Home Prices Catch Fire, Light Up State Economy
Exports and entertainment, two supernovae in California’s dazzling recovery, have dimmed in recent months. But an old familiar star--real estate--is heating up and keeping the state’s economy radiating.
Once again California is leading the nation in rising home values, with the Bay Area and San Diego and Orange counties outpacing all other major metropolitan areas. That is boosting consumer confidence, translating into higher retail sales and a surge in home equity borrowing.
To be sure, many homeowners in Southern California have not yet regained the equity lost during the recession, but some have, and others are getting close. So they are tapping into new home equity lines to remodel kitchens, buy cars, consolidate debts and finance start-up businesses--all activities that are pumping billions of dollars into the economy and helping create tens of thousands of jobs. Home builders are racing to keep up with demand.
Fred and Melinda Beaver of Torrance noticed the housing market turnaround about a year ago. They had paid $243,000 for a three-bedroom house in July 1992, and they watched helplessly as prices fell throughout the community. In 1995, the family two doors down walked away from their upside-down mortgage; another neighbor waited three months for a buyer and took a loss. The Beavers fixed up their house and decided to tough it out.
On a recent Friday night, Coldwell Banker agent Marsha Salsido planted a “For Sale” sign in the Beavers’ yard. The next day, two dozen people walked through, and it sold that evening. The sale price: $289,000.
“It’s amazing,” said Fred Beaver, a communications engineer at TRW. The Beavers are moving up to a bigger house farther west in Torrance. They have already spent $2,800 for a wicker set for the den and are shopping for new dining and living room furniture.
“Real estate is key to the strength and relative vibrancy of the California economy,” said Mark Zandi, chief economist at Regional Financial Associates, a national economic consulting house in West Chester, Pa. Zandi estimates that at least 10% of Southern California’s jobs are tied to the housing market. “It is the difference between an economy growing above or below the nation.”
And its resurgence could not have come at a better time.
Market’s Rise Offsets Weakness of Exports
Asia’s woes are clearly taking their toll, weakening California exports of computer products and engineering services and casting a pall on the tourism industry. With sales slowing at major high-tech companies such as Intel and National Semiconductor, partly because of the Asian situation, the state’s manufacturing employment grew just 1.5% in the first quarter of this year--less than half the rate of the same period a year ago. By comparison, construction employment in the state boomed 10% in the first quarter.
Asia accounts for half of California’s merchandise exports, which have grown briskly every year this decade, from $58 billion in 1990 to $110 billion in 1997. But Howard Roth, a Bank of America economist, figures that the state will be lucky to stay even this year. “The worst isn’t behind us,” he said.
Asia’s predicament also has pinched entertainment, as Hollywood is finding it harder to sign film-distribution agreements there. That has compounded problems caused by a strike threat earlier this year and a shortage of sound-stage space. All in all, employment in the core motion pictures sector in Los Angeles County--which had grown an average of 10% a year since 1992--has barely budged since last fall, and total production days, another key barometer of the industry, are actually down by a half-percent through May of this year.
California’s long-term prospects for international trade and entertainment remain good. But for now, their slowdown is even affecting the real estate industry. For example, it is beginning to push up office vacancy rates in the hot Glendale-Burbank entertainment corridor. Brokers confirm that the 500,000-square-foot building now being erected in Glendale, formerly known as the Palladian Tower, has been slow to get tenant commitments.
“There’s less appetite for space from entertainment companies,” said Bill Boyd, a senior vice president at Grubb & Ellis who specializes in that region.
But Boyd quickly adds that companies are not vacating office buildings there either. And on the whole, he and others say, Southern California’s real estate market, led by the residential sector, is continuing to strengthen and is expected to contribute more to the state’s economy, now in its fourth year of expansion.
Real estate accounts for a fifth of the national economic activity and has traditionally played an even stronger role in California, where land and home prices are generally higher. Thus far, real estate has more than offset the weakness in the state’s export industries and entertainment.
Construction is leading all other industries in job growth, and other housing-related sectors--such as lumber and furniture manufacturing, building-material retailers and mortgage lenders--all are doing brisk hiring.
Tom Lieser, a UCLA economist, remembers how law firms, accounting companies and a host of other service providers laid off workers because the housing market collapsed earlier this decade. “In the downturn, we realized how dependent we are on real estate,” he said. “Now it is once again generating jobs.”
Statewide, the housing market has been gaining momentum since prices hit bottom in the latter half of 1996, and it has really taken off in the Bay Area and San Diego and Orange counties--where job growth has been frenetic.
In April, more than 607,400 existing houses changed hands in the state, a 15% increase from the same month a year earlier, according to the California Assn. of Realtors. The median price of houses sold that month rose 10% to $199,160.
