Analyst Sees Southern California Economy, Real Estate Soft for Next Year

All the signals are in place of a slowing economy. Home sales are down in California by more than 20 percent. But home prices are still appreciating, albeit at a slower rate than before (6 to 8 percent a year instead of the double-digit figures of the past few years).


Residential lending is down, as are residential building permits. Employment is up, but slowing. Short terms interest rates are up, and so are mortgage rates and inflation. And, of course, affordability is low.


In Southern California the inventory of new housing stock is at the highest level it’s been since its most recent peak back in 1990 (the bulk of it in Riverside and San Diego counties). Inventory of existing housing is also growing as marketing time continues to lengthen.


Defaults and foreclosures have increased sharply in the Southland, with both notice of defaults and foreclosures up from last year.


Compiled and summarized by Dr. Michael Carney, executive director of the Real Estate Research Council of Southern California at California Polytechnic University, Pomona, this market data is sending mixed signals. So reading these economic signals is not that easy right now, as the market turns from favoring sellers to favoring buyers.


The California economy appears to be strong, although softening a bit. Still, Carney is not sure about how to interpret the recent upswing in foreclosures. NOD’s, he said, are driven by people not having jobs, therefore not being able to make their monthly mortgage payments. Job creation has not been a problem in California, however. Unemployment in the state is at a historically low level right now, but job creation is expected to slow down over the next year.


Foreclosures, on the other hand, are driven by borrowers purchasing homes with no-money-down loans or other creative financing products. And a lot of that has been going on the past few years. Expectations that interest rates on these loans are going to be reset next year is a cause for concern for those borrowers. It could possibly turn the spigot of the foreclosure pipeline wide open next year. If it does, it could mean a boon of opportunity for subscribers of RealtyTrac.


Carney characterizes himself as a “zero inflation kind of guy,” so he was not in favor of the Federal Reserve’s decision at its August meeting to pause interest rate hikes after 17 consecutive adjustments of 25 basis points each that started back in June 2004. Fearing that inflation and long-term interest rates will continue to rise — as measured by the Consumer Price Index — he expects the Fed to resume rate hikes very soon, which may also have an effect on foreclosures in the future.


Based on the data he has right now, Carney’s outlook for the next year is calling for continued weakness in the Southern California real estate market. He is forecasting that inflation will continue to rise, home prices will stay flat or possibly edge down further. Both home sales volume and residential building permits will continue their downward trend. The home ownership market will remain weak for the year ahead, he said, and the economy and employment growth will slow.


All in all, Carney believes the important factors to keep an eye on in the next year are employment, inflation and mortgage rates — all factors that can help subscribers to RealtyTrac — whether they are real estate investors, agents or buyers looking to work with, or purchase a foreclosure property in California — realize their American Dream.

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