The Big (real estate) Chill

June 18, 2004

Largest housing market may be slumping

By Glenn Roberts Jr.
Inman News

The sky isn't falling, say Southern California real estate experts, but the housing market is definitely coming back down to earth. Inventory is creeping up, price increases are slowing down, and the prolonged housing boom may finally be showing its age.

The inventory of listed homes has doubled and even tripled in some parts of the Los Angeles basin.

"California's house prices have gone through the roof, especially in Southern California. This is a boom, a huge boom. And booms don't usually last for a long period of time, " said Kenneth Rosen, chairman of Rosen Consulting Group in Berkeley.

Russ Bergeron, general manager of SoCalMLS, said the inventory has probably doubled in the past six months, with for-sale properties spending more time on the market. "If interest rates go up and prices don't go down, this could quickly turn from a seller's market to a buyer's market," he said.

Michael Davin, executive vice president for CataList Homes of Hermosa Beach, Calif., said that inventory has nearly tripled in the past three months in some upscale communities, such as Manhattan Beach, Redondo Beach and Torrance. And while those in the real estate industry may be starting to see the slow-down, the public is still waking up to this new reality.

"Most people have sort of heard that it's a little slower, but really it hasn't sunken in. A lot of sellers are ignoring what's going on, and pricing their homes today even above the ones that sold in March because they think that the market is still going up. There are sellers with almost fantasy-like expectations of getting 20 offers on their home like their neighbors did two months ago," he said.

"They've been conditioned that the market is going up 20 percent a year. That's simply a fallacy. Like anything that goes up too fast, that's not good. Ultimately you're going to have a correction. There is no way we can hold onto the gains in the housing prices that we saw in the past six months," he added, referring to the boom of low interest rates and rising housing prices as "an extreme perfect storm."

While it was rare to see home buyers putting in bids less than asking price during the housing boom, Davin said the climate for buyers should improve. "Buyers have been conditioned that you don't write offers below asking price and you should write offers above asking price. It's amazing. It's like people have forgotten how to negotiate. We're going to start to see that change a little bit," he said.

Davin said he sees no reason for the slowdown to snowball into a housing-market avalanche: "There's nothing dramatic going on right now," he said, as the market is still performing well above average. While home prices continued to shoot up in the first quarter of this year, Davin said he expects some moderation in pricing. If the public reacts dramatically to the slow-down, the housing boom could grind down even more rapidly, he said, and could conceivably create a "self-fulfilling prophecy" in which the perception of the boom's end actually accelerates its end.

Home prices appear to be over-inflated in Southern California, Rosen said during a housing forecast presentation Thursday at a home builders' conference in San Francisco. Los Angeles has "been the answer to everyone's prayers" in terms of the boom in the housing market there, though these extraordinary times won't likely last, he said, and price growth in that region represents "excessive appreciation rates which I think have substantial reason to reverse." Commenting on especially robust price growth in Orange County, he added, "These sorts of things aren't sustainable."

Fast-moving price gains in the condominium market, with many investors rushing into that market, are likely to wear down quickest as the market cools, Rosen said. Prices could slip as much as 20 percent to 30 percent in some markets, he said.

A Chapman University forecast calls for median home prices to fall 2.7 percent in Orange County in 2005, which would be the first decline there since 1995. Median home prices in Orange County soared to an all-time high of $543,000 in May.

Summer months are typically a peak time for people to list their homes, Bergeron said, and the inventory levels after this peak season may be more telling than the current period. First-time home buyers will be the group most impacted by a rise in interest rates, he said. "If you don't already have any equity built up to trade up or trade sideways you're kind of hurting," Bergeron said.

Copyright: Inman News Features

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