Predictably, Some Experts Believe They Can Forecast Property Values
I recently received a notice in the mail from two University of Michigan business school professors who claim to have “developed a system that predicts housing appreciation rates and provides a reliable tool for forecasting. . . . The system will allow homeowners to gauge how their investment will perform over time.”
Taking the guesswork out of buying a home sounds great, but how realistic is it to believe that anyone can accurately forecast property values?
Professors Dennis Capozza and Paul Seguin accurately predicted in 1990 that home prices in Los Angeles would plummet by about 25% to 30%. Many of the duo’s predictions six years ago for other national housing markets have also proved accurate.
Basically, the Ann Arbor-based professors reason that areas with high rental rates in relation to housing costs will experience low housing appreciation, while communities with relatively low rental costs will post dramatic appreciation over the course of a 10-year period.
Over the long term, Capozza maintained, the relationship between rental income and appreciation will even out to be the same in every U.S. housing market. “All markets are predictable,” Capozza said. “They tend to revert to a long-term mean.”
Los Angeles and Ventura county rentals were high in relation to property values a few years ago, Capozza said, foreshadowing a dramatic drop in prices. Now rents and property values are in greater equilibrium, he said, and Los Angeles is no longer at risk for decreases in property values.
While most of the country is basically treading water with appreciation rates about even with inflation, Capozza now expects the L.A. housing market to register slightly above-average capital gains, or about 1% a year after inflation.
That’s the overall prediction for Los Angeles County; Capozza doesn’t break the numbers down any further. That notwithstanding, Capozza said, “people in Los Angeles can safely purchase a home and not get large declines in their property values.”
The notion that any system can accurately predict property values anywhere in the country doesn’t quite seem possible--even to economists, who are used to making predictions.
“A model that can predict property values sounds appealing, but I have a basic skepticism about such predictions,” said Jack Kyser, chief economist of the Economic Development Corp. of Los Angeles County. “Each local market will have its own nuances.”
Kyser does, however, have some local predictions of his own. Angelenos should expect no price increases this year; this really means 1% to 2% real decline when inflation is taken into account. In 1997, Kyser predicts a modest 1.5% increase in local prices--which will probably translate into a modest after-inflation decrease.
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Stymieing the prospects for price increases--especially in the San Fernando and Antelope valleys--Kyser said, are persistently high numbers of foreclosures in Los Angeles County. In 1990, there were 2,641 foreclosures. In 1994 and 1995, the annual totals multiplied more than tenfold to about 28,000. Kyser expects the volume of foreclosures to decrease only slightly in 1996 to about 26,000.
Kyser’s predictions carry two big caveats. The first is that the rate of change in home prices will vary greatly by city, neighborhood and block. Some parts of the Valley and Ventura County, Kyser said, will stabilize or improve; others will continue to experience a further decline in values.
The second factor to consider in assessing any forecast is the information being used to make predictions. “The quality of economic data is deteriorating because of cutbacks in spending by the government agencies that issue various statistics,” Kyser said. That has an impact on the accuracy of forecasts.
Tom Lieser, associate director of the Anderson-UCLA Business Forecast, agrees with Kyser. “I’m somewhat skeptical of forecasts,” said Lieser, himself a forecaster. “Last year, we predicted a recovery and it didn’t happen. We misjudged the inflation rate and prices in fact declined.”
For 1996, Lieser and his colleagues predict that home prices will turn up and slightly exceed inflation. But, he warned, “it’s going to vary much by location.”
UCLA makes its predictions according to a calculation of home values based on a so-called typical home with certain square footage and amenities. The forecasts don’t predict increases or decreases in average or median prices, Lieser said, because such predictions are usually skewed. Last year, for example, part of the reason that average and median prices posted such a decrease was because cheaper homes were selling better than more expensive ones and there were fewer luxury home sales to boost average and median prices.
The California Assn. of Realtors is predicting very modest pre-inflation price increases for 1996 and some after-inflation declines. Sales, according to the CAR, are expected to increase 7.4% to 462,000 for single-family homes. The median price for homes is expected to edge up 0.5% before inflation to $178,540. Condo prices are expected to decline from a median of about $138,510 in 1995 to about $138,000 in 1996.
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Nobody knows for sure which forecasts will be accurate and which won’t, said Lieser of UCLA. All the economic indicators suggest that now is a good time to buy, but buyers are still reluctant, he said.
People with substantial income and education are, in fact, moving to Los Angeles, and in the last five years there hasn’t been enough new housing construction to keep up with demand. In the future, Lieser said, this could lead to another Southern California housing shortage.
For now, many buyers are still waiting for prices to absolutely bottom out, Lieser said. “It all comes down to a matter of confidence.”
Ron Galperin is a real estate attorney with Wolf, Rifkin & Shapiro in West Los Angeles.
