Mike’s Real Estate Show

Chris Thornberg, late of the UCLA Economic School, has made his forecast of the California Real Estate market and it’s NOT pretty! I’ve included the Press Democrat article below:

Forecast: Housing to hit bottom in 2007
Economist predicts no rebound in area market for five years
By MICHAEL COIT
THE PRESS DEMOCRAT

 

Falling home prices will likely hit bottom early next year, but it may not be a soft landing and housing likely won’t rebound for five years, an economist told Sonoma County business leaders Friday.

 

 

 

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The housing downturn already is causing job losses in construction and real estate and could depress consumer spending, increasing the chances for a recession, said Chris Thornberg, a principal with Beacon Economics in Los Angeles and formerly with the UCLA Anderson Forecast.

“It was a bubble. And the bubble is popping. The real debate is whether this is going to be a soft or hard landing,” he said.

While Thornberg wouldn’t make that call, he said there is now a 50 percent chance of recession in 2007, up from a 30 percent chance earlier this year. The outlook for next year “is somewhere between a mediocre economy and a recession,” he said at Friday’s breakfast presented by the Sonoma County Economic Development Board.

The county’s housing market has been falling back after an eight-year run of soaring sales and prices reached its peak in August 2005. The correction was expected, with Thornberg and other economists saying it was overdue, but it has been quicker and stronger than many anticipated.

Many builders, brokers and lenders have become resigned to the housing slowdown, yet hope Thornberg was wrong when he predicted the market won’t regain strength until 2011.

“I think he was confirming what we have been watching. We’ve been there before. It’s going to be a little longer than I would like to see,” said Phil Trowbridge, a longtime home builder who noted sales have slowed at his Vintage Greens development in Windsor.

Sonoma County home sales are down more than 27 percent so far this year. The median price has fallen 7.7 percent over the last year to $567,000 in September.

Sales and prices also have fallen across the Bay Area and nationwide, leaving two questions - when will it end, and can the economy survive the hit?

Two forecasts - by Moody’s Economy.com and UCLA - predict housing will remain weak for at least two more years and as long as five years. Prices should dip lower before leveling and then move little for several years, absent a recession and significant job losses in sectors other than housing.

The balance of the region’s economy - primarily wine and tourism, technology, business and professional services - should sustain uneven, moderate growth, according to Steve Cochrane, a Moody’s analyst.

“The outlook for Sonoma County remains very moderate with the potential for considerable near-term volatility depending upon the speed and depth of the housing market adjustment. Longer term, Sonoma will be closer to an average performer,” Cochrane wrote in a recent report for the Sonoma County Economic Development Board.

Jobs and housing historically have tracked each other, with recessions leading to declining home sales and prices.

Sonoma County’s most recent housing decline was tied to the recession that hit California and the Bay Area in the early 1990s. Prices here fell 4.2 percent overall in 1993 and 1994 during what was a four-year downturn.

What makes the current slump unusual, particularly in California, are the generally positive signals for the economy, Thornberg said.

Unemployment is low, income gains top the national average, tourism is strong, commercial leasing has improved, and manufacturers are earning record profits. Add falling oil prices, low interest rates and a strong stock market, he said.

Even Sonoma County’s recent run of monthly job losses is not a major cause for concern because the region should benefit from a Bay Area-wide recovery that has taken hold, he said.

“The numbers may not be good, but I don’t think it’s indicative of a long-term trend,” Thornberg said. “I doubt prices will go into a free-fall.”

Still, what is going on in housing remains troubling, Thornberg said. The market’s annual double-digit price increases the last several years drew buyers who figured the gains would never end, setting up a painful correction, he said.

“A home is a spectacular investment, but not because of its value,” he said.

Yet homeowners increasingly viewed homes as a piggy bank rather than a roof over their head that would provide modest gains over the long run, Thornberg said.

Historically low interest rates largely drove the surge, making monthly mortgage payments less costly and allowing buyers to purchase more with their money even as prices went higher.

Adding fuel to the housing sector were loans that further reduced costs for buying and refinancing homes. Lenders expanded offerings of these interest-only loans and option mortgages with even lower monthly payments that allowed buyers to qualify for larger loans.

Thornberg described it as “funny money” because those monthly payments eventually go higher, and homeowners rely on rising property values to refinance into new loans or sell to pay off loans.

Falling prices already have led to rising loan defaults for many more homeowners across Sonoma County and state. Others could feel the pinch when it comes to spending decisions because they feel less wealthy.

“How consumers respond, that waits to be seen,” he said. “This might all blow over. On the other hand, there is the potential for a true catastrophe.”

One reason is Americans over the past 18 months have registered the lowest savings rate since the Great Depression. The gap between spending and disposable income has fallen from 7 to 8 percent in the early 1990s to negative levels today, Thornberg said.

“This is not a pretty picture,” he said.