Houses Are Still Hard to Buy, But They’ll Get Harder to Sell Too

It’ll be harder to sell a home next year in Orange County.

New houses are so expensive--averaging more than $382,000 near the end of the year--that only a tiny slice of the county’s population can afford them. A lot of the customers for these pricey houses sold their older homes, using the equity gained from the boom in values.

But the market for resale homes--which is about four times larger--has slowed down too. Prices, according to experts, are just high enough at a median $253,000 to be beyond most buyers’ pocketbooks but not rising fast enough to entice a lot of people to sell.

Altogether, sales of new and resale homes are down 27% this year, although that doesn’t look quite so bad when you realize last year was an unusually brisk year for sales.

For the county’s important home building industry, the upshot is that builders have put up homes they haven’t yet been able to unload in such places as Aliso Viejo, the area west of Mission Viejo, and the new town of Rancho Santa Margarita farther south and east.

All this is a far cry from last year, when prices were rising so fast that many buyers jumped into the market with both feet, fearing they’d never be able to afford a home if they didn’t buy now. Almost anything the builders cared to put up sold within days, and frantic buyers camped out in front of new subdivisions.

But beginning late last year and continuing through this year, the market slowed down. And it will be a lot slower next year, experts predict.

“For a couple of years, builders had to know more about crowd control than selling,” said Buck Panchal of the Meyers Group, a real estate consulting firm. “Next year they’re going to have to spend a lot more time finding out what people want and how to market it to them.”

That means prices won’t rise much: The most optimistic estimates put next year’s price increases for new homes in the range of 5% and under. That’s not much more than inflation, which is expected to be around 4%.

And it’s a long way from the astonishing 35% that new homes appreciated on average in 1988.

Buyers will be choosier, impelled not by fear of rising prices but by genuine need for a home.

“Most of the speculators have left the market, and the few people who can afford a new home have definitely sobered up. They’re a lot more discriminating about what they’re buying,” said Kelly McDermott of Market Profiles, a housing consultant.

The price of resale homes--which accounted for about 80% of the roughly 40,000 homes sold this year--isn’t expected to rise much, either.

This year, for instance, the price of the average resale house will probably end the year about 14% higher. In 1988, during the boom, it was 25%. Next year it will be less than 9%, says Leslie Appleton-Young, an economist at the California Assn. of Realtors, which tends to look on the bright side. A gloomier appraisal comes from economists at Chapman College, who predict resales houses will appreciate only about 2% next year, or only half the rate of inflation.

Sales could be down 10% or more, says Appleton-Young.

“You just can’t have prices go up 25% a year when incomes are going up only 5%,” she said. “Something’s got to give, and we’re seeing that it’s the sales.”

Some brokers and builders concede prices may not go up much, but they say they won’t fall, either. That’s because, they say, unlike in the oil states or the slumping New England states, where home prices have dropped, the Southern California economy will continue to create tens of thousands of new jobs. And all those people will continue to buy houses even at high prices.

That theory’s valid, but maybe only partly so. If you look beyond the simple averages for home prices, you find that some builders have already dropped prices on their most expensive homes or are offering cash incentives to buyers. And some owners of older homes have taken their houses off the market rather than sell at a price lower than their asking price.

“The fear that there won’t be enough houses to go around or that interest rates would keep going up, all that’s considerably dampened now. And that means the market’s gotten soft,” said Alfred Gobar, a Brea housing consultant.

“The guy that owns a $200,000 house doesn’t have to worry that much about an erosion in value,” said Gobar. “But at the higher end, well, it’s going to be tougher to get a high price.”

Looking beyond next year, though, a lot depends on factors far beyond the control of the county’s big housing industry, such things as a recession or a rise in interest rates.

Meanwhile, a couple of trends that have emerged over the last few years will continue into the new year and beyond, according to experts. Some of them are:

* The migration of the middle class to cheaper houses in the inland counties of Riverside and San Bernardino. Orange County has more jobs, though, so many of these people will drive back here to work over roads already clogged with cars.

* The people who are left will buy more condominiums and townhouses, the only type of housing they can afford. A new condo cost an estimated $193,000 near the end of the year, almost half the $382,000 a new house cost.

* Others will rent, and rents are expected to increase as the county’s apartments--an estimated 4% of which are now vacant--fill up. The average rent for a two-bedroom apartment in the county’s larger complexes runs between $575 and $775 a month, according to the Apartment Assn. of Orange County.

* Anticipating higher rents, investors are combing the county in search of apartment buildings to buy. Few owners are willing to sell, and prices are high. While vacancy rates are double the 2% of a few years ago, the high prices for the county’s dwindling land supply are expected to keep apartment construction down and make owning an apartment complex very lucrative in the future.

* Some areas of the county that have yet to see a single home built on them will come a step closer to construction, particularly on the the Irvine Co.’s enormous landholdings. Among the projects making their way through the planning process next year: Seven thousand acres just outside the city of Orange; and the canyon areas just east of Anaheim. Construction could start late next year on the ultra-expensive homes at the Irvine Coast between Newport Beach and Laguna Beach. And Laguna Laurel, the Irvine Co.’s big community planned for Laguna Canyon, is up in the air because of community protests.

* Houses will get still bigger on the average. Builders need to increase the home sizes to justify the high prices. Thanks to the enormous influence of the Irvine Co. on the market, many of these houses will be the pastel-colored Mediterranean affairs favored by company Chairman Donald L. Bren.

* Everything else, of course, depends on roads: The big question is whether enough of them can be built in time, since growth shows no signs of abating either through an economic downturn or by some form of government fiat. Orange County has grown so fast that it has outstripped the capacity of its roads, and things are almost certainly going to get worse. The building industry this fall failed to persuade the county’s voters to tax themselves another penny on the sales tax to raise money for building roads.

In the future, some experts worry, high home prices and the deteriorating quality of life here--symbolized by the horrendous commutes many Southern Californians endure daily on the freeways--may turn out to be as big a threat to the Southland’s economy as cutbacks in defense spending or slumping computer sales.

ORANGE COUNTY HOME SALES AND PRICES LEVEL OFF

PRICES

Change from Change from Average Previous Same Month, Month Price 1989 Month Last Year January $238,070 +1.1% +26.4% February 241,763 +1.6 +22.7 March 242,232 +0.2 +25.5 April 254,356 +5.0 +27.8 May 255,989 +0.6 +25.8 June 248,638 -2.9 +18.7 July 252,987 +1.8 +18.1 August 251,959 -0.4 +12.4 September 261,097 +3.6 +12.8 October 260,180 -0.4 +18.6 November 246,442 -5.3 +8.8

SALES

Change from Change from Number Previous Same Month, Month Sold Month Last Year January 3,292 -27.7 -4.4 February 3,151 -4.3 -19.6 March 4,594 +45.8 -21.2 April 3,594 -19.6 -38.0 May 3,910 +5.9 -30.9 June 4,173 +6.7 -34.5 July 3,461 -17.1 -36.9 August 4,431 +28.0 -19.8 September 4,095 -7.6 -23.1 October 3,593 -12.3 -27.3 November 4,080 +13.6 -7.8

Source: TRW Real Estate Information Services.