Jon Lanser from the OC Register interviewed Ryan Ratcliff. It’s the same stuff I’ve already written about.
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Q. Everybody’s got a buzz phrase for the condition of the O.C. market — from bubble to froth to soft landing to lull. You got one for us?
A. I’ve become awfully leery of buzzwords lately – they carry too much baggage. If I look at the relationship between interest rates, rents, and home prices and say “bubble,” some people think I’m implying a 30% drop in home prices in the next six months. If I say “soft landing” to mean I don’t think there will be a recession next year, the housing bulls think I’m saying that home sales will recover to 2004 levels next year. So I’ve sworn off the buzzwords…
Q. Where’s this O.C. market headed? How long will this trend continue?
A. Historically, it takes a serious recession to generate a significant drop in home prices – like Southern California in the 1990s. Without that kind of economic distress, owners aren’t motivated to make quick sales for lower prices: they prefer to wait for a good offer even if it takes months. The number of listings rises, the number of transactions plummets, and prices flatten out – exactly what we’ve seen recently in Orange County. Since we’re not predicting a recession in the next two years, we expect to see this trend of flat prices and falling sales continue.
Q. How much can housing’s ills pull down the rest of the region’s economy?
A. Our forecast is that the real estate will be a drag on the overall economy for several years to come, but that the drag won’t be enough to create a recession. Historically, it takes substantial job loss in two sectors to create a recession, but right now we don’t see another sector outside real estate that looks vulnerable to job loss.
Q. Are there one or two key numbers you’re carefully watching – numbers that if the moved dramatically would either alter or strengthen your convictions?
A. Two things I’m watching going forward are: what’s happening with home prices; and whether new data comes along to suggest a recession is more likely. Since I’m interested in whether the same home will sell for less money next year, my preferred measure of housing prices is the OFHEO Home Price Index. It’s the best answer to my question, since it uses repeat transactions on the same property to measure appreciation. Seeing the OFHEO index decline for several quarters in a row would certainly make me rethink my forecast. Of course, if the economy slows more than we’re expecting, the resulting recession could lead to falling home prices. Since one of the assumptions of our forecast is that no other sectors will have substantial job loss at the same time as the real estate sector, that’s what I’m keeping an eye on. Two items stand out here: any indication of a slump in manufacturing (decrease in weekly hours, a drop in industrial production, etc.). And any significant slowdown in consumption spending as slowing appreciation makes people feel less wealthy. These are only a sample – there are many outside forces that could end up tipping 2007’s fragile economy into a recession.
Q. UCLA’s been at the forefront of warning folks that real estate’s party will end. Are you surprised at the emotions tied to the grand bubble-or-not debate? I bet you get some interesting feedback …
A. I think housing is the place where the intersection between economics and real life is most obvious, and since housing is the biggest investment most people make, I guess it’s no surprise that feelings run high. Having said that, I never got hate mail until I started talking about housing’s role in overall economy.
End of interview
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