Orange County Register

Sadly, Eyeball í07 ends today. For the past week and a half we’ve presented a spectrum of opinions on whatís ahead for Orange County housing. (You can read ‘em all by CLICKING HERE.) Hope you’ve enjoyed it! Now, for Part 11 …

We finish our eyeballing with Leslie Appleton-Young, vice president and chief economist for the California Association of Realtors trade group. She’s a University of Pennsylvania grad, like your blogger, and she’s certainly got an interesting vista of the state and local market.

Us: What’s your outlook for the O.C. housing market for 2007?
Leslie: Sales statewide will be down about 24 percent in 2006 and another 7 percent in 2007. Orange County will see slightly larger declines because the run-up in sales activity was initially stronger than the state as a whole and the median home price in Orange County at $699,200 is well about the statewide median of $555,290. Affordability issues also will work to constrain sales activity in 2007. We are projecting a 2 percent decline in the statewide median price (this) year as the market continues to normalize. Orange County prices may be slightly softer because the inventory of unsold homes for sale is higher in Orange County than in many other parts of the state.

Us: How would you describe the risks for a huge price drop?
Leslie: Unlikely across the board as long as the economy continues to grow, job gains are positive, interest rates stay low and incomes increase. A huge price drop requires a much larger increase in the inventory of homes for sale than we have seen to date. If we head into a recession, all bets are off for the housing market. If growth continues at the moderate pace we saw in 2006, the correction in housing will be contained.

Us: How do you think O.C. will differ from the nation or state market?
Leslie: Because of the greater-than-average inventory of unsold homes on the market, sellers in Orange County will need to be especially motivated and realistic if they are really interested in selling in todayís market. There is a lot of competition, so only those homes that are priced to sell and are in excellent condition will sell quickly.

Us: What events might change your outlook, pro or con?
Leslie: A recession or spike in mortgage rates is the most obvious negative scenario for housing.

Us: What might be the housing surprise we’ll be talking about a year from now?
Leslie: Not sure, except that there will be one!

• MISS AN EYEBALL? Just CLICK HERE to read our archive.

Hereís Part 10 of Eyeball í07, our New Year’s toast to the slew of opinions on whatís ahead for Orange County housing. For a week plus, weíve brought you fresh outlooks daily on the county housing scene from a key local observer. Return tomorrow for our final installment!

Condos are often a fickle slice of the housing market. And it was an exciting 2006 for this niche, with the debut of O.C.’s first high-rise luxury condos in Irvine of the I-405. To get an eyeball on this kind of real estate, from low-rise to penthouse, we checked in with Veronica Hicks, who follows this O.C. market at Condos Etc.

Us: What’s your outlook for the local condo market for 2007?
Veronica: I still believe there is some instability in the condo market, particularly for first-time homebuyers. The number of condos sold in 2006 vs. 2005 was down more than 30 percent. Average closed sales prices were up more than 6 percent. Condos priced $500,000 and under accounted for 67 percent of all condo sales in 2005 and fell to 61 percent in 2006, which tells me that the first-time homebuyer is struggling to get into the housing market. The increase in pricing is due to a shift in the mix of the buyer to a more affluent buyer (downsizing, second homes). I believe that condo prices will be down slightly or flat in ‘07, because of the increase in inventory availability, and because buyers have more choices, sellers will have to invest in improvements before they go on the market just to earn similar price levels.

Us: How rough has it been selling condos recently? What kind of buyers and sellers are you seeing?
Veronica: Selling condos has definitely been much more of a challenge for the last six months. Most of the buyers and sellers in the market are first-time buyers, first-time sellers and first-time investors (now trying to sell or buy). Buyers have had a lot more to choose from and are able to get more for their money than a year ago. The challenge is deciding on a fair price to offer. Buyers are concerned about a continued decline and know that condos take a harder hit than a single-family residence. Most buyers are waiting a year to buy because they don’t think the market will increase and they actually expect a decline. Sellers, on the other hand, are still hanging on to last year’s pricing, and in many cases this is their first time to sell. So convincing them to price realistically and be patient during a longer sales cycle is difficult.

Us: How would you describe the risks for a huge drop in condo prices?
Veronica: The risks for a huge drop in condo prices in ‘07 is really going to be driven by a couple of factors; neither will be an “overnight event.” … One, timing of new builder inventory coming into the market and the competitive incentives and pricing flexibility that can be offered by builders; two, if buyers continue to sit on the sidelines and wait the market out; and three, changes in mortgage products: Increases in interest rates or fewer programs that require less down.

