Strong Home Values a Shelter for Economy

Southern California’s buoyant residential real estate market and rising home values are a key factor shielding the region from recession. That marks a sharp contrast with the early and mid-1990s, when falling prices and slow sales contributed to the area’s worst economic collapse since the Depression.

The strength of residential real estate also is benefiting other U.S. metropolitan areas. But few, if any, have enjoyed rebounds as dramatic as Southern California’s.

It is a major reason Southern California is suffering only a slowdown while the San Francisco Bay Area, hurt by a deep downturn in high technology that has deflated home prices lower, is in recession.

Real estate has remained a stable source of jobs for the local economy, including employment for construction workers, lenders and real estate agents. Even more important, analysts say, is how rising home values have supported consumer spending.

Strong home values and low interest rates have combined to spur a wave of refinancing. That has enabled consumers to cut monthly mortgage payments, and sometimes take out cash as well, providing a local economic stimulus.

“If you cut your mortgage payment, it’s just like a monthly tax rebate check. It’s a big deal for maintaining purchasing power,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy.

Economists say high home equity, particularly in areas such as Southern California, also has kept consumer confidence from falling further amid the U.S. recession. As a result, they say, consumers continue buying cars, homes and other items.

All the same, the local real estate business hasn’t been enough of a force to prevent a slowdown in the region’s growth. And it could become less of a prop for the local economy, with home building in the region expected to decline moderately this year and most of the mortgage-refinancing surge apparently over.

For now, though, Southern California’s residential real estate business is providing economic staying power and helping the region resist the national recession.

“It has translated into spending we didn’t see in the last downturn,” said Fred Furlong, an economist with the Federal Reserve Bank of San Francisco.

In other cases, such as that of Virginia Bock, home equity has provided a financial safety net. After Sept. 11, Bock knew her job as a product manager for an airline services company in Orange County was in jeopardy. She responded by quickly refinancing the mortgage on her Irvine townhouse, reducing her monthly loan payment to $1,300 from nearly $1,500. As part of her new loan, Bock obtained a $100,000 line of credit allowing her to borrow money by drawing on her home equity.

Bock was right about her job--she was dismissed Nov. 1. By relying on her savings and the benefits of her new home loan, Bock said, she can stay in her townhouse and survive financially until at least this fall, if she can’t find a good job before then.

“I’m really not in a bad situation,” she said.

Real estate specialists such as mortgage broker Edward J. Rosenblum, co-owner of Flagship Mortgage in the San Fernando Valley, say the difference is striking between the situation today and the devastating Southern California recession of the early 1990s.

Then, Rosenblum ran a mortgage finance operation in the Antelope Valley and worked with home builders. One of the big problems, he said, was that would-be home buyers balked at going ahead with purchases, despite plummeting prices, because they sensed that prices might go even lower.

Some Antelope Valley home builders couldn’t persuade people to buy even with offers of free swimming pools and allowances of $20,000 to $25,000 for upgrades.

Things were so grim that at one failed housing development in Lancaster, unfinished homes were sold to the filmmakers of “Lethal Weapon 3” and used as the background in a simulated inferno scene. (The homes weren’t actually burned down, but they were bulldozed after filming was over.)

In other cases, homeowners handed the house keys to their mortgage lenders because they owed more on their mortgages than the homes were worth.

These days, Rosenblum said, people eager to buy homes stream into his office, and refinancing deals remain an active part of his business. In fact, lenders locally are fighting for refinancing customers--unlike a decade ago, when plummeting prices left many Southern Californians with little or no equity to tap.

“If you have equity in a house, and you have a pulse, somebody will make you a loan,” Rosenblum said.

And homeowners are plump with equity. That reflects skyrocketing home values in Southern California, including the five Los Angeles-area counties and San Diego County. DataQuick Information Systems Inc., a La Jolla firm that tracks real estate trends, said the value of a median-price house in Southern California climbed $2,468 a month last year.

Although other metropolitan areas also enjoyed substantial appreciation, DataQuick found that Southern California’s advance in value was more than four times the national gain.

