A Housing Rebound? Well, Sort of

Like gladioli struggling through the soil toward the springtime sun, a growing number of key real estate indicators are pushing upward and fueling hopes that the worst of California’s three-year housing slump is over.

Sales of new and existing homes alike have steadily improved over each of the past few months, and prices in most parts of the Southland are stabilizing.

Construction starts are also up and the number of building permits issued to developers--the best gauge for measuring future activity--has posted solid gains.

“We’re finally on the road to recovery,” said Leslie Appleton-Young, an economist for the California Assn. of Realtors (CAR). “The worst of times are behind us.”

However, Appleton-Young and most other economic experts caution that further improvement in the housing market will come slowly.

“There are still too many homes for sale and not enough people to buy them,” said Eric Brown, a housing consultant and analyst for the real estate auction house of Kennedy-Wilson Inc.

“You’re not going to see much appreciation over the next year or two because there’s a lot more supply than there is demand.”

Even realtors and builders, an unusually bullish group, say the huge number of homes that are still for sale in most parts of Southern California will prevent prices from going up more than 4% or 5% annually over the next few years.

And although most experts agree that today’s housing market is stronger than it was a year ago, cold statistics don’t necessarily prove it.

In fact, some observers say they can’t remember a time when traditional indicators of the market’s strength--sales rates, construction starts and the like--have been so confusing or downright misleading.

For example:

* In February--the latest reporting month--California’s home resale rate jumped 13% from January and was up 15% from February, 1991.

But CAR, which publishes the figures, only tracks deals that are already completed--so the trade group’s resale numbers primarily represent winter sales that only recently closed escrow.

* Most developers say that the overall strength of the market has improved dramatically from the same time last year, but their numbers don’t show it.

Unlike realtors, most builders account for their sales immediately instead of waiting until escrow closes.

As a result, their sales figures are being matched against first-quarter sales from a year ago, when a quick victory in the Persian Gulf War led to a strong but short-lived burst of buying.

* Many builders have recorded steady sales gains over each of the past few months. But that was expected: Sales usually come to a standstill during the winter holiday season and then pick up again when the new year begins.

“I’ve never seen so many ‘buts’ in my life,” said Stephen Smiley of The Meyers Group, a research and consulting firm headquartered in Encino.

While the sales rebound is obviously good news for realtors and home builders, lenders say they are benefiting too.

That’s because the bulk of their business is shifting back toward making large, high-profit loans to people who want to buy a house instead of making smaller, lower-profit loans to homeowners who simply want to refinance their existing mortgage.

“In February, refinancing accounted for 65% of our business,” said Bob Garman, senior vice president of Directors Home Loan Mortgage Corp. “In March, it dropped to about 50%. That means that the resale market is warming up.”

Qualifiers notwithstanding, signs abound of a rebound in the Southland’s housing market:

RESALE MARKET

Thanks largely to lower interest rates, CAR says sales of existing single-family homes across the state rose 13% in February from January. It was the biggest month-to-month increase in more than five years and pushed the resale rate 15% above its year-ago levels.

Year-to-year sales were up in nearly every Southland area. Los Angeles and San Diego each showed a 7% improvement from ’91 levels, Orange County, a strong 19% increase, and Ventura, a 15% gain.

Sales in the Riverside/San Bernardino area dropped 11%, a decline that some analysts attributed to the fact that sales in the Inland Empire a year ago were generally stronger than sales in other parts of the Southland at the time.

Fred Sands Realtors, Jon Douglas Co. and California Prudential Realty--which together account for more than half of all resales on the Westside of Los Angeles and a large portion of sales in the San Fernando Valley--all say they logged between 20% and 30% more sales in March than they did in February.

Officials at Century 21, the Southland’s largest real estate sales network, are also reporting solid gains.

For example, the company’s vast Region 5--which is comprised of the San Gabriel Valley, Riverside and San Bernardino counties--reports that its March sales were up 28% from February and 7% from a year ago.

“The market has finally turned,” said Larry Ross, the region’s manager. “It’s not going to take off as fast as a rocket, but it has finally left the launch pad.”

One factor that set the stage for the rebound, Ross said, was the prolonged decline in interest rates that began about the middle of last year. Lower rates, combined with softer asking prices, allowed many more Southlanders to finally buy a home.

Rates bottomed out at about 8% in early January and have since inched upward. But ironically, Ross said, the upturn may have actually fueled the sales increase started by the rate drop that began in 1991.

“I think a lot of people were ‘sitting on the fence,’ waiting for rates to go even lower before they bought a house,” Ross said. “But when rates started moving up again in January, they jumped off the fence and decided to buy.”

Other realty experts share that opinion, and point to the recent resale report published by the San Fernando Valley Board of Realtors as evidence that the uptick in mortgage rates turned many “lookie-loos” into serious buyers.

