USC Experts
Predict 'Soft Landing' in Real Estate --
Real Estate Prices Won't Decline Substantially
By Glenn Roberts Jr.
Inman News
Friday, June 23, 2006
SAN FRANCISCO -- Unless there are substantial job losses, the real
estate market appears on track for a soft landing, said economists for
University of Southern California's Lusk Center for Real Estate.
"We don't believe the housing market is going to fall off a cliff.
We don't really subscribe to the hard-landing story," said Stuart
Gabriel, Lusk Center director, during a presentation Thursday at the
annual PCBC event, a conference for home builders held at San Francisco's
Moscone Center.
This is, however, a time of "stagflation," or economic stagnation
coupled with inflation, Gabriel said, and the real estate market is
losing steam -- with a general slowing in price-appreciation and sales.
Higher interest rates and energy costs, and reduced refinancing activity
are also taking a toll on consumer spending, which has sunk from about
3.9 percent in 2004 to a current level of about 3 percent.
Despite this, Gabriel said it's unlikely that there will be a major
shrinkage in house prices, given the strength of employment numbers.
Interest rates, though marching up, are not high by historic standards,
he said.
The situation was a lot different in the early 1990s, when job losses
contributed to a major downturn in the real estate market. Gabriel said
that the impact of job losses in the aerospace sector hit Southern California's
real estate market hard during that period.
"Barring that sort of event we don't expect significant falloff
in house prices," he said.
Likewise, job losses in the construction and real estate-related industries
during this slowing period should not cripple the housing industry,
said Raphael Bostic, director of the Master of Real Estate Development
program at USC and a Lusk Center expert.
Gabriel's forecast calls for the economy to slow to a 3 percent to
3.5 rate of real gross domestic product growth for the remainder of
the year after a rate of about 5 percent in the first quarter.
Delores Conway, director of USC's Casden Real Estate Economics Forecast
who also participated in the presentation, said that in California,
rising home prices appear to be driving more housing activity to central
areas.
"The population is shifting in California more toward the center
of the state, where we tend to have more affordable housing," she
said.
Some major markets in the state, such as Los Angeles, are still seeing
high levels of price appreciation, though sales activity is down from
a peak. "The number of sales has declined very significantly in
all the cities," she said.
The apartment market, meanwhile, has rebounded in some areas as shrinking
housing affordability has diminished the pool of potential home buyers.
"People are in some sense being priced out of the market,"
she said, while there are year-to-year rental increases of 7 percent
to 10 percent in some Southern California markets.
USC economists noted that condo markets -- particularly in formerly
frenzied areas such as San Diego and Las Vegas -- might be the most
vulnerable to changing market conditions.
Conway said that some proposed condo projects will actually be built
out as apartments because unit sales fell short of expectations. "This
is particularly true in San Diego, which has been a bit of a bellwether
and a bit of a leading indicator for the rest of the cities," she
said.
There is no evidence of price declines in any California markets at
this point, though, "If we do see price declines, where we would
probably look for them first is in the condo markets," Conway said.
Bostic said, "I've been concerned about downtown San Diego for
a long time, particularly in the condo market." He also said the
luxury real estate market may feel the weight of the housing slowdown
more than the general market.
But he said he is generally bullish on the housing sector, and he noted
that the Lusk Center is not predicting a recession.
"I don't think price declines are likely at all, absent significant
job loss," he said.
As available land dwindles and housing affordability worsens in California,
Gabriel said he expects that buyers will increasingly gravitate toward
multi-family dwellings.
Regulators have turned their attention to the popularity of unconventional
home loan products and the risk that such products could pose, though
the Lusk Center experts said they expect the use of such products will
not have a substantial negative effect on the housing market.
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