By contrast, Southern California’s home values tumbled during the region’s prolonged recession in the early 1990s while values rose elsewhere. According to an analysis by Economy.com, a consulting firm in West Chester, Pa., the median sales price for Southern California homes fell 18% from a pre-recession high of $206,600 in the fourth quarter of 1989 to a low of $168,800 in the third quarter of 1996.

During the same period, Economy.com said, the median sales price nationally climbed 26% to $115,600 from $91,600.

The collapse of Southern California’s housing market, particularly in Los Angeles County, largely stemmed from the severe retrenchment in the aerospace industry and the loss of jobs, many of them high-paying.

Meanwhile, home builders, after putting up one development after another in the 1980s, abruptly cut back.

That brought the loss of thousands of jobs and upheaval in real estate-related fields, from construction to savings and loans, many of which failed. Building, in particular, “stopped dead in its tracks,” Rosenblum said.

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Home Equity Turns Into a Reserve Fund

By some accounts, the real estate decline was second only to the aerospace retrenchment in causing the region’s recession. Then the real estate market was dragged down further by the 1994 Northridge earthquake.

By the late 1990s, Southern California’s slow recovery was gaining momentum. The population grew and home building came back, but nowhere near the dizzying levels of the 1980s. The housing supply got tighter, particularly in Los Angeles and Orange counties, causing a shortage that pushed up prices, even after the national recession began in March.

When mortgage interest rates fell to a 30-year low last year and triggered a home-refinancing boom across the country, Southern California was one of the hubs of activity. Home equity turned into a reserve fund, or piggy bank, that fueled consumer spending even as the job market worsened.

According to DataQuick, lenders provided a record $116 billion in home-refinancing deals last year in Southern California, more than triple the level in 2000. “For a lot of families, it’s more important than the stock market,” said John Mitchell, an economist who tracks California and other Western states for U.S. Bancorp.

Terry Del Rosario-Heard and her husband, Edwin Heard, took advantage of the opportunity to refinance. They pulled a total of $150,000 in cash out of their residence in Mission Viejo and an investment house in Dana Point.

They used the money to pay off one car, buy another car, eliminate debts and invest in other real estate. And they have cash left over. For now, they are through with paying interest on credit card debt.

Del Rosario-Heard said those changes have brought her “peace of mind.”

“I have less stress,” said Del Rosario-Heard, 43, a psychiatric nurse. “I have enough money in the bank for bills, for emergencies and even investments.”

The financial cushion provided by real estate for the national and regional economies has limits, however. Although homeownership spread to a record 67.9% of U.S. households in the third quarter of 2001, not everyone owns a house.

Also, more U.S. homeowners are getting into trouble managing their mortgage payments, signaling the possibility of rising foreclosures and weaker real estate markets ahead. A report released last month found that the percentage of mortgages more than 30 days past due was 4.87% in the third quarter of 2001, up from 4.01% in the same period a year earlier and the highest level in 10 years.

Analysts attributed most of that rise to the nation’s recession. Other factors, they say, are the growing number of low-income homeowners, predatory lending practices and borrowers who have taken on too much debt in their home loans.

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Homes Can Sell Within Two Weeks

For California, though, the news is better. The state has yet to show a major rise in mortgage delinquencies. In the third quarter, its past-due rate was 3.76%, up from 3.18% a year earlier, but down from 3.97% at the end of 1999.

Local homeowners who have lost their jobs and are truly in desperate financial shape can, in many cases, sell their homes at a profit and avoid foreclosure. That’s a far cry from much of the 1990s.

Wendy Furth, an agent at Coldwell Banker in Northridge and president of the Southland Regional Assn. of Realtors, remembers the early 1990s as a time when homes typically sat on the market for six months or more. She said brokers would give away lottery tickets and gift certificates to Nordstrom to drum up business for open houses.

Today, she said, “there’s so little inventory that if something is priced right, it’s not unusual for a home to sell in two weeks.”