Solid Ground for Shaky Times
Southern California’s resilient residential real estate market is the silver lining amid the recent gloomy economic news, as consumer spending from rising home equity and refinancings as well as employment generated from real estate transactions continue to buoy the local economy.
Increasing home values, coupled with low interest rates, have prompted consumers in near-record numbers to use home-equity funds and extra cash from refinancing transactions for purchases that pump money into local businesses, shielding the region from the economic shakiness the rest of the nation is feeling more acutely, analysts say.
Skyrocketing home sales have generated employment for lenders and real estate agents, and also have given a boost to related businesses, such as home inspectors, insurance agents, and to cities and counties through increased tax revenues.
Since the 1970s, real estate has directly accounted for at least 40% of the upswings and downswings of the economic cycle, and it services a large component of the nation’s gross domestic product, said Edward Leamer, director of the UCLA Anderson Forecast.
In the last five years, the value of Southern California’s housing has increased 59% to $1.5 trillion, and is up 76% compared with 1988, when the region experienced its previous real estate boom, according to DataQuick Information Systems Inc., a La Jolla firm that tracks real estate trends.
On an individual basis, the average residential property in California today is worth about $42,000 more than a year ago, earning homeowners about $3,500 a month, tax-free, said John Karevoll, a DataQuick analyst.
“If that money is plugged into the economy,” Karevoll said, “it’s spectacular.”
No data are available to quantify how much consumers are spending from the cash they’re pulling out of refinancings, but the surge in that activity has, at the least, lifted homeowners’ confidence and spurred them to spend more freely on dinners out and entertainment, economists say.
“When we cut people’s monthly mortgage payments by 20%, and they’re saving $500 a month, they feel like they can shop more, maybe even invest in a new car,” said David Soleymani, managing director of First Capital Corp. in Santa Monica. “It has a ripple effect in the economy.”
Seasonably adjusted U.S. auto sales, at 18.1 million nationwide in July, were the highest since an all-time record of 21.3 million last October. For Southern California, July auto sales were up 20.4% from last July, according to JD Power & Associates, an auto industry market researcher.
After recently refinancing his home loan, Randal Winter, a Newhall contractor, is about to begin construction of a room and bath addition on his Stevenson Ranch home in the Santa Clarita Valley.
He and his wife Gail not only are saving $200 a month on their mortgage, which they will use for home-improvement purchases and savings, but the couple also pulled out $50,000 in the refinance for the remodel, which will employ local plumbers, electricians and construction workers. When the job is done, the Winstons will buy furniture, drapes and carpet, giving a boost to local merchants as well.
The nearly unprecedented level of mortgage refinancing, the result of low interest rates, has had the greatest impact on the local economy, analysts say.
During the week ending July 26, the Mortgage Bankers Assn. of America posted its fourth-highest level of mortgage loan applications on its market composite index, up about 95% compared with the same period a year ago. Refinancing activity represented about 66% of the total applications.
In Southern California in June, lenders reported a near-record $10.6 billion in refinancings, about double the number from the same period a decade ago, according to DataQuick.
Patsy Grant, a home mortgage consultant with Wells Fargo Home Mortgage in Pasadena, said that her office posted its biggest month ever last month. Refinancings, which usually account for about 60% of the loans, made up about 85% of her office’s applications.
Mark and Jennifer Fedde, owners of a Pasadena furniture store, recently refinanced their Sierra Madre home to put in a new kitchen floor and add to their children’s education funds.
“We have three kids, with lots of cost,” Mark Fedde said. “We saw the rates coming down, and saw an opportunity to save on our monthly mortgage and invest in home improvement.”
Real estate investment is looking even more attractive after the stock market’s recent plunge, analysts say. Last year, for example, the average real estate investment trust stock was up 10% in value, compared with the 20% decline of the Standard & Poor’s 500, according to a Real Estate Research Corporation report.
During the last decade, the average stockholder earned $23,000 in the equity market, whereas the average homeowner earned $44,000 in home equity, according to Wells Fargo Home Mortgage.
Put another way, a $50,000 investment as a 20% down payment on a Southern California home in June 1992 would be worth about $175,000 today, according to DataQuick’s Karevoll.
Falling mortgage rates and a tight supply of housing pushed the June median cost of a Los Angeles County home up 18% from a year ago to $269,000, marking the eighth consecutive month that the county set a record price, according to DataQuick. Home sales jumped 9% in Orange County, typical of the brisk pace regionwide.
Buyers put an average of about $4,000 in costs into the pockets of lenders, title insurance companies, inspectors, notaries and others per transaction, according to agents and lenders. Realtors earn about 6% on each residential home sale, so a $269,000 sale can generate $16,000 in commissions.
Buying and selling homes and refinancing mortgages aren’t the only ways in which the economy benefits from real estate. Homeowners who use their equity gains to purchase a certificate of deposit, for example, pump money into the economy when the bank uses that money to lend to developers, who pay laborers and buy lumber and other construction materials.
The financial cushion real estate provides regional economies is limited, however. The widening gap between income and home values has some economists worried about how long the current spike in prices can last. They also caution that the recent stock market decline could trigger a change in the spending habits of consumers, which in turn could cause a slowdown in the housing market.
But as long as the demand for housing continues to outstrip the supply, housing will probably continue to have a positive impact on the economy, they say.
“The high-priced market is not without risk,” said Stuart Gabriel, director of the USC Lusk Center for Real Estate. “But there won’t be a house-price collapse.”