Us: What events might change your outlook, pro or con?
Veronica: Events that could occur that would positively affect the condo market are increases in market rents, making it more attractive to buy; postponements or deferments in the new condo developments that are in the planning process; and a reduction in interest rates and more attractive first-time buyer loan products. Events that might put a damper on the market are increases in interest rates; a tightening in lending policies; or an increased level of inventory that creates a dumping of condos.

Us: What might be the housing surprise we’ll be talking about a year from now?
Veronica: I believe that there is going to be a bit of reluctance by buyers to put down payments on the new developments, especially if the deposit is nonrefundable. The effect could result in a postponement or cancellation of some of the new projects, particularly the high-rises with significant homeowner association dues. The cancellation of those developments could have an effect that either tightens inventory, meaning that buyers won’t wait, or creates negative publicity that results in buyers sitting out longer on the sidelines waiting for the market to drop.

• TOMORROW: California Realtors’ chief economist.

• MISS AN EYEBALL? Just CLICK HERE to read our archive.

Hereís Part 9 of Eyeball í07, our seasonal gathering of opinions on whatís ahead for Orange County housing. Every day in this period, weíre bringing you a fresh outlook on the county housing scene from a key local observer. Return daily through Jan. 2 to read whoís saying what about us.

And no person has personified the O.C. housing outlook game more than Gary Watts. He’ s the Mission Viejo broker/economist who’s either hated or loved, depending on the market cycle or your own view on the world. He called the early ’90s drop and the recent nine-year rally correctly. But his projection for 15 percent gains in ‘06 was off. (Read his previous visit to this blog HERE!) So, Gary … what’s next?

Us: What’s your outlook for the local housing market for 2007?
Gary: Both sales and prices will be up from 2006. Sales should rise to our 10-
year average of 40,100, which puts sales up 10 percent, and prices should rise 7 percent for homes and the 4 percent-5 percent range for condos.

Us: How’d you miss on ‘06?
Gary: What appears to have affected my numbers for last year were two events: (a) the Fed raising the rates a half percentage point higher than I thought they would. This put a “cramp” on buyers and many postponed buying waiting to see how high they may go. This slowed down sales and then these slower sales ran straight into (b) a huge jump in our spring inventory when those inventory numbers usually decline. These two forces caused the sellers, who needed to sell, to liquidate at much lower prices — just to capture the few buyers in the marketplace. Interestingly enough, maybe 30 percent (or more) of the listing market was made up of sellers who were “un-motivated” and just looking to get a specific price. This too added additional pressure on our selling market. These sellers obviously did not “need” to sell and thus by year’s end they began departing the market and our inventory dropped to less than 12,000 — down for our peak number of 15,863! Yet the economy did what I thought it would do in 2006. It continued to grow, the job market remained strong, interest rates never exceeded 6.75 percent, and although prices should have risen, we did not have the housing collapse that many forecasted.

Us: So inventory will be … ?
Gary: Our housing supply (inventory) should average three to four months this year. (That’s homes for sale divided by the sales pace.)

Us: How would you describe the risks for a huge drop? What events might change your outlook, pro or con?
Gary: The only risk would be inflation getting out of control and the Fed
raising interest rates higher than going lower. Even then, I do not see any
huge housing price drops.

Us: What might be the housing surprise we’ll be talking about a year from now?
Gary: The Fed drops the interest rate more than a half percentage point and all the buyers sitting on the sidelines get into the market while the rates are low. If the “un-motivated” sellers stay out of the market, we could be in for a very big surprise.

• TOMORROW: A condo expert.

• MISS AN EYEBALL? Just CLICK HERE to read our archive.

Hereís Part 8 of Eyeball í07, our holiday haul of opinions on whatís ahead for Orange County housing. Every day weíre bringing you a fresh outlook on the county housing scene from a key local observer. Return daily through Jan. 2 to read whoís saying what about us.

UCLA economists have been warning us about real estate’s challenges for some time. When we checked in with them for their 2007 outlook, we got a pair of expert eyeballs: Ryan Ratcliff’s local perspective and Ed Leamer on the national scene.

Us: What’s your outlook for the housing market for 2007?
Ryan (photo at left): Our prediction is based on the fact that historically,
we’ve only seen substantial declines in nominal home prices during periods of major job loss. From 1990 to 1992, unemployment in O.C. jumped over 4.5 percentage points — a huge jump. From 1990 to 1995, the median sales price of an O.C. home fell 9 percent. We don’t see anything like a 4.5 percentage point jump in unemployment in the next year or two in O.C., so I think that 9 percent drop over five years is the worst case scenario — worse than anything we’re likely to see given the current economy. Without any recession-sized job loss in O.C., we expect more of what we’ve already seen in 2006: flat prices and falling sales.
Ed (photo at right): Nationally, I expect low levels of sales of both existing and new homes, aggressive pricing of new homes (e.g., a 10 percent decline in price), but very little erosion (2-5 percent) of sales prices of existing homes.

