csua.org/u/aan -> www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/12/12/BUGFIA7CN680.DTL
SFGate Technology: It's a high-tech world - - we just plug you int o it... This is one of the most ex pensive housing markets in the nation, yet the past two years, stimulate d by low mortgage interest rates, have seen record numbers of sales and prices increases. To answer that, The Chronicle invited three experts to discuss the topic: Avram Goldman, president of Coldwell Banker Northern California Residen tial Real Estate, who heads the largest staff of real estate agents in t he top half of the state; John Karevoll, senior analyst with DataQuick I nformation Systems, who has been gathering and parsing data on real esta te for the La Jolla (San Diego County) company; and Ken Rosen, a UC Berk eley professor who specializes in the real estate market.. I think there are cycles w hen real estate is very good, and then cycles when it corrects. It has to do with more global issues, ec onomic issues and other issues. If you're looking currently, I don't see in the near future much of a bub ble. That can happen because y ou cannot continue to go up double digits forever. The market sometimes needs to pause and catch up and catch its breath. So if you look at the things that really drive the real estate market, you have interest rates which are still at 35-year lows. I think the bigges t thing that's driving price today is lack of inventory. Karevoll: We just probably had the second-strongest October ever in the B ay Area, and prices continue to go up at about 18 percent. I'm missing t he last three days of the calendar month for that. Except for the new pe ak there, it (the median price of a home) went up from $544,000 in Septe mber to what looks like will be $553,000. A bubble means that a market has taken leave of its senses. The buying activity there is fueled by the expectation of gain, and right now, as Avram said, what we're seeing is basically buying activity wher e people are putting roofs over their heads. As far as a correction goes, yes, especially when interest rates start to go up. The bubble thing just doesn't seem to be happening despite an en ormous number of forecasts from near and far that said that it would hap pen. What did Ed Leamer of UCLA (director of its Anderson Forecast) say a couple of years ago? He said, "What are they s moking up there in the Bay Area?" We call it a bubble, and t hat's the wrong word for Northern California. What we have happening her e is extremely low interest rates, and easy credit has put a lot of new buyers in the market, and we don't have a lot of people cashing out and leaving the area. I'm going to give you some economic numbers that indicate that there is a disconnect going on here. What's happening in the Bay Area is this: We have a deficit of home ownership, so people took advantage of the low in terest rates and easy credit to become homeowners. Let me give you the demographics and the job situation, which I think eve ntually will cause us a problem. We've lost 135,000 jobs the last three years in San Francisco. In Oakland, we l ost only 30,000, and we've actually gained 6,000 in the East Bay. So the job situation would have said that this would be a very bad housin g environment. Every time we've had a recession like this, with a run-up in prices, which we did have in the late 1990s, you would get a housing recession. But what offset that was the extraordinarily low interest ra tes. Q: Where do you see things going in the next five years? But given that interest rates don't rise beyond the 7 percent level, given that the deficit doesn't go up another 50 percent, I see pretty good thi ngs for the housing market. Karevoll: There's some softening here and there, but it's still very stro ng. I do agree that other factors have offset the terrible economy. Ther e have been extraordinarily low interest rates, easy credit and trade-up buyers having built up more money. I'm worried about the Bay Area and California as a whole. The California Association of Realtors affordability numbers are 14 percent for San Fra ncisco. The problem with that is that's with very low interest rates. I'm thinkin g that if interest rates go up, it's out of control. Q: If Bush raises the level of what the government can spend and borrow, will that affect interest rates? What really matters is the stock of debt and how much growth i n the debt there is relative to the size of the economy and who holds th e debt. So the deficit is going to go to 4 to 5 percent of GDP from 35 percent. What's really the negative about it is who's holding it. It's being held by India, China, Hong Kong, Taiwan and Japan. I think they're going to try to buy real estate pretty soon. So I would o pen a Coldwell Banker office in Hong Kong and Shanghai, and I think you' ll recycle a lot of money over here because the Asian economies love the Bay Area. Rosen: I think the Bay Area, because of this huge backlog we had, may tak e a longer time to unwind. I can't imagine with these affordability rati os that we won't see (more) slowing in the market over the next three ye ars than we've had the last period of time. I think price declines are ver y possible, but that's where we disagree. It wouldn't shock me to see a price decline of 15 percent on average over a three- or five-year period . From 1990 to 1994, the Bay Area probably lost about 10 to 11 percent of its value. Karevoll: I think if there's speculation anywhere, it would be in the con dominium area. There might be a little bit of it there, but the standard single-family house isn't speculation. Q: Isn't there a sense of expectations of huge profits in the short-term? We saw a little bit of it in the late 1990s, but I'm not seeing that now. Q: What did home-value appreciation average in the last three years in th e Bay Area? We had the boom in the late 1990s in certain locations, including San Francisco. I think i t was up 26 percent in one year, but 2001, 2002 and 2003 have been very modest. What is the statistic that you look at to s ee what it is? The way we look at it is a percentage of sellers selling right now who have owned their homes for less than half a year. We've also done it for three months and 12 month s Right now, it's 38 percent at a half year or less. For example, at UC Berkeley, many parents come in and buy a condo for four years while their kids ar e there. It's very important to say that because we all th ink it's a much bigger number. Vacancy rates are at just about their highest levels, (but) they're turning a little bit now, getting a little bit better. I think the main effect is there's been a reallocation of p eople from rental to home ownership. I don't think the building problem in the Bay Area is ever going to solve itself . Q: Do fewer people in the Bay Area sell than in other areas? Karevoll: We've got this churn rate, how fast (houses) turn over. Basical ly, the Bay Area is about the same as the rest of the state. California has always had a higher turnover rate than the rest of the country. Everything happens faster in California, and that's reflected in the length-of-ownership st atistics. One other thing about the market -- and this is one of those obscure litt le factors that's going to play a big part -- we have to remember that f or every mortgage dollar being loaned out there right now, there are two waiting in the wings to be loaned. All of these huge institutional investors look at investment just the sam e way everybody else does. They're chasing securitized mortgag es, and they have been now for the last four or five years. Once the stock market kicks into gear, as it is doing right now, we're go ing to find that an awful lot of that money dries up, and that will also influence interest rates. There's not going to be as much money waiting in the wings out there as there is right now. That's going to be a huge factor Q: Are credit standards get tighter? Karevoll: Right now, (lenders) are making loans to people that they didn' t used to make loans to, and it would be easy to conclude that that is b ecause of looser underwriting criteria. They have much better risk management information than they used to. They 're able to make loans they didn't ...
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