Issues: Affordable Housing

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Harvard report sees no losses from slowed sales

By Emmet Pierce
UNION-TRIBUNE STAFF WRITER
June 9, 2006

Southern California's housing boom is running out of steam, but the slowing pace of sales won't erode the huge gains in equity that many homeowners have realized in recent years, says a report by Harvard University.

Dismissing the likelihood of sharp price declines, Harvard's State of the Nation's Housing 2006 report offered reassuring news to homeowners who have seen their values soar since the late 1990s.

“The economy does not look poised for a nose dive,” said Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. “A soft landing is in the offing, not dramatic price declines.”

Not all economists share the report's optimism. In recent months, some analysts have warned that price drops are possible as inventories of for-sale homes grow in Southern California. Economist Mark Schniepp of the California Economic Forecast said yesterday that those who embrace the “soft landing” scenario may be engaging in wishful thinking.

“It has become a popular notion simply because people really want it to happen,” Schniepp said. “We know that happy endings don't always happen. We may be in the midst of a hard landing. . . . Interest rates are rising, and relatively sharply since March.”

Economist Zoltan Pozsar of Moody's economy.com holds that the lack of affordable housing and the broad use of adjustable-rate mortgages make California's pricey housing markets vulnerable to corrections.

A flattening of price gains is likely in most U.S. markets, but California “is at the highest risk of seeing downward pressure in home prices,” Pozsar said. “You are more exposed because housing is most unaffordable in California of all states. Home prices have been in a much sharper run-up than elsewhere, but median incomes have not kept pace.”

The Harvard report had been scheduled for release this coming Tuesday, but the document was posted yesterday on Business Week's Web site. The study had an upbeat outlook for the United States overall.

Major price declines seldom occur without severe overbuilding, major job losses or a combination of heavy overbuilding and modest job loss, the Harvard analysts wrote. “Fortunately, these preconditions are nowhere in evidence across the nation's metropolitan areas.”

“Even with higher interest rates and home prices crimping affordability, the lure of house-price appreciation continues to draw home buyers to the market,” the report said. “While the national homeownership rate edged down a tenth of a percent in 2005, it increased in the West and Northeast, where house-price growth was the strongest.”

Harvard placed the national homeownership rate at about 69 percent in 2005. Locally, the homeownership rate is estimated at about 60 percent by the California Association of Realtors.

In April, San Diego County's housing prices slipped in some areas. The overall median sales price was $505,000, down from the peak of $518,000 in November. The year-over-year increase was 4.3 percent from a year ago. Overall sales were down nearly 31 percent from April 2005 to 3,705 transactions.

Harvard's housing center attributed continued price gains around the country to the lending industry's development of adjustable loans that enable people to buy costlier homes. Such loans typically offer low monthly mortgage payments for several years, before adjusting upward.

In the past two years, interest-only loans, which defer principal payments for a set number of years, went from obscurity to about 20 percent of the dollar value of all loans and 37 percent of adjustable-rate loans originated in 2005, Harvard reported.

Payment-option loans, which allow borrowers to make minimum payments that are lower than the interest normally due, accounted for nearly 10 percent of last year's loan originations. Federal regulators last year issued guidance designed to limit the use of such loans to prevent a rise in defaults.

Notices of default – the first step toward mortgage foreclosure – increased 60 percent in the San Diego region in the first three months of 2006, compared with the first quarter of last year, research firm DataQuick Information Systems reported.

John Karevoll, an analyst for DataQuick, said it's too early to know whether the increase foreshadows a rise in foreclosures. The 1,533 notices issued during the first quarter of 2006 were below the quarterly average of 2,149 over the past 14 years and accounted for only a fraction of the region's homes. Normally, about 5 percent of people who receive default notices actually lose their homes.

The Harvard report was optimistic about the ability of home buyers to handle adjustable loans. For most homeowners, increased mortgage payments are still several years off. Homeowners generally have “sizable equity stakes to protect them from selling at a loss, even if they find themselves unable to make their mortgage payments,” the report said.

The report discussed the San Diego region's status as one of America's least-affordable housing markets. It said the cost of a median-priced home locally now equals about 10 times the median household income.

Despite the lack of affordability, G.U. Krueger, a housing economist in Irvine, said sound economic fundamentals will prevent the region's home prices from dropping steeply.

“It is really hard for me to believe that home prices will drop dramatically when economic growth is still relatively good in San Diego,” Krueger said.

Emmet Pierce: (619) 293-1372;
emmet.pierce@uniontrib.com

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