California Sees Housing Boom Become Slump
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August 29, 1990
California Sees Housing Boom Become Slump
By RICHARD W. STEVENSON, SPECIAL TO THE NEW YORK TIMES
LEAD: On front lawns in many cities along the California coast, the for-sale sign has become almost as common as the palm tree, and to some sellers seemingly as permanent. After several years of breathtaking price increases and demand so strong that houses were snapped up within hours of being listed, California's giant real estate market has slowed drastically.
On front lawns in many cities along the California coast, the for-sale sign has become almost as common as the palm tree, and to some sellers seemingly as permanent. After several years of breathtaking price increases and demand so strong that houses were snapped up within hours of being listed, California's giant real estate market has slowed drastically.
Just as in the Northeast in recent years, California sellers accustomed to huge annual increases in housing prices have been shocked by how low the offers have come in. Some are dropping their prices to meet the highest bid, and housing prices are now falling in many areas. But in other cases they are either taking their houses off the market or leaving them on and refusing to budge much on the price.
Volume of Sales Down
As a result, the pace of housing sales in California has been dropping even more quickly than the price. Figures released Monday by the California Association of Realtors indicated that the rate of houses sold fell in July to its lowest level since December 1985. The seasonally adjusted annualized rate of sales last month for existing single-family houses was 419,943, down 15 percent from July 1989. Construction of new houses is also off sharply.
And while prices in some inland cities like Sacramento continue to rise, prices are dropping in the population centers along the Pacific Coast. The median price of a single-family house sold in Monterey was down 9.3 percent from July 1989, and in Los Angeles it was down 4.5 percent. Prices in Santa Barbara dropped 2.9 percent from a year earlier. In the San Francisco Bay area, the drop was 1.8 percent.
Statewide, the median house price in July, at $194,099, was down 3.7 percent from a year earlier, when the statewide figure peaked at $201,653.
After the heady atmosphere that made this one of the nation's most overheated housing markets for the past several years, the new reality has come as a shock. Starting in 1986, prices rose as much as 30 percent annually in some areas, with the sharpest increases in 1987 and 1988.
Even with such increases, buyers found themselves in bidding wars that often pushed the selling price above the original asking price. Their willingness to pay reflected a belief that the house would be worth even more within a few months.
The ''buy at any price'' mentality seemed by late last year to have finally outrun the ability or willingness of many people to buy a house, and has disappeared this year. With the sales rate down and so many houses on the market, the pressure to lower prices is even greater, and many analysts expect prices to fall further, particularly if the national economy, now burdened by the Middle East crisis, descends into a recession.
But while the rapid deceleration of the housing market on the California coast resembles that of the Northeast, there are a number of important differences. Since prices in the Northeast have been falling longer and farther than here, more sellers have taken losses. And the Northeast's economy is weaker than California's.
In the view of many real estate agents here, the slump is nothing more than a temporary cooling. Californians continue to recite a litany of factors they think will keep the housing market from going into a steep dive, including the state's diversified economy, widespread restrictions on building that have limited the supply of housing and its strong population growth. Early census figures show that the state's population has topped 29 million, for an explosive 23.7 percent rise in a decade.
No Strength Left
Despite such optimism, the housing market in California is so enervated that the Kaufman & Broad Home Corporation, the state's largest house builder, recently started offering to pay closing costs for new-house buyers, an incentive worth about $10,000. The Marina City Club, a condominium complex in Marina Del Rey, has cut prices up to 22 percent. A developer in Lancaster, in the Mojave Desert north of Los Angeles, recently cut prices on some houses to less than $200,000, from $245,000, infuriating owners of identical neighboring houses who paid the developer full price just a few months ago.
More than a year ago, Charles M. Harker put a three-bedroom, two-bath house in the Los Angeles suburb of La Canada on the market for $497,500. The house, which he bought and remodeled as an investment, remains unsold, with the price slashed to $445,000 and Mr. Harker and a partner close to the point where their chance for a profit would evaporate.
