Wednesday, January 11, 2006
CONCORD - One of the state's most prominent economists who has predicted the demise of the white-hot housing sector remained steadfast in that outlook Tuesday, as he bluntly described housing at present as a "bubble" market.
Christopher Thornberg, senior economist with the UCLA Anderson Forecast, ticked off multiple reasons why he believes the housing market is headed for a slump, which has perils for the East Bay, in particular. Thornberg was one of the keynote speakers at the Contra Costa Business and Education Summit, at which participants discussed ways to create an educated workforce suitable for an economy based on global competition and innovation.
But it was the local economy and its crucial housing market, and Thornberg's assessment of both, that captured the attention of the luncheon crowd at the Concord event.
Thornberg believes a drastic slowdown in home sales looms in the Bay Area and other parts of California.
"You are starting to see a slowdown in housing market activity, and that says loud and clear that things are starting to break," Thornberg said. "The feeling is that we have peaked. And beyond that is a downhill run."
The arrival of the housing slump is more of a matter of when than if, Thornberg said.
"The clock is ticking," he said.
Thornberg said California home prices are about 30 percent to 40 percent overvalued. He added, though, that a decline in prices -- if that comes about -- would occur over the better part of a decade, not suddenly.
And the falling of that domino would jolt others, he warned.
"If you have a big decline in unit sales, you'll have mortgage brokers and real estate agents and construction workers all losing jobs," Thornberg said. "And what's driving the California job market right now? Construction, finance and real estate jobs. Those will go away."
A slowdown in the value of homes would constrict the amount of equity that homeowners can tap to pay for everyday expenses or discretionary spending.
"Don't forget about the wealth effect," Thornberg said. "All that wonderful money is going to disappear. Suddenly, the house isn't going to be able to pay for the kids' education, it's not going to pay for your retirement in Bermuda and it's not going to pay for that face-lift at age 74."
A separate report from the Federal Deposit Insurance Corp. about the regional economies around the country detailed a significant slowdown in home sales. A portion of Tuesday's FDIC report, based on data collected by the California Association of Realtors, found that it's taking longer for owners to sell their houses.
For example, in an East Bay real estate territory that includes the Tri-Valley and the Fremont-Hayward region, homes last September remained unsold for an average of 2.1 months. That's up 163 percent from the roughly 24 days that homes remained unsold in September 2004.
Areas that include central and eastern Contra Costa suffered a 73 percent increase in the time that homes were staying unsold, while San Francisco struggled with a 75 percent increase.
Thornberg also charged ahead with a criticism of one of California's most sacred real estate bulwarks, the venerable Proposition 13. Thornberg said the tax-slashing Prop. 13 has created many inequities in how much residential and commercial realty owners pay in property taxes.
"Prop. 13 really needs to go," Thornberg said, firmly grasping one of the third rails of California politics. "Will it go away in the near future? Probably not."
"I think you're smoking dope," responded Jim Duvall, dean of natural and applied sciences at Contra Costa College in San Pablo.
In an interview after the meeting, Duvall said he would not have been able to buy a home in Sacramento decades ago had Prop. 13 not been in effect, because property taxes tended to skyrocket in the 1970s prior to its passage.
Thornberg's argument is that Prop. 13 forces legislators to use what he called "bad" taxes to raise revenues, such as the income tax, rather than "good" taxes, such as property taxes. But Duvall believes California politicians will never cut income taxes to offset higher property taxes if Prop. 13 is jettisoned.
As for his outlook for the East Bay economy, Thornberg painted a rosy picture for 2006 -- with one caveat related to housing.
"The East Bay and the overall Bay Area will continue to experience a recovery," Thornberg said. "But Contra Costa is a lot more exposed to a housing and consumer pullback."
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