NO BURSTING REAL ESTATE PRICE BUBBLE; COST OF DOING BUSINESS: UP, UP, AND AWAY

By: Roman P. Mosqueda, Esq.

Real Estate Broker

            According to Leslie Appleton-Young, Chief Economist of the California Association of Realtors, there is no bursting bubble in real estate prices as yet.

            She stated this conclusion in her presentation on economic update on the real estate industry at the general membership meeting of the Beverly Hills/Greater Los Angeles Association of Realtors (BH/GLAAR) on July 23, 2004.

            The Author, a member of the BH/GLAAR, attended Ms. Young’s presentation, wherein she denied any bursting bubble, but warned that: mortgage rates are moving up, appraisals are more conservative, and housing prices tend to be quick to rise, but sticky on the way down.

Law Of Supply

And Demand:

            Price appreciation of homes is directly related to inventory of homes for sale.  Indeed, while demand has been very strong (with the entry of Asians, among others,) the supply of new housing in Southern California remains limited.

            The Riverside-San Bernardino area continues to lead in both residential housing development and nonresidential construction.

            According to the 2004-2005 Economic Forecast and Industry Outlook for California and the Los Angeles Five-County area of the Los Angeles County Economic Development Corp. (LAEDC), “(r)esale home prices have appreciated dramatically in the past few years, raising concerns of a ‘housing bubble’ and speculation about the timing of its demise.”

            It continues that “(w)ith resale home prices rising in double-digit rates, there’s once again talk of a ‘housing bubble’.”  It clarifies that “(t)he word ‘bubble’ implies an inevitability to ‘pop’, i.e., a drastic decline in prices.”

            It concludes  that  “(w)hile home prices in Southern California are high, the conditions for dramatic price declines do not seem to exist.”

            It further points out that “(f)or prices to drop significantly, either 1) the increase in supply must outpace the underlying demand, or 2) the demand for housing must fall drastically.”

Effect of Higher

Interest Rates:

            According to the LAEDC 2004-2005 Economic  Forecast and Industry Outlook cited above, “(t)he early 1990s saw a sudden and drastic decline in demand … due to defense downsizing  and a severe regional recession.”  “Home prices fell as people moved out of the area.”

            But “(t)oday, the demand is strong and the region’s economy is improving.”

            It concludes that”(i)t is unclear as to whether the demand for housing will decline enough to cause prices to fall even with higher mortgage interest rates.

            “Current homeowners are more or less insulated from the increase of home prices,” according to the LAEDC 2004-2005 Economic  Forecast and Industry Outlook.  “If anything, many benefit from the price appreciation by taking out equity from their homes to pay off higher-interest liabilities such as credit cards debts and auto loans ….”

            “In the past few years,” according to the LAEDC Economic Forecast and Industry Outlook, “the low mortgage interest rates reduced the gap between rents and mortgage payments, and many people jumped at the chance to own their homes.”

            “The spread of sub-prime lending (for borrowers with low FICO scores) also gave many the chances they never had before.”

            But it warns that, “(o)nce mortgage interest rates rise, the gap (between rents and mortgage payments) will widen again and the hurdle between renting and owning will become higher.”

            It also points out that “(b)y capping the  increase in property tax assessments at 2% annually (in  California), (Proposition 13) further insulates  existing owners from tax hikes on their now more valuable homes.”

Cost Of Doing Business

In California:

            While it predicts that “California’s economy will continue to gather momentum over the balance of 2004 and into 2005,” it also points out that:

“1. The state’s business basis is composed of small and medium-sized firms that often have limited resources;

 2.  All firms in the state are operating in an increasingly competitive global environment (with ‘off-shoring’ of jobs).”

And there is a “premium” attached to doing business in California, according to the LAEDC Economic Forecast and Industry Outlook:

1.   energy costs remain high;

2.      gasoline and diesel prices remain comparatively high;

3.   cost of worker’s compensation insurance remain high;

4.   contributions to the unemployment insurance fund are increased; and

5.   paid family leave contributes to higher cost of employing people in California.

Worse, AB 2832, which has passed the Assembly and is now in the Senate, will raise the minimum wage in California to $7.25 effective January 1, 2005, with an additional increase to $7.75 on January 1, 2006.

Together with the high cost of workers’ compensation insurance, the increase in minimum wage may lead companies in California to relocate out of state.

SB 1841, which has passed the Senate and is now in the Assembly, will require employers to notify employees if the employer is using any  form of electronic monitoring that affects the right to privacy of its employees.

If SB 1841 becomes law, any violation thereof carries a minimum fine of $5,000, plus  attorney’s fees.  It may have the unintended consequence of loss of job.

The good news is, despite the high cost of employing people and high housing cost in California, the state’s population will continue to grow, according to the LAEDC Economic Forecast and Industry Outlook.

Los Angeles County, in particular, has the movie, television, technology and aerospace industries and beaches and mountains as attractions for population and job growth.

            With approximately 10,237,000 residents by January 1, 2005, Los Angeles County is really a state masquerading as a county, according to aforesaid LAEDC Economic Forecast and Industry Outlook.

            The challenge is for more affordable  housing  (than the $465,000 median price of single family dwelling  as of May 2004) near place of work of its residents.

            (The Author, Roman P. Mosqueda, has been a real estate broker since 1999, and a California attorney since 1984.  He is a Realtor by virtue of his membership in the Beverly Hills/Greater Los Angeles Association of Realtors, California Association of Realtors,  and National Association of Realtors.)