"Reviving the Economy: Real Estate"-California's Residential Market
Friday, April 03, 2009SUZANNE PRATT: Tonight, we continue our special series "Reviving the Economy: Real Estate," with a look at California's residential market. Joining us is Richard Green, U.S.C. Professor and director of the school's Lusk Center for Real Estate. Richard, welcome to the program.
RICHARD GREEN, DIRECTOR, USC LUSK CENTER FOR REAL ESTATE: It's pleasure to be here.
PRATT: So talk to me about California. How bad are things out there?
GREEN: Things are pretty bad out here. Depending on where you are in the state, house price have declined between 10 and as many as 50 percent. And really problematic is we have a lot of people who are under water on their mortgages. Thirty percent of people in California who have a mortgage have a mortgage whose balance spread is more than the value of their house.
PRATT: And would you expect that of those 30 percent, how many do you think are going to default on those mortgages?
GREEN: That's really hard to say. One thing we know is that people who actually put money into their houses they tend not to default unless they have to, but a lot of people in California bought houses without a down payment, so the default rate could be as high as 10, 15 percent on those mortgages.
PRATT: So what is the biggest drag in California currently? Is it the employment situation, unemployment situation or is it inventory?
GREEN: I think it's the unemployment situation. Actually inventory has come back to reasonable levels in the last few months. We've had big increases in sales particularly in the inland empire. That's San Bernardino and Riverside Counties. But the employment picture here is pretty bleak. As you know, the unemployment rate nationally is 8 1/2 percent, but here in California it's even worse at 10.5 percent. And again you get away from the coast, the unemployment rates are even higher than that.
PRATT: So what is your outlook for California? When do you think it's likely to turn around?
GREEN: Well, I think one of the issues is how does the stimulus money flow? One thing that's going to be helpful to us is in the stimulus bill the conforming loan limit for Fannie Mae and Freddie Mac loans was raised and in the housing rescue bill, people are going to be allowed to refinance those loans even if they don't have a lot of equity and that will allow people to get lower interest rates and put more money in their pockets. The other thing is, we need a lot of infrastructure out here in California. We have a lot more people than we have the infrastructure to support it so to the extent that the Federal stimulus package provides for infrastructure and allows people to go to work on those infrastructure projects, it will be helpful to our unemployment picture and once jobs come back, I think you'll start to see the housing market come back here pretty quickly.
PRATT: And I think you told me earlier today when we spoke that you think there's a possibility that California could be one of the first residential markets to turn around. Why do you think that's the case?
GREEN: I do and the reason is, as bad as things are out here, we didn't have the overbuilding particularly along the coast that you saw in places like Nevada and Arizona and Florida. In part the regulatory environment here makes it very hard to build so if you look at the vacancy rate in Los Angeles, that's vacancy in detached homes and apartments, it's among the lowest in the country, which means as soon as there's demand, we should see a return to some health in the housing market here.
PRATT: So we have probably a little bit time left for one question. Are there any particular signs that you watch for to tell you that things may be starting to bottom for people who might be looking for a house to buy a house?
GREEN: Well, there are two signs generally that we look at. One is that inventory number and the inventories have been dropping pretty rapidly here so that's very good news. The other thing is does owning look good relative to renting as a bargain and right now with the lower prices and low interest rates I think it does. But the employment picture really clouds everything else at the moment and until we see those jobs come back, it's going to be hard to be really bullish about the housing market here.
PRATT: Understandable. Thank you for joining us.
GREEN: My pleasure.
PRATT: My guest, USC Professor Richard Green.