''The market just came unglued,'' said Mr. Harker, an accountant. ''Many of us looked at it as though the strong market would continue. We didn't see the fall coming quite so fast.''
In November, Ann Pettijohn, a broker in Orange County, listed a three-bedroom house in the planned community of Irvine. The owner was being transferred, and had turned down an offer to sell the house to his company for $325,000, convinced that he could get a higher price.
'No One Buying Anymore'
The house remained on the market for six months at $339,000 before the owner finally gave up and accepted the company's offer. The company has had the house on the market through another broker for $319,900 and just accepted an offer that Ms. Pettijohn said was probably in the $315,000 range.
''That's a common scenario,'' Ms. Pettijohn said. ''The house eventually did sell, but the market in 1989 was $339,000 and in 1990 it's $315,000 to $319,000. It's like someone blew a whistle that only dogs and buyers could hear, and suddenly there's no one buying anymore.''
Few sellers are actually losing money. Except for those who bought at the peak last year and must sell now, most homeowners are still far ahead on paper after the double-digit price increases of previous years. As a result, banks and savings and loan associations in California report no upswing in foreclosures on residences, and most analysts say the state's financial institutions will weather the slump without any significant damage.
The Economy Is Rattled
Still, the downturn is extremely unsettling in California, where analysts already see signs of vulnerability in an economy that has enjoyed robust growth longer than almost every other region of the country. The economy is being rattled by huge layoffs in the aerospace and military contracting industries. Commercial real estate developers and brokers are being battered by a glut of new office space. Permits for construction of residential housing declined to an annual rate of about 160,000 in June from an average of 238,000 last year, prompting the beginning of a decline in construction jobs.
And some analysts say California's economy and its housing market are in for tougher times.
''With the economy at risk in the future, we couldn't have hit bottom yet in the housing market,'' said David Hensley, an economist with the business forecasting project at the University of California at Los Angeles. ''I'd expect further erosion in sales and probably prices too.''
'Cyclical Downturn'
Richard A. Snyder, a broker in San Diego who is chairman of the California Association of Realtors' long-term planning committee, said: ''We are in an adjustment period. My personal view is that we are going into a cyclical downturn that could last one-and-a-half to two years.''
But, Mr. Snyder added, ''We will in fact weather the storm and we won't see the price decreases you have seen in the Northeast.''
There are a few bright spots in the state. Sacramento and other inland cities, where prices are far lower than along the coast, continue to see increases in sales volume and price. In a state where only 18 percent of households can afford the median-priced house, according to the Realtors association, the lowest-priced houses are selling briskly.
But most of the state is facing a wrenching readjustment. Jim and Marilou Brown put their house near Santa Barbara up for sale in June 1989, asking $289,000, roughly the same price that a similar house down the street had sold for a few months earlier. Mr. Brown, a newspaper editor, moved immediately to Florida with the couple's son to start a job there, while Mrs. Brown stayed behind for what they thought would be several months.
An 11-Month Ordeal
But the house did not sell until May, 11 months later, and only after the Browns dropped their price by nearly 10 percent, to $263,000. In the end, after accounting for capital gains taxes and $25,000 in improvements they made, Mr. Brown said they barely came out ahead despite having purchased the three-bedroom house at the beginning of the boom in 1986 for $187,000.
''It was a bust as far as our expectations were concerned,'' Mr. Brown said. ''We didn't lose, but we certainly didn't come out with diamonds and rubies and gold fillings. It was kind of a shock because when I left California, the boom was still going on.''
Real estate agents by and large say they remain optimistic. Ms. Pettijohn, the broker from Orange County, said she got a call the other day from an investor who had stopped buying properties last fall, asking her to suggest some good values.
''When your investor buyers start calling,'' she said, ''you begin to think they're sniffing the bottom of the market.''
