Chapman’s Affordability Study Predicts Another Double Digit Home Price Drop for Southern California

Just as the National Association of Realtors’ forecasts tend to be overly optimistic (see this morning’s post), Chapman University’s tend to be quite pessimistic. I think they’re still mad that Gary Watts made them look foolish several years in a row, or it could just be something inherent in their system.

Anyway, as part of their coming June “comprehensive forecast of key economic variables,” Chapman’s Economic Research Center today released their projection of Los Angeles County, Orange County, and Inland Empire housing prices based only on one variable, affordability.

To reach the historical average affordability rate, Chapman says L.A.County median home prices need to fall an additional 23.3% and Orange County by another 13.7%. The Inland Empire, which has had the more severe overbuilding and foreclosure rates, need “only” fall another 8.2% to reach Chapman’s magical median.

Now for the bad news:

“It is likely that home prices will decline even more . . . since corrections usually drop the affordability index below the historical mean.”

Their math assumes modest income increases and flat interest rates. Declining rates could significantly decrease the amount of “correction” needed, while more modest pay increases could offset at least some of that.

I think historical trends in L.A. and Orange Counties are skewed by many years of affordable land.  Today’s situation of being practically built out on the coastal plain should result in higher affordability rates, in our opinion.  That doesn’t totally invalidate Chapman’s conclusions–we’d just pick more modest numbers.  We’re also hopeful that continue declines in mortgage rates will increase affordability.

It seems to us that both Chapman University and Gary Watts are like broken clocks.  Gary’s stuck at sunrise:  He always thinks prices will keep going up.   Chapman’s stuck at midnight:  The worst is yet to come.  They’re both right once in each economic cycle, like a broken 24-hour clock that’s right once a day.

Still it’s one more thing to consider.  We think a 5% – 10% additional price drop will hopefully do it for the coastal plain at least.  (See “A Change in Our Projections“).

Like we keep saying, nobody knows for sure (See “How Low Will Prices Go?”).

For Chapman’s full report, including some nifty charts, in PDF form, click here.

And click here for “a little perspective” on our real estate woes, here for “a little more perspective,” here to find out “what to do when nobody knows what’s next,” or here to find out “how to sell your So Cal home for top dollar in 30 days.”

As for me, I think it’s time to get outside in this beautiful weather & go for a jog.

National Association of Realtors’ Economist Still Too Optimistic?

We got our April “Research Update” from NAR yesterday (“Existing Home Sales to Stabilize Before Upturn in Second Half of 2008“) . That seems too optimistic to us.

Maybe Lawrence Yun, their new Chief Economist, hasn’t heard about the annual cycle yet (See “Market Predictions 101:  Our 2 Real Estate Cycles“), because he thinks things will start picking up when they start slowing down in most years.

Here are the first three paragraphs of NAR’s press release:

Little change is expected in existing-home sales over the next few months, before improving notably during the second half of the year, according to the latest forecast by the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said the market will come into clearer focus this summer.  “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure,” he said.  “We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets.  The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met.”

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in February, slipped 1.9 percent to 84.6 from an upwardly revised reading of 86.2 in January, and was 21.4 percent lower than the February 2007 index of 107.6.  “The slip in pending home sales implies we’re not out of the woods yet, though an era of successive deep sales declines appears to be over,” Yun said.

We do see some signs of bottoming, but from where our office sits on the OC/LA County line off the 605 in Lakewood, we really can’t tell if it’s just a spring uptick on a longer downward trail.  We’re still sticking with our most recent forecast (see “A Change in Our Projections?“)

We think DataQuick’s numbers from yesterday only tend to confirm our perspective (“What DQs numbers mean“)