Us: How would you describe the risks for a huge drop?
Ryan: This all hinges on whether we’ll see a major job loss in O.C. in the next couple of years. We think that construction employment will fall relatively less than in other parts of California, given new building still in the pipeline. However, O.C. has a high risk of job losses in mortgage finance. So far, it looks like these job losses will remain moderate, but it’s too early to say for sure.
Ed: Nationally, expect a major adjustment in real prices, but spread over five years or more. The chance of a major drop in nominal prices in a given year is negligible. The market doesn’t adjust that way. It’s a volume cycle, not a price cycle.

Us: What events might change your outlook, pro or con?
Ryan: We could get a worse outcome in O.C. if either of these two vulnerable sectors (construction and mortgage finance) takes a bigger hit than we expect. We could get a better outcome with a significant decrease in interest rates in 2007.
Ed: Nationally, a recession with substantial job loss would be very hard on housing.

Us: What might be the housing surprise we’ll be talking about a year from now?
Ryan: From where we stand now, it’s hard to imagine that the housing boom could get going again anytime soon, but it’s a possibility if the cards fall right. As real estate became a big drag on the U.K. economy this year, the Bank of England lowered interest rates — much like what we think we’ll see in 2007 in the U.S. In the months that followed, home price appreciation took off by so much that BoE had to raise interest rates again. If the Fed gets overaggressive in stimulating the slowing economy in 2007, the U.K. experience suggests we could see a brief return of real estate fever. We don’t think this is likely, but it could happen under the right circumstances.
Ed: The surprise will be that our forecasts are correct. That is something to talk about.

• TOMORROW: Broker/economist Gary Watts.

• MISS AN EYEBALL? Just CLICK HERE to read our archive.

Hereís Part 7 of Eyeball í07, our salad bowl of opinions on whatís ahead for Orange County housing. Every day in this period, weíre bringing you a fresh outlook on the county housing scene from a key local observer. Return daily through Jan. 2 to read whoís saying what about us.

Now we’ll turn to Charles Rother of American Strategic Capital in Los Alamitos. Sure, he’s basically a stock kind of guy. But Charles is a whiz at evaluating relative risks in various investments using well-known data streams. So considering all the real estate numbers out there, we figured we should hear from Charles’ computer …

Us: What’s your outlook for the local housing market for 2007?
Charles: Orange County home prices are likely to decline 5 percent in 2007. To sell their homes, homeowners may need to price their homes 10 percent or more below the highest price ever paid for a similar property on their street.

Us: How would you describe the risks for a huge drop?
Charles: For 2007, there is a 26 percent probability that Orange County home prices will decline more than 7 percent, and an 11 percent probability that prices will drop more than 10 percent.

Us: How’d you get those numbers?
Charles: To forecast future home price changes, American Strategic Capital uses an econometric model. In other words, we measure past relationships between home price changes and important economic variables including employment growth, short and long-term interest rates, housing affordability measurements, building permits and housing inventory measurements. The relationships are combined into a mathematical equation. The resulting projections represent forecasted home price changes. Currently, the expected home price change is minus-5 percent. The probabilities presented represent the historical distribution around a minu-5 percent home price change.

Us: How do you think O.C. will differ from the national market, if any?
Charles: During the last nine years, Orange County home prices have appreciated approximately 228 percent. In contrast, the median home price appreciation for 377 real estate markets nationwide was only 61 percent. In fact, during the last nine years, Orange County residential real estate has outperformed 99 percent (373 of the 377) of housing markets nationwide. From a historic and relative basis, Orange County residential real estate appreciation has been phenomenal. Unfortunately, economic fundamentals do not support current home prices. During the last nine years, neither household incomes nor rents increased enough to economically support current prices. Given current housing affordability, slow job growth, rising interest rates and declining real estate construction and financing activities, Orange County residential real estate is likely to decline more than the national average for 2007.

Us: What events might change your outlook, pro or con?
Charles: Falling short-term and long-term interest rates, surging household incomes, declining mortgage defaults, or accelerating employment growth would lead to more favorable housing market in 2007. If all these conditions were met, Orange County home prices would likely appreciate in 2007. Escalating short and long rates, falling household incomes, surging defaults, declining employment, or a collapsing sub-prime lending market would lead to more unfavorable housing market conditions in 2007. Under such conditions, Orange County home prices would likely decline more than 5 percent in 2007

Us: What might be the housing surprise we’ll be talking about a year from now?
Charles: If there is a housing surprise for 2007, it will be the historic number of mortgage defaults occurring without an economic recession.

