Hold off on that panic attack
Although it may appear to some that the sky is falling, Chicken Little can relax for now. As Southern California’s real estate boom fades and a more normal market returns, buyers and sellers can take some comfort in what lies ahead.
Industry analysts say the tumbling prices, glut of houses and 8% to 10% interest rates that marked the recession of the early 1990s are nowhere in sight now. The area’s strong, diverse economy will help prevent a market freefall similar to the one the region experienced then.
“The fundamentals today are vastly different than those of the ‘90s,” said John Karevoll, chief analyst for DataQuick Information Systems, a La Jolla-based real estate research firm.
Karevoll says that by the end of the year, he expects Southland home prices will have risen by 6% to 7% from the median price of $460,000 in 2005.
“Even in a worst-case scenario, which is not expected, economists say homeowners will lose no more than 7% of their homes’ value down the line,” Karevoll said. So much for a real estate crash.
Much has been made recently of the downturn in San Diego County’s real estate market, considered a harbinger for the region. Alarm bells went off when the June median home price there fell 1% and the number of sales dropped 24% from the same month a year ago -- a tumble experts attribute largely to conditions peculiar to that area, most pointedly the overbuilding of downtown condominiums.
That is not the case in the rest of Southern California, where in June, prices rose 7.4% from a year ago to a median of $494,000. The number of existing homes and condos sold dropped, but new-home sales, which made up 22% of the market, are showing strong gains, according to DataQuick analysis.
Taking a longer view, Los Angeles County prices rose 14.7% and sales of existing homes fell 13.8% during the first half of 2006 from the same period a year ago. In Orange County, during the same period, prices rose 10.7% and sales of existing homes remained level, while in San Diego County, prices went up 3.7% and sales dropped 12.4%.
In contrast, new-home sales in San Diego County dropped 16.9% during the first half of this year, compared with that period a year ago, while such sales, including condo conversions, soared 25.1% in L.A. County and 34.6% in Orange County.
The reason for such strong new-home sales activity is pent-up demand, a spillover from a half-decade of under-construction. Most big builders, wanting to avoid a repeat of the ‘90s -- when they were stuck with unsold homes after the recession hit -- now build houses only after preselling them.
“That is an intelligent business plan,” said Carola Cherief, vice president of sales for Centex Homes. “We plan to continue that strategy. It’s easier to slow down the sales pace this way and hold off on construction so we don’t saturate the market.”
With Southern California adding 200,000 to 300,000 new residents a year, the demand for homes won’t slow anytime soon, economists say. And until the stock market takes off again -- and no one knows if or when that will happen -- people are expected to keep parking their investment dollars in real estate, at least for now.
So why the 13% sales decline overall? It is more a reflection of a drop from the record number of sales the region has seen in the last few years than an especially slow sales rate this year, Karevoll said. Today, the sales pace is “around the average.”
Prices, meanwhile, have continued to rise. The median price of all homes in Orange County during the first half of 2006 was $624,000; in L.A. County, it was $505,000. Regionwide, however, prices in June -- which rose 6% from a year ago to $493,000 -- represent the smallest year-over-year increase since May 2000. The median is expected to continue to set records, but at a slower rate of appreciation than in June.
The move back to a “normal” market is resulting in unnecessary panic among some sellers, who are cutting prices too soon, industry observers say.
“Some sellers’ expectations have shifted way out of whack,” said Raphael Bostic, an economist and professor at USC’s Lusk Center for Real Estate. “They think their homes should be on the market only for a week or two. But that’s not the norm from a historical perspective.”
At this midpoint in the real estate cycle, sellers who are testing the waters are planting for-sale signs in frontyards, fishing for top dollar, then taking their homes off the market months later when they don’t get those prices. Anecdotally, about half the listings on the market fall into this category, industry analysts say.
The consequence of this activity is that it falsely inflates the inventory, keeps homes on the market longer and can skew the realty picture. On the other hand, serious sellers who price their homes right are enjoying more timely sales, agents say.
Because some homes are on the market longer, David Toyama, a Coldwell Banker broker in Eagle Rock, has seen a subtle shift in favor of buyers, who for several years struggled to purchase properties -- especially at the entry level -- and finally are getting some breaks from sellers willing to accept contingencies.
Ricardo and Eva Mendez, and their three grown children who live with them, desperately wanted to move up from their Highland Park home on a noisy, busy street, said daughter Gladys, 29. Until late last year, the family felt priced out of the market. But in November, Eva and her two daughters spotted an Eagle Rock house that had been listed for two months.
The Mendezes jumped at the chance to grab the four-bedroom “major fixer,” Gladys said, for $29,000 less than the asking price of $749,000. The steep appreciation of their first home allowed them to make a hefty down payment and have money left over for renovations.
“We lucked out,” Gladys said. “The timing was right.”
Timing has made a difference in the mortgage market too. While buyers may be encouraged by the return to more normal home-price increases, they still face higher interest rates, said Mark Cohen, owner of Cohen Financial Group in Beverly Hills.
A year ago, a buyer with a 10-year-fixed, interest-only mortgage, for example, locked into monthly payments of about $2,448 for a $500,000 loan at 5.875%. Today, with rates at about 6.75%, that borrower would pay $2,813 per month, a 15% jump.
The psychological barrier to home buying -- when interest rates reach a number that discourages buyers and pushes home prices down -- is 7.8%, Karevoll said, but most economists do not expect rates to reach that level in the near future.
With interest rates still in “reasonable” territory, buyers are flocking to areas where they smell bargains, such as San Bernardino County. In June, the median price was $367,000, up 14% from a year ago. Available homes there have increased, and some sellers are giving buyers allowances for repairs and carrying their second mortgages, said Hector Castaneda. The Century 21 Town & Country agent said he’s giving buyers’ agents more than half of his commission as incentive to get more traffic to listings that are about to expire.
Eagle Rock agent Toyama, who has ridden out several real estate cycles, is sanguine about the current changes.
“I love this market right now,” he said. “Sellers are more reasonable, buyers are getting in the market, and the flip artists are gone. We all win.”