What’s the Bay Area housing market going to do next year? That depends on whom you ask. We interviewed four economists who track the market and, no surprise, we got four different answers. The economist with the brightest outlook, Scott Anderson of Wells Fargo & Co., says housing prices will rise next year, maybe by as much as 5 percent. On the other end of the spectrum, consultant Christopher Thornberg of Beacon Economics says he doesn’t expect any significant appreciation until 2011 at the earliest. Who’s right and who’s wrong? Only time will tell.

THE INDUSTRY REP

Name: Robert Kleinhenz

Title: Deputy chief economist

Institution: California Association of Realtors

Education: Doctorate and master’s degrees in economics, University of Southern California. Bachelor’s degree in economics, University of Michigan.

Years following the California housing market: 20

2006 in review: “Whether you look at the Bay Area or state as a whole, it is important to note we’re not talking about a market that has fallen into the tank, but we’re looking at a market that’s seeing a slowdown in sales from extreme levels of the last two years to levels that are more normal.”

The California Association of Realtors officially expects that when the tallying is done for 2006, the state’s median home price will have risen 7 percent to $560,700, Kleinhenz said. At the same time, the group is predicting a 23 percent drop in the number of homes sold.

Kleinhenz said he thinks the market is beginning to stabilize.

“We’re either at or very close to the bottom in terms of the drop-off in sales.”

2007 forecast: Kleinhenz and his group predict that housing prices will fall 2 percent in 2007 while the number of homes sold statewide will slide by 7 percent. The group doesn’t have an official forecast for the Bay Area, but Kleinhenz said he expects the trends in the region to mirror those statewide.

“The Bay Area will track very closely with the rest of the state, and be slightly down year-over year in terms of median prices,” he said.

The region will probably see a smaller drop in the number of homes sold than other parts of the state because the decline in sales volume began earlier than it did in other cities, meaning that most of the correction has already occurred, Kleinhenz said.

2008 and beyond: It will take awhile before the region sees any kind of major price appreciation.

“We’re not looking at huge gains, the likes of which we saw in the early parts of the decade, but single-digit growth for the next couple of years if we see any increases at all.”

The extent of price appreciation will depend on the economy and interest rates, he said.

“A lot of this hinges on the underlying economic circumstances. There are a lot of good reasons to expect that the economy should hold up fairly well not only through next year, but for the balance of the decade.”

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THE CONSULTANT

Name: Christopher Thornberg

Title: Principal

Institution: Beacon Economics

Education: Doctorate in management, the Anderson School at UCLA, 1997. Bachelor’s degree in business administration, State University of New York, Buffalo, 1989.

Years following the California housing market: Six.

2006 in review: “It was the year that the great real estate bubble of the zeros came to an end,” he said. “We started off the year with a roar and we ended up on a whimper.”

The first signs that the market was shifting came at the end of 2005, as the number of homes sold began to decline, Thornberg said.

“When real estate bubbles burst, they start on the activity side before they trail over to housing starts, construction and prices.”

2007 forecast: The worst isn’t over, according to Thornberg.

“The nation is still on a spending binge. We’re just starting to realize that this ATM we call a house is no longer full of cash. In 2007, we’re going to wake up and recognize (that) if I’m going to plan for my future and pay for my kids to go to college, I have to do it the old-fashioned way, and that means spending less.”

He sees a further decline in median home prices.

“They will continue to drift down,” he said. “Prices don’t collapse in real estate. We’ll see a slow deceleration and movement downward in prices.”

He also expects little change in the number of homes sold.

“People buy homes when they are trading up, and you trade up when you have lots of equity in your home,” he said. “If you’re losing equity, you don’t trade up.”

2008 and beyond: “I don’t think we’ll see any appreciation until 2011 or 2012,” he said.

California home prices historically have climbed 3 percent per year, after adjusting for inflation. During the housing bubble, prices were rising by 15 to 20 percent a year, after inflation.

“We have to work all that excess growth in prices out of the system,” he said. “Without a collapse in prices, we have to sit back and wait for the forces of increased demand and inflation to push prices up.”

