Outlook on California Housing Market Goes from Glut to Potential Shortage
Prakash, Snigdha, American Banker
Housing markets in California have made a stunning about face: Lenders there now may face a housing shortage instead of the glut of a few years ago.
In a recent paper entitled, "Thinking the Unthinkable: Housing Shortage on the Way?" the California Association of Realtors warns that a scarcity of affordable housing could dampen economic growth, now that more Americans are expected to move to the state than leave.
For the first time in five years, net domestic immigration to California will be positive in 1998, as residents of other states flock to thousands of new high-tech, entertainment, and software jobs, according to the Business Forecasting Project of the Anderson School at UCLA, Los Angeles. "Serious supply shortages are already emerging in areas where economic growth has returned the fastest and are likely to spread as the California economic expansion broadens," writes the Realtors' deputy chief economist, G.U. Krueger.
The group is worried because the new building permits, which fell precipitously in the '90s, are projected to increase only slowly for the rest of the decade.
For lenders, though, a tighter housing market in a state that last year accounted for 17% of all mortgages would be good news. Scarcity already is driving up the value of homes that collateralize the loans. That means larger-and safer-home loans, says Mark Zandi, chief economist of Regional Financial Associates, West Chester, Pa.
For homeowners who hit a financial roadblock and want to bail out of the mortgage, appreciating home prices are a big plus, says Terrance G. Hodel, president of North American Mortgage Co., Santa Rosa.
They can sell the home and repay the loan, he says. Falling home prices during most of the '90s have left owners holding mortgages larger than the value of their homes, and many financially troubled borrowers have opted for foreclosure.
A housing scarcity and price gains also boost the demand for related lending, such as construction loans to builders and home equity loans to newly enriched homeowners.
Eventually steep price increases could pave the way for a painful correction. California "has a history of developing price bubbles that eventually pop," Mr. Zandi notes.
But he adds the state has "a ways to go before we see a speculative house price bubble developing. …