Friday, December 17, 2004

Standard & Poor's volatility index ranks SLO County as the most likely housing market in the nation to pop

Are we in a housing bubble?, The Tribune

A new Standard & Poor's volatility index ranks SLO County as the most likely housing market in the nation to pop. Should homeowners be concerned, or might our recent real estate run-up continue? the most likely housing market in the nation to pop. Should

The Tribune

If there is a housing bubble, and if it should burst, San Luis Obispo County would be the most likely spot in the nation to get drenched.

So says a new Standard & Poor's report that ranks San Luis Obispo County No. 1 on its housing volatility index. The statistical measurement evaluates 331 U.S. metropolitan areas based on the chances local housing prices would decline if the economy suffers a downturn.

"We are not saying your area is going into the tank," said Scott Mason, who prepared the report along with Francis Parisi. "We are just saying that if the economy takes a turn for the worse, it is going to be one of the most potentially volatile in the MSA (metropolitan statistical area)."

An economist who has studied the SLO County market for several years said the index fails to account for certain key factors, such as the area's appeal to retiring baby boomers.

Half of the top 20 areas ranked by Standard and Poor's are in California, and 19 of those 20 are on the East Coast or West Coast.

Double-digit price increases since 1998, coupled with a pronounced drop in prices in the early 1990s, led to San Luis Obispo County's high-volatility ranking, the financial analysts said.

Standard and Poor's is a credit and financial information provider based in New York.

The report's authors emphasized that their analysis does not target the real estate industry but is prepared primarily to help mortgage securities buyers assess the risk of loans in mortgage portfolios. It is one tool investors and homeowners can use to help them evaluate whether or not home values are likely to hold up.

That may be small consolation, however, to the county's homeowners and merchants, who shudder at the mere mention of a possible housing bubble. So much of personal wealth and the county's economy are tied to housing that even a minor dip in prices can have far-ranging impacts.

Since 2000, the county's median home price has more than doubled. It stood at $465,560 in October, a price that only 14 percent of county households could afford. Meanwhile, the huge run-up in values has allowed existing homeowners to tap their equity for everything from home improvements to college tuition and dream vacations.

Local businesses and governments benefit from some of that spending, too, both in increased sales and tax receipts.

Now all those with a stake in the local housing market may be more at risk. Wide coverage of the housing volatility index in such publications as Money magazine this week could cause potential homebuyers to throttle back on their purchase plans, say some local leaders.

"It basically causes people to get nervous without any good reason," said Bill Watkins, economist for the UCSB Economic Forecast Project. "The idea that coastal California prices would fall without a national recession is very hard to make sense out of. When that happens, people lose wealth, construction goes down, and places like Home Depot won't sell as much."

But Watkins said he doesn't believe that will happen anytime soon. Because the housing index focuses on price statistics, he said it ignores the desirability of the local area and the fact that wealthy baby boomers and retirees nationwide are more than willing -- and able -- to pay the price to live here. A leveling of prices, rather than an actual decline, is more likely, he added.

That could be good for the market if it allowed more families to afford to own a home, said Dave Garth, president and chief executive officer of the San Luis Obispo Chamber of Commerce. Still, he said any decline is likely to be short-lived.

"It is obvious to most people that the increases we have had are not sustainable forever, which means that prices have to level off or decline at some point," he said. "We have had housing dips before and probably will again, but that doesn't mean I think prices will decline over the long term."

Asked how he will respond to worried callers, Garth said he will say what he usually does when San Luis Obispo winds up on one of the nation's best or worst lists.

"We try not to overreact whether they are good or bad," he said. "It is their view of the world, not necessarily ours."

A bigger concern, he said, is what the index report might do to local real estate prices.

"It could wind up being a self-fulfilling prophecy," Garth said. "There will be a lot of investors waiting for the dip to find bargains and jump into the market."

Ultimately, whether or not one makes money in a volatile market comes down to timing, say the index's creators.

"A lot depends on when you get into the market," Parisi said. "If you buy low and sell high, the difference will be much greater than in a stable market. But if you buy at the top and sell at the bottom, you will lose a lot."


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