Real estate experts address O.C. market

Andrew Edwards

As home prices around Newport-Mesa and the rest of California

continue to rise, homeowners want to know if their property values

are sitting on a bubble that’s waiting to burst.

Until the market plays itself out, different people are ready with

different answers to the bubble question, which was addressed at

multiple conferences around Southern California this past week.

Whether or not home prices are on the verge of deflation is more

than an academic matter, said Bill Cote of the Cote Realty Group in

Corona del Mar. Cote, who does not believe there is a bubble, is

bothered by the potential of academics forecasting real estate

deflation to discourage the public. He said it’s tough for general

audiences to discern between the various forecasts that are out

there.

“It affects the confidence of the market -- people start talking,”

Cote said. “People can’t tell unless they’re sophisticated in

economics.”

For his part, Cote expects the market will remain healthy unless

mortgage rates make a surprise jump. As of Thursday, mortgage giant

Freddie Mac reported that average 30-year fixed mortgage rates were

at 5.57%. Five-year hybrid adjustable-rate mortgages were at 5.05%.

Both rates decreased last week.

“Confidence is going to stay at a fairly decent rate as long as we

don’t go crazy with interest rates,” Cote said.

In Costa Mesa, Cornell University’s Real Estate Council presented

a discussion Tuesday that focused on potential futures for numerous

home markets, including Orange County. John Burns, president of

Irvine-based John Burns Real Estate Consulting, told an audience at

the South Coast Repertory that the county is almost built out.

Without the likelihood of an influx of new housing, he said, he

doubts home prices will be taking a downturn.

“Much of the appreciation we’re seeing is permanent,” Burns said.

Burns does not believe prices can continue to rise forever,

though. He said it’s only a matter of time before prices get to a

point the market cannot support.

“Horrendous affordability is going to put the brakes on the market

eventually,” he said.

The California Assn. of Realtors reported in a June 9 release that

only 11% of people in the association’s Orange County region could

afford to buy a home in the area.

Recent reports from real estate trackers show homes in Orange

County continue to gain values, though appreciation has relaxed from

last year’s breakneck pace.

Earlier this month, La Jolla-based DataQuick Information Services

reported median home prices around Newport-Mesa went up in May when

compared to last May’s property values. The only neighborhood where

home prices dipped was Corona del Mar, where there was a small

decline.

The La Jolla company noted May was the first time in more than 3

1/2 years countywide appreciation year-over-year was in the single

digits. Most of Newport-Mesa did not slow to the county average.

Aside from the 3.4% dip in Corona del Mar, south Costa Mesa was the

only local zip code where year-over-year price increases did not

reach double digits in May.

Whereas Burns’ remarks at the Costa Mesa event indicated the

housing market could gradually cool off, economists at UCLA’s

Anderson Forecast also presented their views Tuesday at the

university’s Westwood campus.

In a report titled, “The California Report: Beware the Froth,”

Anderson Forecast senior economist Christopher Thornberg wrote the

low interest rates often cited by real estate professionals as a

driving force behind the home market’s growth cannot fully explain

how people can continue to buy homes that get more and more

expensive. Thornberg argued homeowners purchasing pricy homes are

using equity to move up into new houses and borrowing more through

interest-only loans that he considers risky.

Thornberg does not expect a sudden drop in home prices. Instead,

he expects activity in the real estate business to drop off. He also

contended a low supply of homes is not enough to explain rising

prices, since rental rates for apartments have not kept pace with

rising home prices.

“If we have a shortage of housing in California, you would see it

in rents first,” Thornberg said in a telephone interview.

Cote disagreed, and does not believe the apartment renters are in

the same market as people looking for costly homes.

“There’s a lot of wealthy people who want to live in Newport

Beach,” he said.

More predictions were offered Wednesday by Chapman University’s A.

Gary Anderson Center for Economic Research. The forecast was a

revision of a previous prediction that Orange County home prices

would drop more than 7% this year. The center now expects home prices

will go up by 6.7% this year.

Center director Esmael Adibi said expectations of a downturn were

reversed this year because interest rates did not rise to levels

previously expected.

However, the Chapman report, which conceded Chapman economists’

expectations of real estate price drops have been incorrect for three

years, still predicted home prices would fall slightly in 2006.

At UC Irvine’s Paul Merage School of Business, real estate

management program director G. Christopher Davis continues to believe

that a significant deflation risk is not present locally. He’s not

worried about the recent slowdown in appreciation, and said home

markets typically cool off in summer, since home buyers with children

tend to make deals in spring to align their moving schedule with the

school year.

“They want to get the escrow closed before school starts in

September,” Davis said.