Forecasters at Chapman University Many in Orange County are asking the same question: Who can afford a home here?
The school’s half-yearly economic outlook released Thursday, June 23, calls for a 14% drop in local average selling prices for June 2023 – one of the first projections of a significant drop in home values. Orange County forecasts average home prices to rise from $ 1.03 million in the first quarter of 2022 to $ 891,000 by mid-2023. Sales counts are down 20% this year.
The formula for home depreciation relies heavily on expensive mortgages after prices rose by 30% in the first two years of the epidemic. Mortgage rates are below 3% in 2021, and Chapman’s forecast rises to 7% before the national recession.
Yes, the county’s overall economic rebound is in progress from the business challenges created by the coronavirus business. Chapman expects local bosses will add 81,000 jobs this year – up 5.1% job growth – after hiring 47,000 (3.1% growth) in 2021.
But Orange County’s 1.66 million workers will still have a 14,000 pre-epidemic 2019 staff shortage this year. And Chapman economists worry that roughly half of recent appointments are in leisure and hospitality businesses, where payments are generally not close to the level of home buyers.
And don’t forget the county’s sliding population – four years in a row, with an average of 6,000 fewer residents – is another limitation on housing demand.
“Look at how many days it takes on average to sell a house,” says Jim Doty, senior Orange County economist with Chapman. “It has doubled in just a couple months, right? So the market is definitely changing and the main reason is the impact on mortgages and payments and why affordability is declining.
Chapman’s previous forecasts are one of the few nationwide views that have seen the problematic inflation emanating from the chill of the epidemic trade-off. How did many “experts” escape that recession from an overly stimulating economy – and the obvious next step, rising interest rates?
“I can’t answer that except to say that people don’t know history and don’t believe in history,” says Doty. “It takes you into this tulip mentality, the bitcoin mentality, the markets go up.”
The Federal Reserve’s cheap money policies are about to end. Mortgage financing is going to be more expensive. Home buying had to be slow.
“We are saying that with strong growth, we will be coming out of the 2020 recession quickly,” says Doty. “But that kind of rapid increase in spending and COVID-19 compensation checks will go to businesses, states, and individuals – leading to high inflation. This was not a tough call to make.”
Rising rates should force real estate investors to consider the safety of government bonds now paying 3%. Investors want real estate deals to increase yields by 5% to cover additional risks – which translates to a 12% drop in rental property prices, Doty says.
And the change in the role of the Fed makes a lot of sense – from a booster pumping a sick economy to a tighter wad to cool the heated trading environment. Doty says this is an “inevitable” national recession – and a problem for real estate.
“Nearly every time the Fed has tightened monetary policy – certainly when you have this kind of inflation – there has never been a soft landing,” he says. “So how does someone trust Soft Landing? When we look at periods when they don’t, historically, why do people think home prices can go up forever?”
Doty adds that the tough lessons from the housing bubble bursting in the mid-2000s could compound the pain of the coming sluggish economy. For example, they expect that lenders will soon become very stingy with the decisions that home hunters make.
“In 05-’06-’07 you had financial institutions throwing mortgages at people who didn’t really own mortgages,” Doty says, adding that loose credit standards would go a long way in appreciating that era’s price. “With bank control, you don’t have it now. Banks is not going to come and play the white goddess. They are going to simply say to these people, ‘Sorry, we can’t offer a mortgage’ and that will lead to a further decrease in prices.
Jonathan Lansner is a business columnist for the Southern California News Group. He can be contacted at [email protected]