The biggest increases were recorded in Santa Clara and San Diego counties, both up more than 17% from a year ago. Orange County’s median price jumped 13%, and Los Angeles County, where the job and housing recovery has trailed the state by about a year, also saw a nearly 10% price hike in April, fueled by heated activity on the Westside.
The Inland Empire, comprising western Riverside and San Bernardino counties, has yet to make a comeback, although home buyers are expected to push farther east as prices climb in Los Angeles and Orange counties.
Many Southland homeowners who purchased at the peak of the market have yet to recover all of their equity. Nima Nattagh, an economist at the real estate research firm Experian RES in Anaheim, analyzed the price changes of houses that have changed hands more than twice--considered a more accurate measure of a property’s underlying value. He estimates that people who bought in Orange County in 1990 remain about 10% away from drawing even, and the figure is far higher for those in Los Angeles who purchased at the peak in 1991.
Nevertheless, Nattagh says, he has no doubt that homeowners will see all of their equity restored, given the recent impressive gains and expectations for continued low interest rates.
“California has emerged as leading the nation,” he said.
Between the first quarters of 1997 and 1998, home values in the Bay Area shot up almost 20%, according to Experian’s figures. Five other California areas--including Orange County, at 13%, and Los Angeles, at 6.7%--placed in the top 10 among 38 major cities nationwide.
Among all metropolitan areas, including smaller ones, Naples, Fla., led the housing market in this period, with a nearly 22% gain on resale of existing homes.
Builders Try to Keep Up
One big reason values are likely to keep growing for at least the next couple of years is the shrinking supply of available homes. Home builders are frantically trying to keep up with bulging demand as more people and jobs pour into the state.
“Demand is at a record high because there are so many new jobs and people are recovering equity they lost,” said Randall Lewis of Lewis Homes, a major builder in Upland. But Lewis and others say they are constrained by available land in prime locations and the lengthy permitting process. “The only thing holding down growth is the supply of lots ready to build on,” he said.
For current homeowners, that’s not necessarily bad news. The short supply is likely to push up home values even higher, which in turn will make some families scramble to find housing but will boost consumer confidence even more among homeowners.
“It has tremendous psychological impact on one of the most important constituencies in Southern California--the backbone of the middle class,” said G.U. Krueger, an economist at the California Assn. of Realtors.
Perhaps the biggest psychological impact is what economists call the “wealth effect.” Seeing their home values increasing, consumers are likely to feel better off, thus inducing them to spend more for goods and services. Although that may not be all good because households are more inclined to save less, in the shorter term the additional spending gives a healthy kick to the economy.
The wealth effect has clearly taken hold in the Bay Area, where retail sales are approaching double-digit increases, just as they did in the Southland during the housing boom in the mid- and late-1980s. The beginnings of that are also emerging in Southern California.
Mike Amato, head of Washington Mutual Bank’s Southern California branches, says the volume of home equity loans and lines of credit in the Southland doubled in March and April from the first two months of the year, to about $50 million. “When they see real estate values expanding, they get confidence. That’s when they remodel their homes and start a new business,” he said.
Studies by the Federal Reserve and Wells Fargo Bank show that home equity loans are used most frequently for home improvements, followed by repayment of other debt, major purchases and educational and business needs.
Two months ago, Daniel and Naratorn Menzie, both 38, doubted that they could qualify for a $25,000 equity loan. They had paid $197,500 for a two-bedroom, one-bath house in Sherman Oaks in March 1993, and they estimated that the value had dropped to $160,000 in 1996. But when they applied for the loan, the Menzies were shocked when an appraiser for Great Western Bank gave them the news. Yes, they easily qualified for the loan. And why not? The new appraisal: $220,000.
“When I mentioned it to my husband, he didn’t believe it,” said Naratorn Menzie, a legal secretary who plans to use the low-interest loan to add a second bathroom and a family room with a fireplace. “I think it’s too high, but I’m happy.”
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Change in Home Values
Home values nationwide are increasing at the highest rate this decade, and California is leading the way. Of the top 10 fastest-growing major metropolitan markets, six were in California. The percent change is calculated from the first quarter of 1997 to the first quarter of this year.
% Change
San Francisco: 19.8%
Oakland: 17.7%
San Diego: 16.3%
Orange County: 13.0%
San Jose: 11.9%
Seattle: 9.6%
Detroit: 9.3%
Boston: 8.1%
Denver: 7.7%
Los Angeles-Long Beach: 6.7%
Note: Home values are based on resale value of the same homes which have sold at least twice--a method considered more accurate than changes in median prices of homes sold.
Source: Experian RES
*
IN REAL ESTATE: * Other high-appreciation markets include Naples, Fla.; Jersey City, N.J. K1
