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Economist: Bakersfield will feel pain of real estate crunch long-term
| Tuesday, Mar 25 2008 5:39 PM
Last Updated: Tuesday, Mar 25 2008 5:38 PM
The annual Kern County Economic Summit takes place Wednesday, with speakers and panelists weighing in on growth, economic trends and quality of life indicators.
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Los Angeles-based economist and UCLA Anderson Forecast alumnus Christopher Thornberg will be giving a talk called “Peering Over the Edge: Real Estate and the Economy in 2008.”
He spoke about real estate, falling median home prices and the local economy with The Californian on Tuesday.
The following are excerpts from the interview with Thornberg.
Q: Locally, we’re seeing (median) home prices have already fallen 20 to 25 percent —
A: You’ve got to be real cautious with that number because that number — the median price statistic — is swayed by the type of product that’s moving through the market. So, in other words, if suddenly a lot of nice homes are sold, the median home price goes up even though it may be that market prices aren’t rising. And vice versa, if a lot of lower-end homes get sold, then the median price may go down even though nothing is fundamentally changing in the market, right? ... Now unfortunately, I don’t think that Bakersfield is covered by a (Case-)Schiller-type statistic (that uses repeat sales to track changes in the housing market). But speaking from the point of view of some of the major markets in the state, what you’ve been seeing is a decline in prices that probably is averaging somewhere around, in Bakersfield, my guess would be 18 or 19 percent from the peak.
So with that in mind, the big question is: When does this bottom out?
Well the answer there unfortunately, is we are probably only halfway there. I expect prices in California to fall close to 40 percent when all is said and done. And the reason I think at least 40 percent is because of the fact that the one thing that characterizes this real estate bubble relative to all other real estate bubbles is just how much home prices went up.
I mean, it’s insane when you look at the overall increases in prices that we’ve seen. They just don’t make any sense when you compare them to people’s incomes. That is the driving issue.
Now what this means is, the market is not going to find any stability until prices drop to a level that’s reasonable given people’s (incomes). And that will probably be, like I said, close to 40 percent.
Q: Do you have any idea how Bakersfield fits in with the rest of the state and the nation? Are we going to follow that 40 percent as well?
A: Yeah, maybe a little worse, actually.
Because what you face in a place like Bakersfield is a lot of first time homebuyers. You are dealing with a market that was more towards the lower end of the overall market, and as a result of that, you have a higher proportion of subprime products than (in) many other parts of California.
And those two factors would tend to indicate a higher than normal foreclosure rate, a higher than normal decline in prices.
So if the overall state goes down by 40 percent, Bakersfield may find itself down by 45 percent, all said and done. Maybe 50 percent.
Q: So what does all that mean for Bakersfield’s overall economy?
A: Well, in the short run, it’s hard ... you know a big driver in growth in the local economy (was) people moving in. And now people are moving out. And that’s certainly going to be an issue.
Another big issue, of course, has been the fact that all the big increases in home prices out there has yet again stimulated a lot of secondary consumer spending — buying furniture, buying this, buying that. And of course now, that’s going the opposite direction.
With home prices coming down, people don’t have that home ATM to draw on anymore, and that means a big pull-back in consumer spending in the area.
So in the short run, there’s no doubt, it’s going to be ugly. You have a big fiscal impact in local government. Local governments make a lot of money on taxable sales and real estate transfer taxes and property taxes. And those are all going to get hammered.
... But in the long run, the nice thing is, with prices coming down to a reasonable level, there will be more room for expansion in the long run.
Because one of the big issues California was facing was, home prices that were so high that businesses couldn’t attract anyone. Families were leaving the state because they couldn’t afford anything.
So now with prices coming back down again, you have the fortunate side effect of a market that will allow more growth.
And that’s a positive thing in the long run.