The board, whose 8,000 members make it the biggest in the state, said that escrows closed on 878 Valley homes last month. That was a 12% increase from March, 1991, and a staggering 59% surge from February, when sales were hurt by flooding caused by heavy rains.

Most of the deals that closed escrow in March were negotiated in January--after the slow holiday sales season had ended and mortgage rates began rising again.

Importantly, escrows were opened on another 890 homes last month. “That’s a hint that we’re seeing a real recovery, not a flukey spike in sales,” said Jim Link, the board’s executive director.

The Los Angeles Board of Realtors, which represents most parts of the Westside and other areas closer to downtown, reports a similar increase.

Although the 466 single-family homes and condos that closed escrow in its market area in March was down a bit from last year, sales were up 28% from February. Another 870 sales were pending.

Sales have also picked up in areas farther south.

Officials at the East Orange County Assn. of Realtors--a large group that represents several communities, including Orange, Santa Ana and Tustin--say that the 275 homes that were sold in February was a 42% increase from the month before.

“We sold another 272 homes in March,” said Cindy Baker, the board’s president. “It’s a widespread recovery--everything is selling, from low-priced condos to million-dollar homes.”

The Long Beach Board of Realtors--which includes Signal Hill, most of Lakewood and parts of Seal Beach--reports that 180 homes were sold in the area in February and another 146 homes sold in March. Both represented double-digit increases over a year earlier.

And the California Assn. of Realtors, which represents 130,000 sales agents across the state, is also expected to announce solid sales gains for March when it releases its monthly report later this week.

Still, no one is predicting that the resale market will soon return to the heady days of the late 1980s, when some sellers were deluged with multiple offers the minute they put their home on the market, and prices were going up 10%, 20% or even 30% a year.

“There is a huge amount of homes that are up for sale, so buyers can afford to drive a hard bargain,” said Chuck Lamb, CAR’s president and co-owner of four Century-21 offices in the Southland.

“It’s the basic law of supply and demand: There’s still more supply than there is demand, so we won’t see prices jumping up real fast for a while.”

Some experts believe it could be a long while before prices surge upward again.

There are nearly 13,000 homes for sale in the San Fernando Valley alone, up from 12,000 a year ago, and more than double the number of houses that were for sale when prices were skyrocketing in the late 1980s.

The Los Angeles Board of Realtors reports 17,000 homes for sale, compared to 15,000 a year ago and only about 5,000 when prices were soaring a few years back.

Statewide, CAR says there’s a 16 1/2-month supply of homes for sale--compared to an historic average of about 11 months. Even if realtors should quit accepting new listings today, it would take until the summer of next year for all those homes to sell based on the current resale rate.

“The state of the resale market is a little fuzzy right now,” summed up Frederick Cannon, senior economist for Bank of America.

“Resales seem to be getting better. But with all those homes on the market, I think it could take two or three years before home prices start going up faster than the overall inflation rate.

“Buying a home now is probably going to be a break-even proposition, unless you’re going to hang on to it for a few years.”

NEW-HOME MARKET

If the picture of today’s resale market is a “little fuzzy,” as Cannon said, the picture of new-home sales is downright out-of-focus.

“Overall, the market is in better shape than it was a year ago, but the numbers don’t really show it,” said Ben Bartolotto, an economist and executive director of the Construction Industry Research Board in Burbank.

Permits to build new homes and apartments in the state were taken out at a respectable 105,000-unit annual rate in February, the latest data available. That was up 12% from the 93,000-unit annual pace of February, 1991.

But when permit data for March is released in the next week or so, Bartolotto expects “a large decline” from March, 1991 levels.

Why? Because permits peaked at a 134,000-unit annual rate in March of last year, largely because builders were rushing to get approval for new projects before the five-year-long drought forced cities to clamp down on new construction.

“The rush artificially inflated the numbers for last year,” Bartolotto explained.

“Permits for this March are going to be pretty good, but they won’t be anywhere near the levels of March, ’91. So when you see a big drop for March, don’t worry. The industry is in a lot better shape than the numbers will indicate.”

New-home sales also have improved over the past few months.

An estimated 2,600 new homes were sold in Los Angeles County in the first quarter, according to analysts at The Meyers Group. That was up 30% from the fourth quarter of last year but down 15% from the first quarter of ‘91, when a brief burst of buying activity ensued after the shooting started in the Persian Gulf in January.

Another 1,639 new homes were sold in Orange County in the first quarter, a staggering 51% increase from the previous three months but a 17% drop from the first-quarter of ’91.

First-quarter sales in San Diego were up 7% from the final three months of last year, while Ventura posted a 47% sales gain. Sales rose nearly 50% in both San Bernardino and Riverside counties.

