Good news on real estate

June 22, 2007 11:00 pm

Thomas D. Elias

It happens every year about the same time pitchers and catchers report to Florida and Arizona for the start of spring training: For sale signs pop up all around California like toadstools after a heavy rain.

And this year, there was good news and bad news in the springtime for both buyers and sellers.

First, the bad news. The intense boom of the 1995-2005 decade has plainly petered out. Anyone who buys a California home and expects to make a 20 percent profit in less than one year - the same kind of expectation fostered by the dot-com stock balloon of the late 1990s – is in for a serious disappointment. In the most heavily populated parts of the state, there will still be profits, but they will be in a more normal range, about four or five percent per year.

That is also the good news. For while the rest of America, places like Miami, Denver, Houston, Phoenix, Boston, Washington, D.C. and other boom markets of the last 10 years are suffering declines, that's not true in most of California.

Yes, there have been small declines in some relatively overbuilt parts of this state. In the third quarter of last year, home prices in Orange County dropped by 0.8 percent – less than one percent – from the previous year. In Sacramento, the drop was about 3.5 percent and in San Diego County approximately 2.1 percent.

Those figures come from the California Association of Realtors and its parent, the National Association of Realtors.

Constructive pause

But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat. That's also true in places that are built out, with little hope for new housing that isn't constructed on the sites of previously existing homes.

Examples of these phenomena are Seattle, with a 14.6 percent price rise during last year's third quarter and the Inland Empire area including Riverside, San Bernardino and Ontario. Prices there were stable, even as the number of houses and condominiums sold was down. Reason: Many people who expected to make a quick profit pulled homes from the market when they realized windfalls weren't coming.

In the Los Angeles-Long Beach market, buyers paid 5.2 percent more this spring than a year earlier and in San Francisco they paid an average of 3.8 percent more.

None of these positive numbers will blow investors away. But they ought to be comforting to recent homebuyers who paid top dollar and worried they might lose equity they saved for years to create.

In fact, price increases have slowed gradually for most of the last year all over California, but the state has been spared any precipitous drop. It's one thing not to be making windfall profits. But it's no disaster when prices remain fairly stable while wages and salaries gradually catch up with prices that have risen sharply for about 10 years. That kind of pause can even be constructive, as it both allows a new cadre of homebuyers time to save up the down payments that can get them into the market and it creates some stability in communities where opportunistic buyers have moved in and then moved out again in short order, taking tens of thousands of dollars in profits with them when they left.

It's also a familiar part of the California real estate cycle. Booms in California generally last eight to 10 years, followed by leveling-off periods of about four or five years. This was true during the 1960s, '70s and '80s, with the approximately 15 percent average price drop of the early 1990s the only aberration.

Immigration is the reason this state rarely experiences true busts after its booms. The more people pile into California, the greater the demand for housing. Demand begins at the bottom of the price scale, but when owners of the cheapest housing sell to newcomers at a profit, they suddenly gain the ability to move up to a new level. This propels the homeowners from whom they buy yet another step up the ladder, right on up to the level of multi-million dollar homes.

That's something for those who decry either immigration or population increases to think about.

No crisis here

The bottom line: California is not in a real estate crisis and doesn't figure to be in one very soon. Real estate agents in the 1970s and ‘80s often told their clients that "No one ever lost money on California real estate." After the bust of the ‘90s, this statement is not longer completely correct. But it's a truism that's still at least close to being true.

Reach Thomas D. Elias, a long-time California political reporter: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it