California Housing Market: A Slow-Moving Train Wreck?
The California housing market is deflating.
The only question left is how bad it will be when all is said and done.
That was the conclusion of a UCLA economics professor who spoke Wednesday in Torrance, Calif.
“At the end of last year, the real estate bubble popped,” Christopher Thornberg said at the South Bay Economic Forecast Conference. “Right now, we’re in the middle of the bubble popping. The real question is, of course, is it going to be a hard or soft landing?”
As mortgage rates remained at record lows for much of the past five years, buyers purchased California homes in droves and pushed prices through the roof. Thornberg described the housing situation in harsh terms:
“This is a slow-moving train wreck.”
The debate of whether California and the nation’s housing markets as a whole are on the verge of crisis has been raging for several years as home prices have soared. In California, where the boom has been exceptionally hot, many cities saw home prices double, even triple since ‘00.
Thornberg, who previously worked at the UCLA Anderson Forecast, has been a prominent advocate of a more bearish view of real estate in contrast to more bullish groups such as the California Association of Realtors.
“Prices are easily 30-35 percent over-valued. Whether prices go down or stay the way they are, you can pretty much guarantee that whatever the value of your house now, that’s going to be the value of your house in 2011,” Thornberg said.
Starting in 2003, home buyers bid up home prices by chasing the upward trend in a virtual feeding frenzy. The good news is that the rest of the economy is doing well, Thornberg said, and home loan rates remain lower than in past decades, meaning it’s unlikely we will see mass job losses like we had in the early 1990s.
During that downturn, people were forced to sell their homes to search for new jobs elsewhere. But in the current real estate slowdown, moderate job growth continues. As a result, we shouldn’t expect desperate homeowners to create a glut of homes on the market that would send prices sinking.
“In a housing bubble … prices tend not to fall. Housing is not something you day trade,” Thornberg said.
The California Association of Realtors issued its forecast yesterday, which predicts a 2 percent decline in prices next year to a median of $550,000. That’s compared with a 7 percent expected increase in prices this year.
In addition to its projected price decline, the group also forecasts a 7 percent drop in sales next year, which would follow a 23 percent expected sales decline this year. But the group’s economists are quick to dismiss talk of a housing bubble.
“To see any pronounced, long-lived decline in home prices, we would generally see the trigger being a long-lived decline in economic conditions. We don’t see that this year or next. We really think a downturn in home prices is going to be short-lived. It may be a year for California,” said Robert Kleinhenz, the group’s deputy chief economist.
Realtors may dismiss talk of a real estate bust, but there’s no doubt that a major problem for California is its large housing shortage. The Golden State doesn’t build as many homes relative its huge population growth, compared to the rest of the nation.
Also, in the past few years, many apartments have been converted to condos to take advantage of high sale prices, throwing fuel on the fire of the state’s housing crunch.
Some unknowns for real estate include how the slowdown will affect homeowners with overstretched credit and adjustable-rate mortgages, or if stagnating home values will cause consumers to spend less.
One certainty, Thornberg said, is that much of California will be “saddled with these prices for a long time,” making it difficult for people to pay their mortgages and for businesses to attract employees to live there.