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Friday, Mar 29, 2024

Unsettled Housing Market Still a Major Wild Card

The Federal Reserve’s September cut of its key interest rate is not a win-win situation by any means. Sure, slashing off a half-point to reduce the federal fund rate to 4.75 percent will lower interest on many home mortgages, credit cards and auto loans. And troubled mortgage lenders like Countrywide will gain some relief from the financial crisis sparked by their giving subprime loans to nearly anyone who asked. But some experts say those with savings accounts will lose out by seeing a drop in their interest. The Fed admits that the risk of inflation remains. And whether the move helps stem the growing global financial downturn, mirrored to some extent in the Valley, is an open question. “I am skeptical that in the short term it will bring buyers back to the residential market,” said Larry J. Kosmont, president and CEO of Kosmont Cos., an Encino real estate and economic advisory firm. “I think buyers now are spooked and will be uneasy until next year,” Kosmont said. “And builders should be prepared to discount 10 to 30 percent depending on location.” “The rates drop is not a silver bullet for the housing market,” he said. Another drag on the economy will come when myriad subprime mortgages with adjustable rates come due in the coming months. Sold by banks and mortgage companies, subprime loans were aimed at buyers with poor credit and, in some cases, not much of anything else. According to Fortune magazine, the industry even came up with an acronym for subprime lending NINJA loans. “No income? No job? No assets? No problem!” Peter Eavis reported in Fortune. The most common subprime mortgage is the so-called hybrid ARMS, which begins at a low fixed mortgage rate then floats upward over successive years. Another popular one is interest-only loans, in which payment of the principal is deferred to a later date. It’s expected that many borrowers will default as principals come due and payments ratchet up. “Over the next six months there will be huge subprime adjustments.” Kosmont said. “We are in for a rough time.” All this comes on the heels of a gloomy economic forecast from UCLA in August. Predictions by UCLA analysts included a 10 percent to 15 percent drop in home prices from their peak; a rise by mid-2008 in unemployment to 5.2 percent from its current rate of 4.6 percent; and infinitesimal economic growth in the first quarter of 2008 (two quarters of negative growth is officially deemed a recession). What’s more, home construction was down 2.6 percent in August, a drop of 19.1 percent from a year ago, the U.S. Commerce Department reported. The Sept. 18 federal funds cut was the first since June 2003, when, to help avoid a national recession, the Greenspan-led Federal Reserve concluded its string of interest rate cuts that followed the 9/11 terrorist attacks. The cuts did the trick, but not without consequences. In Los Angeles and other geography-restricted metropolitan areas, the low housing interest rates created a housing boom that saw commercial and residential property balloon in price, as investors flipped properties for enormous profit. Jumping aboard were apartment owners who from 2002 to 2006 incrementally raised rents, in some cases doubling the price. These days, the average Southern California apartment costs about $1,500 and the median home price is $500,000, according to DataQuick, which tracks real estate data. Meanwhile, average household income in the Valley hovers between $50,000 and $55,000. The dichotomy in the Valley between earnings and housing cost is not lost on Kosmont. “The Valley economy is creating lower paying jobs and higher priced housing,” said Kosmont, who wonders if the Valley can maintain its image as a bastion for the middle class. “You have limited and overvalued (real estate),” he said. “How can an average family afford a $560,000 home?” Some analysts aren’t so bearish on the Valley economy. “I am not hearing the doom and gloom from the businesses out there,” said Bruce Ackerman, president and CEO of the Economic Alliance of the San Fernando Valley. “In the mortgage sector there are problems. Other sectors are OK.” It’s long been a mantra among Valley leaders to say that the area is insulated from recession. Unlike San Diego and the Silicon Valley, the San Fernando Valley doesn’t rely on one job sector, leaders point out. It has plenty of employment in diverse areas such as manufacturing, entertainment, retail and financial services. Leased office space, moreover, sometimes a useful barometer to economic health, has frozen at all-time highs, with a miniscule 2.5 percent vacancy rate. But Kosmont will not budge. He returns to the issue of affordable housing. “It is a self-fulfilling failing prophecy to think you are insulated from a recession when the majority of your population can’t afford a house,” Kosmont said. Still, he doesn’t predict a Valley recession. Lack of affordable housing will hold the Valley back but not destroy, he said. Bella Vista opening in October Bella Vista, an office condominium project in Conejo Valley, is now available for pre-sale and is scheduled for completion in October. The 43,000 square foot project offers suites ranging in size from 1,200 to 8,920 square feet. Amenites include easy 101 freeway access, ample parking and nearby retail stores and restaurants. Michael Slater, senior vice president at the Ventura County office of Richard Ellis, along with colleagues Tom Dwyer and Jennifer Rice, is handling Bella Vista pre-sales opportunities. For more information call (805) 465-1622. Leases renewed The Staubach Co., a leading global real estate advisory firm, is representing the U.S. Bankruptcy Court and U.S. Trustees Services in renewing its Woodland Hills leases. The U.S. Bankruptcy Court renewed its nearly 60,000 square foot lease at 21041 Burbank Boulevard. The court occupies the entire building. The U.S. Trustees space is at 21051 Warner Center Lane and is 8,677 feet. Both lease terms are slightly more than six years with an option to terminate after five and a half years. The combined lease value is more than $13.6 million. Senior Reporter Mark Barna can be reached at (818) 316-3123 or at [email protected] .

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