• TOMORROW: The outlook from UCLA.

• MISS AN EYEBALL? Just CLICK HERE to read our archive.

Hereís Part 6 of Eyeball í07, our year-end cornucopia of opinions on whatís ahead for O.C. housing. Throughout this period, weíre bringing you fresh outlooks on the county housing scene from a key local observer. So remember to return daily through Jan. 2 to read whoís saying what about us.

Our next guest is Bill Plattos, executive VP at First Team Real Estate. The Costa Mesa operation has nearly 2,000 brokers in some three dozen offices throughout Southern California. Clearly that gives Bill an intriguing vista of the local real estate scene ….

Us: What’s your outlook for the local housing market for 2007?
Bill: I think along with (ex-Fed boss Alan) Greenspan that we have hit bottom. But it does not mean we will now start back up next year at the previous pace. Rather, prices and sales will coast through 2007. We really have not seen the prices fall, such as they did from 1990 to ‘95. Nor do I expect that to happen. I think the latest (2007 price) forecasts that I have seen sound reasonable at flat to maybe minus 2 percent. I also believe that it could go up a few points, especially in pockets, because everyone is starting to become more secure where the market is going and that there is still a lot of normal pent-up demand.

Us: What about foreclosures?
Bill: I expect defaults to rise, with lenders working with homeowners more than in the past. Foreclosures will also rise because of some of the 100 percent financing packages.

Us: How would you describe the risks for a huge price drop?
Bill: I do not see much risk because of the good economy and job growth in O.C. The last downturn, we experienced large job loss from closing of defense plants.

Us: How do you think O.C. will differ from the national market?
Bill: In comparison to the rest of the nation, we live in the most beautiful part of the U.S., including the weather ( I came here from Chicago 25 years ago!). It will always be a huge draw, especially the Rose Bowl game, when everyone is wearing T-shirts while we (in Chicago) froze. That is why I came here.

Us: What events might change your outlook, pro or con?
Bill: I do not see anything that would shake things up in O.C. I believe we will work ourselves out of Iraq as we know it now and that inflation fears are overblown.

Us: What might be the housing surprise we’ll be talking about a year from now?
Bill: I think there will be many buyers who will see a buyer’s market as a time to buy, instead of waiting for a seller’s market.

• TOMORROW: Risk-watcher Charles Rother from Los Al, previously promised for today. Ooops!

• MISS AN EYEBALL? Just CLICK HERE to read our archive.

Here’s Part 5 of Eyeball í07, our holiday sampler of opinions on whatís ahead for Orange County housing. Every day in this period, weíll bring you a fresh outlook on the county’s housing scene from a key observer. So remember to return daily through Jan. 2 to read whoís saying what about us.

Mortgage rates are clearly a factor. And nobody knows that subject better than the bond gurus at Pimco in Newport Beach, who spent considerable time in í06 tracking housing markets as they related to mortgage-bond investments. We found Pimco portfolio manager Saumil Parikh willing to share his views Ö

Us: Where are rates on 30-year fixed mortgages headed?
Saumil: We believe 30-year mortgage rates will be lowered by about 0.25 percent to 0.5 percent in 2007.

Us: What about shorter-term rates that set payments for both new and old adjustable-rate mortgages?
Saumil: Shorter-term rates will be lowered by about 1 percent in 2007?

Us: Will loans be harder to get in 2007?
Saumil: We believe the subprime mortgage market will re-price credit risk during 2007, thereby making it more expensive and onerous for first-time homebuyers to enter the market.

Us: How will O.C. home prices fare? Better or worse than U.S.?
Saumil: O.C. home prices will likely underperform national home prices on a percentage change basis in 2007, due to prior inflation, affordability, and the local labor marketís dependence on real estate markets. We believe nationwide home prices — as measured by the federal OFHEO repeat sales index — will be roughly unchanged in 2007. O.C. prices, on same scale, likely down 5 percent or so. The risk to our price forecast is to the downside.

Us: What might be the housing surprise we’ll be talking about a year from now?
Saumil: The surprise will likely be that activity will not rebound meaningfully upon realization of lower mortgage rates. The realization that residential real estate has not historically provided meaningful real returns on investment will come back to the fore, and turnover along with new investments in the sector will underperform current expectations.

• TOMORROW: The view from a stock-market guy

• MISS AN EYEBALL? Just CLICK HERE to read our archive.