Real estate downturn may be mild
BY SUE MCALLISTER
Mercury News Monday, Aug. 6, 2001
As the Silicon Valley economy slows, many homeowners are nervously wondering how much harm it will do to their home values.
The number of homes for sale has more than doubled in Santa Clara County from one year ago. It's not uncommon in some Silicon Valley neighborhoods for homes to sell for 15 percent or 20 percent less than the price of comparable sales last summer. It's too early, however, for the slowdown to be measured in home foreclosures or the number of people asking the county assessor to lower their property values.
Many experts predict this real estate slowdown will not be as severe as during the last recession, when the median price of a home in Santa Clara County dropped nearly 20 percent and thousands of California homeowners statewide were forced to sell for less than they'd paid for their homes. They cite what they say are some notable differences between the housing market of then and now.
Unfortunately, it's ``impossible to know,'' said Michael Mullinix, president of the Santa Clara County Association of Realtors. ``We're definitely in the cycle, but I don't know what the catalyst would be that could cause anything severe'' like the last downturn.
In 1990, the Persian Gulf War was the unexpected catalyst that exacerbated the sense of uncertainty about the nation's economy. A number of other factors also conspired to sap the life out of the county's residential real estate market: the October 1989 Loma Prieta earthquake, layoffs in the defense industry and the aftermath of the savings-and-loan scandal, which made home loans harder to get.
That era and 2001 look similar at first glance:
In the late '80s -- just as in 1999-2000 -- the number of homes for sale was very limited, leading buyers in many cases to compete for what was available, sometimes bidding prices to more than the sellers were asking.
Real estate bubble
Last time around, some real estate agents say, it was real estate investors snapping up rental properties who were responsible for the bubble in prices. This time, it was stock-laden dot-commers. In any case, prices climbed fast.
The median price of a single-family home in Santa Clara County rose from $170,000 in January 1988 to a high of $292,000 in June 1990, according to DataQuick, a real-estate-information firm that gathers home-price data from public records. Against the backdrop of a weak economy, widespread layoffs and other factors, the median price spent a few years in the $240,000 range, before beginning to climb again in 1996.
The median reached about $350,000 in May 1998, and by November 2000 had skyrocketed to a peak of $510,000. The county's median price for June 2001 was $472,750, down 0.4 percent from the previous June.
Home values also dropped in the early '90s; the median price fell nearly 20 percent over the course of a few years.
But barring natural disasters or unpredictable political events, the most important key to the health of the real estate market is the local job market, say the experts.
Slow recovery
``The job cuts have come rapidly and been big,'' said Kenneth Rosen, chair of University of California-Berkeley's Fisher Center for Real Estate and Urban Economics. ``I'm afraid this is going to be a worse recession for Silicon Valley than the early '90s.''
Rosen said he thinks it will be a long time before companies begin investing in technology again -- one key to jump-starting the local economy -- so laid-off workers who came here from elsewhere will begin leaving. Rosen said he expects the median price of homes in the San Jose area to drop 5 percent to 15 percent before the end of next year, with prices of the highest-priced homes falling 25 percent or even more.
Those with a rosier outlook point out that the latest figures show nearly 96 percent of the Santa Clara County workforce is still employed, historically a very high level. And real estate professionals who've worked in the Bay Area market through the downturns of the early '80s and then the early '90s say this cooling period was to be expected.
``We know there are always cycles,'' said Avram Goldman, president of brokerage Coldwell Banker Northern California. ``It surges and then it slows down.''
Goldman said he thinks the prices of homes valued at between $700,000 and $1 million will be flat or decline through the first quarter of next year, and homes in the $1 million-plus range will decline as much as 25 percent in some places. He predicts prices will stabilize by the second quarter of 2002 -- citing low interest rates, relatively low unemployment and still resilient consumer confidence.
Real estate experts cite other differences between the early '90s and today:
Consumer confidence is higher today.
Mortgage interest rates are lower, making it easier for potential buyers to afford homes.
The most recent affordability survey from the California Association of Realtors showed that 21 percent of households in Santa Clara County could afford to buy the median priced home here. That compares with 15 percent in August 1989 and 18 percent in August 1990. (Declining prices help boost affordability, in addition to low interest rates.)
Those who couldn't afford to buy a home in the latest real estate boom are hoping they'll be able to buy as prices plateau.
The Bay Area housing shortage is more pronounced now than in the early 1990s, meaning there is still lots of pent-up demand. The phenomenal job growth of the past decade has been met with very little new housing construction. In a report released early this year, Joint Venture Silicon Valley found that between 1992 and 2000, only one housing unit was built for every 5.5 jobs created.
Bright spots
Those with faith in the market's overall health cite a few other reasons they think things won't get as bad for homeowners as they did in the '90s. Banks have been more conservative in making loans, they say, so fewer people will default on their mortgages than in past real estate busts. Those who bought with the proceeds from stock options in the past few years often paid cash, or at least didn't take out mortgages that were more than they could handle, say some observers, and thus won't be forced to sell in droves, driving down prices. Most everyone cites low mortgage rates as a force that will keep buyers interested.
But perhaps the most common refrain is that the technology industry -- and its job market -- is not going to evaporate, the way defense-industry jobs did. Although about 15,000 people have been laid off in the valley this year, consumers retain hope that things will improve soon.
``There's more optimism now, because our vehicle is still in place,'' said Gary Culbertson, manager of Prudential California Realty office in San Jose's Blossom Valley. ``It's just correcting itself. Whereas the economic vehicle of 1990 disappeared.''
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