Don’t Expect a Great Leap Forward in Home Prices Soon
It’s the time to neatly summarize the year that was and tell everyone what’s going to happen in the year to come.
I’ll summarize 1993. As for making predictions, I’ve learned that’s a bit dangerous-- but property values aren’t about to take any great leap forward in the near future.
The San Fernando Valley Assn. of Realtors reports that the median single-family home sale price as of Dec. 2 was $180,000. A year and a half ago, the median sale price for a single-family home was $239,000. Ouch!
The number of properties listed for sale is significantly down in the Valley. This probably has less to do with quick sales than with the fact that many homeowners have decided that now isn’t the time to sell. There are about 8,300 houses and 2,300 condos listed with Valley real estate brokers.
The consensus among Valley and Ventura County real estate agents is that home sales are doing decently in the under-$250,000 category. The volume of sales is actually up about 10% in the Valley’s lowest-priced neighborhoods this past year, and prices may even be up a bit for some homes in this category.
According to data compiled by the realty association, the volume of sales actually increased in mid-1993 by about 10% over mid-1992 figures in such communities as Panorama City, Pacoima, San Fernando and Sylmar. That trend is expected to continue.
Decent numbers have also come out of Ventura County, where for the first 10 months of 1993, sales activity was 3.4% higher than during the same period last year. Housing prices were down 1.3% this year, but that’s the smallest drop in Southern California, according to TRW-REDI Property Data. While the numbers are improving, at current sales rates, it would take at least a year to sell all the homes currently offered for sale.
Obviously, a lot of what happens in real estate depends on the job market. Los Angeles County lost about 26,000 aerospace jobs in 1992, roughly another 30,000 in 1993 and a loss of another 25,000 is forecast for 1994. About one-third of these job losses affect residents of the San Fernando Valley, according to the Economic Development Corp. of Los Angeles County.
It’s no wonder that 42% of Valley residents polled by The Times this spring reported that someone in their household was fired, laid off or lost income within the past year. All this can’t help but hurt the local housing market and the demand for office and industrial space.
Vacancy rates increased in 1993, according to major commercial real estate brokers. The vacancy rate in many Encino and Sherman Oaks office buildings went up several percentage points this year. And the vacancy rate for so-called Class B buildings has climbed even more.
One problem is that Warner Center Plaza III in Woodland Hills was completed in November, 1991, and it is still 100% vacant. That’s a whopping 592,000 square feet of empty space. Elsewhere in Warner Center, Transamerica Insurance Group announced that it wants to vacate about 240,000 square feet. And 20th Century Insurance is planning to vacate about 200,000 square feet within the next two years to move to the Warner Ridge project now under construction.
Surprisingly, some projects in the Conejo Valley have been so successful that there’s been a 10% increase in rents there in the last 24 months. This compares to a 15% drop in rents along Ventura Boulevard in Sherman Oaks and Encino.
“1993 was a confusing year for real estate,” said Jack Kyser, chief economist for the Economic Development Corp. “In 1994, we’ll continue to lose high-paying jobs, and real estate foreclosures won’t be a pretty sight.”
Valley homeowners shouldn’t expect the situation to improve too quickly, Kyser said. “There’s been an increase in the number of homes sold, but the prices have been declining. It will be a pretty painful situation for people who bought homes three or four years ago.”
The upside to all this, he said, is that “for first-time home buyers, 1994 will be a good year with a large inventory of well-priced homes and low interest rates.”
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There is at least some hope for real estate on the tax front, said Steven M. Friedman, regional director of real estate advisory services at the accounting firm Ernst & Young in Los Angeles.
“There were clearly winners and losers in the federal tax bill that President Clinton signed into law last August,” the Sherman Oaks resident said. “Real estate was for a change a winner.”
There are four basic changes in the law that should help real estate, Friedman said. First, low-income housing credits have been made a permanent part of the tax law. This will encourage investors to finance low-income housing projects and get a tax break.
Second, rental income will no longer be considered a passive activity per se for tax purposes. That means losses from rental properties can be considered as operating versus investment losses and so can be used to offset operating and earned income. This change “applies to a small universe of people, but it has a dramatic impact on that universe,” Friedman said. The result, he said, is that owning rental property will be more attractive as a tax shelter.
Third, cancellation of a debt obligation by a lender will no longer necessarily result in income for tax purposes. Many borrowers have complained that they’ve been hit not only with a reduction in their property values, but also with a tax bill when a lender forgave some of their debt. Owners of commercial property will now be able to defer any “income” that results from debt forgiveness--as long as the taxpayer owns another commercial property.
Residential property owners will be shocked to know, however, that this change only applies to commercial real estate. Starting in 1994, lenders must fill out an IRS Form 1099 for any residential debt they forgive.
Finally, real estate investment trusts are getting better tax treatment, and analysts predict that this will make these real estate securities more attractive to pension funds. With more pension funds in the picture, there’s more financing for real estate.
If all these real estate indicators seem to confuse you, you’re not alone. Only time will tell when real estate in Southern California makes its much-hoped-for turnaround.
