Why local universities have been wrong



Mike Cotter  -  Real Estate
Reprinted from the SUN POST NEWS November 24, 2005

Mike CotterFour years ago, the median price of a home sold in San Clemente was $385,000.  Today, it´s $899,000.  This statistic does not include new home sales.

And while existing homes were doubling and tripling in value over the last four years in different parts of Orange County, the economics departments of two or three local universities nevertheless kept busy each year forecasting the next year´s decline in real estate prices.

Apparently, being completely wrong four years in a row has not dampened their outlook:  True to form, the professors´ latest market predictions are for a 4% to 10% decline in Orange County home prices in 2006.

To be fair, one university included with their forecast an apology of sorts, explaining, "We understand why this forecast might be met with cat-calls.  Our inability to accurately forecast housing prices the past several years does not leave us with a whole lot of credibility."

Three prestigious universities have yet to be right even about the direction of local home prices for any year of this decade.  How could these universities be so wrong for so long?

It seems the academics have placed a very high importance on two statistics that they unflinchingly have believed should squelch a healthy real estate market:  Rising mortgage interest rates and declining affordability.  Regarding interest rates, the colleges have each year tended to predict that mortgage rates would "rise next year."  This hasn´t happened to any significant degree.  As for affordability, the professors constantly cite the county´s low affordability index, which currently indicates that only about 11% of Orange County residents could now afford to buy a median Orange County home at today´s 30-year fixed mortgage rate, with a 20% down payment.

It may well be that the perceived twin threats of rising mortgage rates and low affordability are mostly just bogeymen.  Consider:  Many economists think interest rates will stay level or go lower as boomers´ retirement and pension plans reallocate from stocks to income products, driving market bond rates and mortgage rates down.  Even if mortgage rates do rise, it may not have the deleterious effect some people might expect.  According to the Mortgage Bankers Association, 35% of American homeowners have no mortgage debt at all, 50% have fixed rate mortgages, and of the remaining 15% who have adjustable rate loans, over half of those are "high wealth" income earners, who might easily afford higher variable rates.  This means that perhaps only 7% of the nation´s housing might experience unfavorable pressure from a rising interest rate environment.

Also, contrary to conventional wisdom, statistics over the past 30 years show little correlation between the level of mortgage rates and home price growth in California.  This state´s demand has historically outstripped its supply even in rising interest rate environments.  And the only time prices declined in the past 30 years ? the early 1990s ? we were actually in a declining mortgage rate environment.  Local universities seem oblivious to these historical facts.

Finally, the much watched affordability index may be a theoretical statistic whose usefulness as a predictor of local market value has come and gone.  Judgment aside,  Southern California may have reached a point, as in Europe, where the "haves" already have real estate, and the "have-not's" don´t.  Lately, there seem to be enough "haves" around with real estate cash to keep demand ahead of the limited supply.  Only a local recession ? not modestly rising interest rates and not low affordability ? would tend to change this dynamic.

Cotter has been a California Real Estate Broker since 1981, and is currently a Realtor and Broker-Associate with Century 21 O.M.A., 229 Avenida Del Mar, San Clemente.  He is President of the San Clemente Historical Society and a Director of the Downtown Business Association.  His web site is MCotter.com.  Contact him at Mike@MCotter.com or (949) 322-6009.

Mike Cotter, Broker Associate, DRE #00806890
Century 21 O.M.A., 229 Avenida Del Mar, San Clemente, CA 92672
Mobile 949.322.6009, Fax 949.492.7850
E-mail Mike@MCotter.com
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