Here's a real nutcase
ocregister.com
$1.4 million by 2014 ?
An expert observer believes home prices will show a stunning gain.
JONATHAN LANSNER
Register columnist
jlansner@ocregister.com
If you're antsy about betting the farm on your Orange County cottage, this is your column.
If you're depressed that you can't afford to buy your splice of this paradise after the median sales price for all types of residences topped $600,000 last month, better turn the page.
Here comes a heavy dose of optimism from Walter Hahn, a veteran real-estate economist who's advised some of his industry's most-powerful local players, including the property empires of Donald Bren, Henry Segerstrom and William Lyon. Hahn thinks his benchmark of a typical single- family detached house will sell for $1.4 million in a decade.
Yes. $1,400,000.
For folks without a financial calculator handy, that would be an average 9.9 percent annual rate of appreciation for the coming decade. If proven true, that's a stunning gain following a five-year spurt that roughly doubled a detached home's price to $686,200, by Hahn's count.
"And that's conservative," he says of his forecast.
This isn't some local broker rallying his industry. This opinion comes from somebody who played a major role in top real-estate consultancies for more than two decades.
How does Hahn explain his brash forecast?
It's light years from the "Bubble or not?" risk debate. It's a sharp contrast with, say, that of Wells Fargo Bank's chief economist, who sees flat prices the next decade or so.
Hahn makes it simple: "A basic reason: the economy."
And: "There is no housing bubble. It just doesn't exist."
Hahn's betting that too many new jobs in this technology hub will chase too few homes for sale. He thinks builders won't provide much help because the region lacks enough vacant land for new homes.
It's a gaudy formula. One that makes me gulp.
"My homebuilder clients don't gulp," Hahn says.
One client who buys Hahn's theory is Miami builder Lennar. Hahn was one of many advisers on its winning billion-dollar bid made earlier this year for land at the old El Toro military air base.
"Whatever they paid, they're gonna make a pile of money," Hahn says.
Emile Haddad, Lennar's California boss, says, "I hope he's right."
"We're very bullish on California in general and on Orange County in particular," Haddad adds. "It's Economics 101. Supply and demand can never steer you wrong."
BIG FAT CHECK
So who's going to afford Hahn's $1.4 million home?
He says lots of people.
Last year, he says, 4,100 people paid $1 million or more for an O.C. residence. By 2009, he figures there will be at least 20,000 local residents who could afford a $2 million home - and that's assuming fixed-rate mortgages running up to 8 percent.
His Lennar work found a growing number of extremely wealthy Orange Countians. This class, supported by a growing local technology trade, will fuel the continuing home-price surge.
The hook is that new local jobs – 200,000 in a decade by his count – will be increasingly top-paying gigs, bringing added wealth to an already affluent community. This fresh cash flow will overpower any home-affordability issues.
Booming home prices will in turn mitigate the pain of steep prices by creating big down payments for buyers trading local residences.
"(Business) owners want to live and work here," Hahn says. "This has gone on for more than 20 years, and it will go on indefinitely for the future."
SET OF CIRCUMSTANCES
This eye-catching thesis is the product of a supposed semiretirement.
Hahn's now 73 and claims he's slowing down - working just 30 to 35 hours a week for himself and an L.A. consultancy – after his retirement from Ernst & Young in March.
"This stuff is interesting," he says.
It's curious that he never dabbled in property investments with his own money. The stock market was where he says he invested.
He avoided real estate because he was too close to it. Plus, he never had the patience to do what he knows is required to succeed - manage the properties yourself.
And he wasn't much of a "move up" buyer, either. He lives in the same Turtle Rock home he's owned for 28 years.
Real estate wasn't always his passion. He started his work life as an electrical engineer, experience bolstering his guess at technology's local job promise.
Eventually, economics drew him away - first to two small L.A. operations, then to higher-profile players in Orange County.
He's worked through the past four recessions that hit this region. Such experience allows him to discount comparisons between the current housing boom and the last one, the late 1980s house party that ended so badly.
"It was an anomaly," he says of Orange County's early 1990s real-estate collapse that spun out of the worst job market since the Great Depression. "That was an extremely unusual set of circumstances."
Hahn also lends his insight to the economists at Chapman University, who've badly underestimated O.C. housing's upswing the past three years. Hahn says he's told the professors that "they are nuts."
Esmael Adibi, Chapman's forecast chief, says that Hahn is eyeing shrinking supply while Chapman worries about overheated demand from historically cheap and easy mortgages.
"Walter's got a great track record," Adibi says, "All kind of people are trying to understand (the market). Everyone's got their own way to look at it."
FLY IN THE OINTMENT
You've got to seriously bug Hahn to reveal his own wrinkles in his $1.4 million home guestimate.
He sees four more years of double-digit percentage gains, including 2005. And he sees a recession in 2010 that will push appreciation down to zero for only a single year.
But he finally fessed up to fears about oil prices.
Not modest weekly or monthly price swings. No, it would take a huge debacle à la the 1970s, when oil fell into serious shortage.
That scenario, which might require a toppling of the Saudi Arabian government, could create a painful U.S. recession well before Hahn's predicted downturn. Orange County would suffer, too - albeit to a lesser degree, he says.
Don't forget many homeowners badly stretched their budgets to acquire pricey local property. And Hahn acknowledges, "The next recession will be brutal on those people."
Hahn insists these are worst- case scenarios. "I can't think of anything that would change my mind" about his bubbly forecast.
Property owners will be very happy if this audacious outlook comes true.
You must wonder, though, if there are enough rich folks - and aggressive lenders - to make it happen. |