History repeats itself, and previous trends suggest that it takes years for housing markets that turn sour to recover, he said. The last major downturn occurred 1990-91 and prices didn’t begin climbing again until 1997.

“Volume will be flat through 2007 and slowly start picking up through 2008, 2009 and 2010 as prices stabilize,” he said. “Transactions will take place not for appreciation reasons, but for life reasons — I’ve got a bigger family, I’ve got a smaller family. People who need to move.”

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THE BANKER

Name: Scott Anderson

Title: Senior economist

Institution: Wells Fargo & Co.

Education: Doctorate in economics, George Washington University, 1999. Master’s degree in philosophy, economics, George Washington University, 1994. Bachelor’s degree in economics, University of Minnesota, 1991.

Years following the California housing market: Five.

2006 in review: While some were surprised by the swift and sharp housing slowdown, Anderson says we got off easy.

“It could have been much worse,” he said.

Low interest rates kept monthly mortgage payments manageable for people with adjustable loans and fueled demand, he said.

Anderson says the worst is over.

“We’re seeing encouraging signs that the housing market is already starting to bottom nationally. The inventory for existing homes has stabilized or plateaued.”

2007 forecast: The Bay Area will fare better than the rest of the country.

“We’re looking for stabilization and we could even see sales (volume) start to move up by the end of next year,” Anderson said. “The Bay Area stats are among the best in the state and better than what you see nationally. There’s such a shortage of housing and the economy has picked up some pace.”

Because home prices in the Bay Area have been high for many years, the region saw gains that were less dramatic than in other parts of the state, he said. That will help protect the market against continued price erosion.

“We haven’t seen as much of a disconnect between income growth and pricing in the Bay Area as we’ve seen in Southern California.”

All that may mean that housing prices will rise next year.

“You could see marginal appreciation,” Anderson said. “I think it will be single-digit, it may not be above 5 percent, but it’s going to be there and it might even be higher than inflation.”

2008 and beyond: Big increases in housing prices during the boom years chased people out of the state, leading to an imbalance in supply and demand.

“There is an affordability crisis to some extent in California and that will take many years to unwind. We’re probably in for a long period of pretty modest home price gains both statewide and in the Bay Area.”

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THE ACADEMIC

Name: Ed Leamer

Title: Director, UCLA Anderson Forecast

Institution: UCLA

Education: Doctorate in economics and master’s degree in mathematics, University of Michigan, 1970. Bachelor’s degree in mathematics, Princeton University, 1966.

Years following the California housing market: 21.

2006 in review: Leamer says the housing market actually peaked, in terms of the number of houses sold, in 2005. Since then, sales volume has dropped and fewer developers have sought permits to build new homes.

“We think of 2006 as a very predictable consequence,” he said. “It’s a period of sharp decline in volume and a slow reaction on the price side.”

Sellers, unable to get the prices they wanted, simply pulled their homes off the market rather than settling for lower prices, he said.

Prices fell more in the Bay Area than in Southern California, Leamer said.

2007 forecast: Leamer sees more of the same in 2007.

“We’re in a time-out period in which buyers are looking forward and sellers are looking back. Sellers see a strong market in the past and buyers are looking forward and saying, ‘Show me lower prices.’ As long as buyers and sellers are looking (in) different directions, sales volume is going to be very low.”

Leamer expects prices to continue marching lower.

“We expect a continued drop in sales volume and a very slow decline in prices of resale homes.”

2008 and beyond: “It wouldn’t surprise me if it took five years for sales volume to return to normal and to see some significant appreciation,” he said.

The interior areas of California, where much of the housing boom and bust has been due to new homes, will recover more quickly than the coast, he said. The sharp drop in prices in places such as Sacramento and Southern California’s Inland Empire mean a faster correction is in store for those regions, he said.

“The interior has a different cycle,” Leamer said. “The coastal areas all had relatively small amounts of building and huge amounts of appreciation.”

And that makes a longer correction a better bet, he said.

Source:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/12/31/REGM6N9C4A1.DTL