Chapman University economist Jim Doti sees no housing bubble to burst in Orange County.
Yes, countywide homebuying since last summer has run at its slowest pace since 2012. But Chapman’s semiannual economic outlook suggests the county’s housing market will enjoy a mild recovery as 2019 progresses.
Doti’s logic may surprise many people.
For starters, he explains that local housing prices — easily double national benchmarks — are “economically rationale given the county’s higher median income, amenities and proximity to the Pacific coast.”
Plus, housing suddenly looks not so pricey thanks to a sharp reversal in mortgage rates, which have driven borrowing costs down to near-historic lows.
Doti’s math shows a household buying a median-priced Orange County home in 2018’s third quarter spent 40% of their income to be a qualified borrower. By the end of this year, if the forecast proves true, cheaper mortgages mean the typical local home will cost only 33.6% of income.
However, Doti is by no means projecting any housing boom.
The forecast sees sales of existing homes rising only 1.3% this year, a change of pace from falling 9.7% in 2018. That modest buying uptick will boost the median price by just 1.2% vs. last year’s 4.8% gain.
The recent sales slowdown nudged local developers to cool building plans, a trend that won’t change soon.
Chapman forecasts residential building permit dollars will fall 2.5% this year which is actually an improvement as construction spending fell 13.4% in 2018.
Fewer dollars spent means construction jobs will grow only by 1.2% this year vs. 4.5% in 2018. And those lower mortgage rates won’t help workers in financial services: Chapman expects staffing to be cut by 0.9% this year after dipping 0.4% in 2018.
One reason the Orange County housing market will escape the recent rough patch is that bosses countywide will still be hiring, albeit at a slower pace.
Job growth is forecast at 1.3% for 2019 vs. 2.1% last year. Increases in personal income will cool, too: 4.5% in ’19 vs. 5.6% last year.
And the moderating expansion will continue to be a drag on another major Orange County purchase: vehicles. Chapman forecasts auto spending will grow just 0.3% vs. 1.1% in 2018.
It should be noted that Orange County is by no means alone with an economic chill.
Look at employment trends elsewhere. The school predicts 1.5% more California workers this year, down from 2% growth last year. Nationally, job growth is pegged at 1.5% this year vs. 1.7% in 2018.
Still, Doti notes significant risks in local housing tied to real estate’s three magic words: Jobs, jobs, jobs!
“There is no question O.C. housing prices will fall more dramatically when we have our next recession,” he says. “The drop in median income caused by the recession will have an exponentially negative impact on prices. But that correction will be temporary and will eventually be ‘corrected’ when incomes increase again.”
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