies to file for protection from creditors after three years of aggressively expanding its U.S. real estate holdings.
Although the California economy is the nation's most diverse, with strong industries in agriculture, entertainment and international trade, some analysts predict that it may as long as a decade to absorb all the excess office space that has sprung up in Orange County and downtown Los Angeles.
Since 1987, for example, the office vacancy rate in greater Los Angeles has risen to 20.9% from 13.9%, according to Cushman & Wakefield of California Inc.
Likewise, home sales were so lackluster last year in California and most of the rest of the nation that even sharply lower interest rates haven't sparked a sustained rebound.
"I personally don't see things changing that much with all of these layoffs," said James I. Sorensen, president of West Venture Development Co., an Encino-based housing and shopping center developer. "People need to have a sense that they can meet their obligations in the near term. I don't see prices moving much for three or four years."
Despite sagging prices, only about 20% of California residents can afford to buy a home selling at the median price of $195,000, according to the National Assn. of Realtors.
Luxury homes, in particular, fell out of favor as even the wealthy lost confidence that real estate would continue to appreciate rapidly, as it did in the 1980s.
In swanky Montecito near Santa Barbara, for instance, musician Kenny Loggins' Mediterranean-style villa has been on the market for 18 months, even though Loggins has slashed his original $14-million asking price by more than $2 million and launched a sophisticated marketing campaign that has included the distribution of more than 2,500 color brochures and an 8 1/2-minute videotape.
Such market conditions have prompted many big developers to focus on erecting smaller, cheaper starter houses in remote areas of the Inland Empire and Antelope Valley. Many such developers report strong sales of entry-level homes to the only group that seems to be buying these days: first-time home buyers, an estimated 2 million strong.
Although the most pessimistic analysts predict that everything from shopping malls to single-family homes may experience the same drastic price reductions as luxury homes, most experts believe that prospects of a real estate free fall are overstated.
"The demand for most forms of real estate is fundamentally a function of population growth," said a recent report issued by UC Berkeley's Center for Real Estate and Urban Economics. "Although California did not escape the commercial overbuilding malaise of the 1980s, thanks to continuing employment growth, its prospects for eventual recovery are reasonably bright."
And a recent Commerce Department report forecasts that housing starts will grow 12% this year.
In the meantime, tenants--both commercial and residential--are enjoying an unaccustomed upper hand. Many building owners are offering several months' free rent, tenant concierge services, free trips and other promotions in an effort to keep their apartments and office buildings filled.
But lower interest rates are expected to eventually shift the balance of power back to landlords as well as help many homeowners, house hunters and even real estate developers lower their debt-service costs.
The recent interest rate cuts, for instance, are expected to drive rates on 30-year fixed mortgages under 8% this month. A one-percentage-point reduction on a 10%, 30-year loan with a $100,000 balance would cut monthly principal and interest payments by $72.95.