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California economic dependent on realestate boom { March 15 2005 } Original Source Link: (May no longer be active)
http://www.latimes.com/business/la-fi-econ15mar15,1,2263820.story?coll=la-headlines-businesshttp://www.latimes.com/business/la-fi-econ15mar15,1,2263820.story?coll=la-headlines-business
THE NATION
Real Estate Reliance May Hurt California
The state could take a big hit with a housing market downturn, a UCLA study warns.
By Nicholas Riccardi and Annette Haddad
Times Staff Writers
March 15, 2005
California's hot real estate market is destined to cool down — and when it does, the state's economic recovery could be over, according to a report to be issued today.
The study, written by the UCLA Anderson Forecast, makes plain just how much the real estate boom is holding up the California economy.
Half of the private-sector jobs created in California in the last two years are connected in some way to real estate. Meanwhile, property values in the last four years have swelled $1.7 trillion, the equivalent of about 35% of the total personal income in the state since 2001.
This sharp increase in home equity has spurred consumer spending that, in turn, has fueled more economic growth.
"We have an economy that's rolling along on the basis of a false sense of wealth," said Christopher Thornberg, a senior economist with the Anderson Forecast team.
Exhibit A is Thornberg himself, who is remodeling his West Los Angeles town house.
"I call up my friends and say, 'I've got $200,000 in my house,' " he said, "and I know it's a real estate bubble."
The Anderson Forecast, best known nationally for having accurately predicted the 2001 recession, has long argued that real estate prices in California and the U.S. are unsustainable partly because property values have climbed far faster than personal income.
The report due out today predicts that rising interest rates will hurt the residential market this year and that a national recession is "quite likely" by the end of the decade.
Thornberg said that in California, where home prices have increased faster than in the rest of the nation, the situation is precarious. Even a simple slowdown in the accumulation of equity in the state, he said, could harshly depress spending habits, job creation and economic expansion.
Real estate has become central to California's economy. Real estate-related jobs account for about 10% of private sector jobs in the state, according to the Anderson Forecast, and are growing rapidly.
Of the 243,000 private payroll jobs added in California since 2003, 122,000 are linked to the industry — jobs with construction companies, mortgage processing centers and the like.
What's more, there are 423,000 licensed real estate agents and brokers in the state now, up 25% from 2003. That number represents 2% of all working-age Californians.
"New agents are coming out of the woodwork," said Ron Ario, regional director of the Central/Southern California division of Keller-Williams Realty, a national real estate franchise that doubled the number of California branches in 2004. "They're coming into the marketplace with a higher level of business acumen than in the past."
The construction sector is also booming. Empire Cos., for one, has in three years expanded its payroll from 40 to 200 as it built dozens of homes and developed land for 500,000 square feet of retail space, predominantly in the Inland Empire.
James Previti, the company's founder and chief executive, sees no reason to slow down and is skeptical of prophecies of collapse. "There are no set of facts to change the demand situation," Previti said.
Doom-laden predictions about the bubble bursting have abounded since the market really began to sizzle three years ago. Still, even with long-term interest rates on the rise, February sales data to be released today are expected to show that there was another uptick in home prices in California. Indeed, many economists and people in the business think prices will eventually only taper off, resulting in a so-called soft landing.
"Is doomsday right around the corner?" said Anthony Hsieh, the founder of Irvine-based mortgage lender HomeLoanCenter.com. "Nobody knows how much momentum the market's got."
Hsieh added that a decline in prices could actually be good for the economy because lower prices would attract more buyers and that would create more jobs.
In the meantime, people like Tom Pirruccello are helping to keep the real estate-fueled economy going. The 42-year-old owner of a Burbank clothing company, Pirruccello and his wife bought a two-bedroom house in Studio City in 2001 for $350,000. When they took out a home equity loan last year — at 4% — the house was appraised at $650,000.
The couple added a master bedroom and redid the kitchen, and also picked up a new set of chic furniture.
"It made complete sense. It was really one of those things where it was a win-win situation," Pirruccello said. "How quickly equity builds in California, it's unbelievable."
But some signs of a slowing housing market have started to emerge.
Nationwide, refinancings have tapered off since peaking in 2003 as interest rates have edged upward. At the same time, high prices have put homeownership out of more and more people's reach. Today, fewer than 20% of Californians earn enough to afford a median-priced home using conventional financing and a 20% down payment, according to the California Assn. of Realtors.
Although prices continue to move up on a year-over-year basis, over the last six months the median price has begun to flatten out as the rate of appreciation has slipped below 20%. What's more, in Southern California, the median price declined 2% in January to $415,000, down from $424,000 in December.
During every recession, the residential real estate market has been one of the first sectors hit — except during the 2001 recession. Low interest rates kept property values on the rise and the real estate market hot.
The Anderson Forecast says that's unlikely to happen again. Other economists agree.
"We need some other sectors to carry the ball," said Ross DeVol, director of regional economics at the Milken Institute in Santa Monica. "Real estate simply cannot push the economy forward any longer."
UCLA's Thornberg said it would take strong growth in other sectors of the economy to take the place of a flagging real estate market. Since 2000, California has lost so-called external jobs that cater to the national or international economy — making computer chips or T-shirts, for example — as it gained jobs that cater to other Californians, in retail, nursing or real estate.
Only if external jobs catch on fire, Thornberg said, can the state maintain the status quo, which is lackluster job growth far behind historical averages.
"The best-case scenario is mediocre," he said. "That's what this boils down to."
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