Thursday, February 03, 2005

Area housing bubble not necessarily going to burst

Supply, job growth drive prices, economist says

By Gretchen Macchiarella, Ventura County Star

Economist Mark Schniepp says there is a housing bubble, but maybe a better description is a balloon.

Prices rose with buyers' inflated expectations of future prices, and now the air is leaking out slowly as the market comes back to an equilibrium of incomes and home prices.

"We believe there is a bubble, but not all bubbles have to burst," Schniepp said.

The director of the California Economic Forecast is presenting his annual Real Estate and Economic Outlook this morning. His view is that the Ventura County's housing market has become disconnected from the fundamental economic principles that should underlie prices.

Schniepp is not alone in his position, but other economists counter that the short supply of houses is enough to explain the price run-up. The county's median sales price for existing single-family homes was $612,460 in December, up 25.3 percent from December 2003 but only 1.8 percent from November, according to the California Association of Realtors.

The best-case scenario is that prices continue to be flat and there continues to be job creation, Schniepp said. In that case, incomes could rise to meet the housing prices that sped off ahead of them.

A cataclysmic bottoming out of prices is still possible, but in real estate it doesn't happen all that quickly.

"It will probably stay buoyant through 2005," Schniepp said.

If prices do start to fall, he expects the slide would be over the course of six to nine months, or even a year.

Investors could be what is pushing prices up and what would send them spiraling down. Particularly in the coastal areas of the county, investors are still buying, said Gary Pearson, a buyers' agent in Ventura for Re/Max.

He said there has been a switch in the way most investors think about their investment. The fundamental equation used to be whether a property could produce monthly income, but recently investors are thinking more about the a big return when the property sells.

Pearson said retiring baby boomers from Santa Barbara see particular value in the coastal community and marvel at Ventura County resident's caution.

The estimates of the number of investors in the market remain low, but Schniepp said it can be hard to tell how many people are speculating on consistent appreciation.

"If suddenly prices start to erode and people that have more than one house start to get rid of them," prices could fall quickly, Schniepp said. "The real unknown here is when they are going to jettison those second homes."

Pearson, an investor himself, said he sees the values just continuing to go up and get father out of reach for people. Then again, there is no way to predict the future.

"If you feel it coming, bail," he advised.

Ventura County's saving grace in this supposed bubble is the expense. Not many average people can start snapping up $800,000 houses regularly.

"The higher the home price, the harder it is to start stocking up on them," Schniepp said.

But even those regular home buyers who just want a place to live might be bringing the demand side of the equation up with unreasonable expectations.

The strained mortgage to income ratio of so many buyers and the quarter who have variable rate mortgages could be vulnerable to losing their home if the economy softens or interest rates increase.

"You are going to have to work hard to make those mortgage payments," he said.

Schniepp estimates 90 percent of county residents could not afford to buy a house in the county if they didn't have built-up equity to spend.

"You have to have more than 10 percent of people who can purchase," he said.

Schniepp notes in his 2005 report that price inflation built on perceptions of value rather than intrinsic value are on shaky ground. He said the prices have gone well beyond what the limited supply would cause.

Bubbles are built on demand, he wrote, and just because the supply is constricted by little construction doesn't change the fact that there is a bubble.

"The linkage between job growth and home sales must ultimately be restored," Schniepp wrote.

The threat of deflating home prices comes if the economy weakens and demand slows down because jobs are not as plentiful. Bubbles in real estate are always very regional, Schniepp said, so the threat is softening in the local economy.