House and Bubble
California's housing market has been in high gear for the last few years. What will happen to the state's already rocky economy if it tanks?
1:15 PM, Sep 4, 2003 • By HUGH HEWITT
AS THE RECALL rocks along, reporters continue to ignore the underlying causes of widespread voter disgust, including Gray Davis' the tripling of the car tax this past summer, and the tidal wave of special interest legislation that ranges from workplace protection for cross-dressing employees to the bestowal of land use authority on California's Indian tribes over sites they determine to have sacred significance. Employers already reeling from new entitlements on worker leave are now anticipating a new and hugely expensive mandate on health insurance for all workers, plus whatever the recall-panicked legislature can ship to the lame-duck governor in the next four weeks.
The only reason that Gray has even a tiny prayer of staying in office is the calming effect of rising home prices. This is a story within the story, but it could also have a nasty surprise ending. Think of it as the potential second-half to an economic horrors double feature: The dot-com bust followed by the housing market collapse.
Even the whisper of such a thing alarms most Golden State home-owners. The country as a whole has seen healthy gains in the value of its housing stock. The National Association of Realtors put the national median existing home price at $182,100 in July--a 12 percent rise in one year.
In California the numbers are staggeringly higher almost everywhere. The median price of an existing, single-family, detached home in the state in June of this year was $376,260, nearly a 16 percent jump over the last year. The market was still hot in most places this summer, even as mortgage rates climbed. It took less than a month to sell the average house. And, according to the California Association of Realtors, in June 2003, 572,130 houses changed hands in California, a 7 percent gain over June, 2002. The same group published this shocking list of highest median home prices by community:
Before you conclude that the real estate eruption of the past few years is limited to these enclaves of the wealthy, consider that the greatest percentage increase in median home prices was in Yucca Valley (47 percent) and other big gainers include Perris (36 percent), Ontario (35.3 percent), and Chula Vista (32 percent). The housing boom is universal.
The simple explanation for the rise in housing value is that California substantially underproduces new homes for a growing population. The Building Industry estimates it will construct 180,000 new homes and apartments in 2003, and perhaps as many as 186,000 in 2004. The builders say that each year will be 50,000 units short of the demand generated by population growth, adding to an existing housing stock deficit of approximately a million homes. The Realty Times quotes California Building Industry Association president Harry Elliott as saying that "ever-increasing fees, ever-increasing delays and ever-increasing shortages of land we're allowed to build on" will continue to exacerbate the shortage.
The short-term effect of the imbalance in supply and demand is that those with homes have made a lot of money on paper, some of which has entered the state's economy via refinancing and home equity loans. This is a "false positive" of economic health. But the flow of home value dollars into Californians' pockets has disguised the extent of the economic wreck in the broader economy.
Of course there is a ceiling on home prices, and it may have already gotten too close for anyone's comfort. A state that is losing jobs is losing home buyers, and the rise in mortgage interest rates is cooling demand and with it the sharp rise in home prices. San Francisco may be an early warning sign of the future trend. It has already experienced a real decline in home prices from year to year, and the Foreclosures.com folks report that new notices of default and trustee sales are picking up throughout the state.
The only way to support the current level of home prices is for high-wage jobs to multiply in and around the high cost areas. Without urgent measures to turn California's economy around, voters can look forward to a housing market going into reverse. Just another reason to send Gray packing and Arnold north on October 7.
Hugh Hewitt is the host of The Hugh Hewitt Show, a nationally syndicated radio talkshow, and a contributing writer to The Daily Standard. His new book, In, But Not Of, has just been published by Thomas Nelson.