Study: County home prices to drop

Chapman University forecast, which was wrong in its 2005 predictions, calls for 4.2% dip in 2006.Last year, Chapman University’s economic forecast incorrectly predicted Orange County home prices would drop. This year, the university’s forecast is again projecting a decline for real estate.

Thursday, when Chapman University professor Esmael Adibi presented the university’s economic forecast for 2006, he admitted that he made a mistake last year when he predicted a drop in Orange County home prices. Still, he continues to have a bearish outlook when it comes to local real estate and expects county home prices to dip by 4.2% next year.

In 2004, Adibi forecast that Orange County home prices would drop by 7.4%. Chapman’s numbers show that in reality, Orange County home prices for 2005 are up by 10.3%

Mortgage rates are a key factor in Chapman University’s housing price forecast. Before Adibi presented real estate predictions, Chapman University president James Doti acknowledged that last year the forecast overestimated mortgage rate increases that were expected to occur over the course of this year.

“It’s our miscall on the mortgage rate side that came back to haunt us locally,” Doti said.

Adibi said a second factor made prediction difficult, one that is impossible to assign a numerical value to. In Adibi’s view, home buyers’ expectations of continual appreciation helped push home prices to loftier levels.

“It’s the positive psychology which is driving the market,” he said.

Discussing his 2006 forecast, Adibi again stressed the importance of mortgage rates, particularly the cost of financing a home through adjustable-rate mortgages. His expectation of rising rates means he anticipates fewer people will be able to afford a home in the county.

“The affordability problem that people solve by getting adjustable-rate mortgages is not going away. It’s getting worse,” he said.

Chapman University uses price figures from the California Assn. of Realtors. Thursday, that group released figures stating only 11% of people in the Orange County area could afford a local home.

The average rate for one-year adjustable-rate mortgage Thursday was 5.16% plus 0.8 points. Rates have shown an upward trend throughout the year. On Jan. 6, the average rate for that type of loan was 4.10% plus 0.7 points.

If mortgage rates go down and home buyers continue to make purchases in anticipation of rising prices, Adibi said the Chapman forecast could be wrong again and local home prices’ upward trend could continue.

That possibility is more in line with the California Assn. of Realtors expectations. Association deputy chief economist Robert Kleinhenz said his group expects interest rates to edge upward, but not to increase at a dramatic pace. For coastal markets like Orange County, Kleinhenz expects home prices to increase by about 6% to 12%.

The biggest unknown in the market, Kleinhenz said, is what will happen to homeowners who use nontraditional loans, such as interest-only mortgages, to buy their homes if the economy suffers an unexpected shock.

“If the economy turns south, then we have something to worry about. At least for some of those households,” Kleinhenz said.