The Up Side of Property Downturn
All around us here in California, real estate prices continue to fall. Houses are getting cheaper. Commercial properties are way down. Many builders and lenders are in terrible straits. You’d think the world was coming to an end.
To paraphrase Dan Quayle, a shirt is a terrible thing to lose. And so it is only timorously that I interrupt all this breast-beating about the fall of California real estate to suggest that what is happening may be painful, but it isn’t necessarily bad.
At this juncture, it’s important to say that, of course, people who are suffering deserve sympathy. Homeowners who bought in 1989 and have to sell today are especially unfortunate, and I feel for them. As I write these words, my own home is losing value.
But it’s also important to feel for the people who couldn’t buy in 1989, or any other time, because prices were so high. And it’s important to feel for the common good, which is what’s really at stake here. A dispassionate look at our ongoing real estate slump shows that most Californians will actually end up winners.
First, consider who’s hurting most from the downturn. Dataquick Information Systems, the La Jolla-based real estate data firm, reports that (using August data) 1,200-square-foot homes in Los Angeles County are off just 2.5% from their 1989 peak of $181,700. By my estimation, that house required $51,000 in annual income to support.
Now let’s go uptown a little. A 1,700-square-foot home back then sold for $256,700, which took $73,000 in income. Home prices in this category are off 11.4%.
Even fancier still, a 2,550-square-foot house costing $436,700 required $124,000 in annual income--and is down fully 18.4%.
What does all this mean? That the people for whom a single-family home is mostly shelter (and I don’t mean tax) have been hurt least. The pain has been in proportion to one’s ability to bear it.
Of course, the larger houses required all that income if you put down just 20%. But if you put down more, you’ve probably already profited from a house. And bear in mind that only 8% of Los Angeles County homes are 2,550 square feet or larger. Indeed, less than half the households in metropolitan Los Angeles own their residences, versus nearly two-thirds of Americans generally.
Now look at your own home. It’s the same place it was before prices started sinking. If you bought it to live in, you’re getting what you wanted. If you bought it speculatively, you’re getting what you should have expected.
Remember too that if your house is worth less, so is the one you want to buy. Since big houses have dropped more than little ones, Leslie Appleton-Young of the California Assn. of Realtors is right when she says: “For anyone trading up, there’s a tremendous benefit on the buying side.” The California real estate market is suddenly pro-family.
But lower real estate prices have huge advantages for all of us.
Two years ago, the California Business Roundtable asked senior executives of 836 California firms which factors about the state have the worst effect on business. Despite all the talk of onerous regulations, 77% cited the cost of housing, which ranked first. It narrowly edged the cost of labor, which was named by 74%.
The two problems are connected. Dennis Capozza, a University of Michigan professor of finance and real estate who predicted the Southern California downturn, says sky-high real estate prices raise labor costs: “To attract workers, firms have to pay more, and that makes their products uncompetitive.”
The corollary is that lower real estate prices should help. Says Edwin Mills, professor of real estate at Northwestern University: “You stop losing jobs so rapidly, and you stop losing people who refrain from coming in, including employers.”
Cheaper commercial real estate should be especially beneficial. Businesses can lower their overhead, and more important, they can expand. Cheaper office and manufacturing space also makes it likelier they’ll expand here, instead of Arizona or Utah.
None of this is to minimize the dislocation happening now. The construction industry is dead in the water, and California’s army of real estate agents has suffered many casualties. Some small Southern California banks, their assets overwhelmingly in the form of real estate loans, may even fold.
But as with the aerospace industry, whose short-term shrinkage is painful, we’ll be better off in the long run with a saner, healthier economy. And while home appreciation in the past was a source of debt-based capital, maybe in the future cheaper houses will let people accumulate capital the old-fashioned way--by saving.
California real estate remains among America’s most expensive, which is perfectly reasonable. This is a desirable place, people keep coming, and expensive real estate is a sign of economic vigor, not sickness. But when real estate gets too expensive, it can start to strangle an economy. Inevitably, the market intervenes.
It would be great if home values in California went up forever and incomes somehow went up even faster, so that Californians had an endless supply of home equity, real estate profits and cheap housing.
But that can’t happen. Let’s content ourselves instead with having a nice place to live and a strong economy. All it takes is cheaper real estate, which we’re getting.
It hurts, but as they say down at the gym--no pain, no gain.
Who’s Losing . . .
In Los Angeles County, most home prices are down from their peak, but some homes are off more than others. In general, the bigger the house, the harder the fall.
Percent Peak Home size (sq. ft.) decrease price 1,150-1,250 2.5% Aug., 1989 1,650-1,750 11.4% May, 1989 2,500-2,600 18.4% May, 1989 3,500-3,600 11.0% June, 1990
Source: Dataquick Information Systems
