Friday, February 04, 2005

Editorial: Two views on housing bubble

Ventura County Star

Real-estate crystal ball is murky

Ventura County's economy and real estate go hand in hand. That is reflected in both the title and message of The California Economic Forecast's "2005 Ventura County Real Estate and Economic Outlook" presented at a conference in Westlake Village on Thursday.

The Outlook warns that Southern California's growth potential "relies on available and affordable land prices and the willingness of decision-makers to accommodate growth."

No surprise then that it says Ventura County's shortage of housing and relative lack of infrastructure improvements are impediments to an expanding economy.

"Don't be surprised," the Outlook states, "if local companies continue to defect or expand elsewhere in California."

Among the Outlook's forecasts: "Ventura County is not expected to show extraordinary growth in 2005; however, expect another solid year of job creation and active real estate markets" and "interest rates will not rise sharply."

The Outlook also predicts a slowdown in both sales and appreciation rates of housing, with median home prices forecast to rise 9 percent this year and 7 percent in 2006.

In last year's Outlook, Mark Schniepp, director of the California Economic Forecast, said that home prices were reaching "absurd levels," a phrase he repeated this year, reflecting a hike of 29 percent in the median value of an existing single-family home in 2004.

Economists like to make predictions -- educated guesses, based on trends and past events. Such economic forecasts can be useful to business people and residents, but not all forecasts are the same. As demonstrated in The Star's Jan. 16 Opinion section, asking, "Are California home prices in a bubble?" prominent local economic forecast leaders are in disagreement on this hot question.

Mr. Schniepp said evidence indicates there is a bubble. He wrote for The Star: "Bubbles occur when fundamental economic criteria associated with the demand for any asset fade or disappear, leaving anticipation of price appreciation as the principal reason for purchasing the asset. There is a growing evidence that this type of behavior has largely pervaded the housing market in California and other parts of the country."

Bill Watkins, director of the University of California, Santa Barbara, Economic Forecast Project, said he believes the probability of a bubble is small. He wrote for The Star: "I think recent California home price gains are justified by real events. Changing demographics and wealth accumulation have been driving changes in effective demand. Falling real mortgage rates have reinforced these changes."

Mr. Watkins' opinion will be promoted Feb. 17 at an "Economic Outlook 2005" conference in Oxnard.

Regardless of who turns out to be right, the question is a good hook into the meat and potatoes of all good economic forecasts, such as interest rates and inflation, demographics, employment, new development and quality-of-life indicators, as covered in Thursday's conference.

The Feb. 17 conference will include a forecast of housing and jobs; predictions about Gov. Arnold Schwarzenegger's second year in office; and a debate about whether liquefied natural gas is good for Ventura County and business.

While neither forecast can predict the future with certainty, they provide information and tools to allow individuals to consider the question themselves.

Most importantly, the Outlook underscores the impact of housing -- and the lack of it -- on the overall Ventura County economy. It provides one more reason for city and county governments to focus on housing solutions.