Homes sales almost always hit the skids during the winter holiday season: Many would-be buyers postpone their plans because they’re too busy shopping for gifts or entertaining family and friends; winter weather can sometime keep others inside. As a result, sales almost always pick up when the new year begins.

But Smiley at The Meyers Group points out that unusually heavy rains also kept buyers indoors for several weekends in the first three months of this year, which makes the first-quarter sales gains even more impressive.

Yet another sign that the market is improving--at least from a builder’s standpoint--is that the number of unsold new homes has been steadily dropping.

There are now about 5,000 new homes for sale in Los Angeles County, according to researchers at The Meyers Group. That’s a 22% decline from a year ago.

There are 550 new homes for sale in Ventura, a 24% decline from the first quarter of last year. The 3,127 homes available in San Diego represent a 17% drop.

About 4,000 homes are available in Riverside, a 36% decline from a year ago. There are about 2,400 new homes for sale in San Bernardino, down 17%.

Orange County is the only area where there are more new homes for sale today than there were at this same time last year. The 2,828 units currently available represents a 7% increase--a rise that Smiley attributes to several condominium-conversions that recently came on the market.

Like last year, the developers who are faring best are those that build “affordable” homes for first-time buyers--from $125,000 detached homes in the “starter” communities of the Antelope Valley to $200,000 townhouses in pricey Orange County.

In fact, there are even scattered reports of buyers “camping out” for days in front of new housing tracts in the hope of purchasing a low-cost home--something that hasn’t occurred with any regularity since the overheated market of 1988.

“The market isn’t going to come screaming back, but there’s definitely a growing demand for affordable homes,” said Bruce Akins, president of Akins Homes in Irvine.

About a dozen hopeful buyers recently stood in line for up to 10 days in front of Akins’ Brisa Ladera development in the master-planned community of Rancho Santa Margarita in South Orange County, where Akins is offering single-family homes for $177,000.

Meantime, first-quarter sales at Kaufman & Broad Home Corp.--the Southland’s largest builder of entry-level houses--rose 13% over a year ago to 894 homes.

“I think a lot of people postponed their purchases last year because they weren’t sure about their jobs and the future of the economy,” said Eric Elder, K&B;’s vice president of marketing. “Now their future is a little clearer, and they’re more willing to take on a mortgage.”

Significantly, though, many developers who build pricier homes for “move-up” buyers are also reporting an increase in sales. They suffered the worst over the past couple of years, as nervous consumers balked at taking on the added debt that buying a larger or nicer house entails.

For example, the Southland division of Shea Homes, which primarily builds in the $350,000 to $500,000 range, sold 155 new houses in the first quarter: It sold 143 in the first three months of 1991.

“That might not sound like a huge improvement, but you have to remember that last year’s first quarter was unusually strong because everyone started buying when the war broke out in January,” said Jim Osterling, Shea’s chief financial officer.

“The sales we recorded this year weren’t influenced by anything in particular. The market is simply stronger, and buyers are realizing that prices and interest rates aren’t going to go any lower.”

Urban West Communities, a move-up builder headquartered in Santa Monica, is reporting even stronger gains. Sales at its flagship, 2,500-unit Mountain Meadows development in Moorpark are averaging four to five units a week, compared to only two a week a year ago.

“Our sales have more than doubled, and these are homes that start at $274,000 and go all the way up to $550,000,” said Glen Cardosa, Urban West’s executive vice president.

“The ‘move-up’ buyers are finally getting their confidence back.”

For some companies, the apparent upturn has come too late. Although no one officially tracks bankruptcies and mergers in the construction industry, it’s believed that dozens of builders have been driven out of business over the past few years by the one-two punch of slow sales and the high carrying cost of land.

Eric Brown, the housing consultant, thinks the shakeout isn’t over.

“There are a lot of builders out there who are barely hanging on by their finger tips,” he said. “A modest improvement in the market won’t help them--they need a miracle. “

Few experts see such a miracle coming anytime soon.

For starters, many buyers no longer have to drive to far-flung housing tracts beyond the suburbs to find an “affordable” new house, because prices for many older homes closer to job centers like downtown Los Angeles have dropped. In short, the new-home market is now competing against the resale market--and the resale market is expected to remain relatively soft for at least another year.

In addition, many lenders are still skittish about loaning money to developers so they can build new housing tracts. Even builders who have projects that make good financial sense are having trouble lining up construction financing, which in turn prevents them from building more houses and making more money.

Long-term, though, most analysts agree that the strengthening demand that builders have noticed over the past couple of months--combined with a gradual shrinkage of homes already up for sale--should start to put some modest upward pressure on prices toward the end of this year or in early 1993.

“It’s going to take a while, but prices will eventually start going up again,” Brown said. “But just when that will happen is anyone’s guess.”