Raphael Bostic, economist:We are in a new financial world where we have many more financial instruments than there have been before. Consumers are pursuing them aggressively.
There's been some analysis of how much indebtedness people are doing for these mortgages. Are they over-leveraged or do they have some slack in their income? What we've seen in Southern California is that there is slack. We have not seen households taking on mortgages that are significantly higher than their income. When people go for a mortgage, what do they want? They want the lowest payment, right? It's not necessarily a payment they can't afford. And they may be able to afford to pay more.
Q: What advice would you give homeowners with housing prices at this level? Should they sell and rent?
Bostic:Now let me get this straight. You're predicting a 43 percent drop in prices in Orange County?
Rother:No, let me go over that. If you buy a moderate- level home, it will drop about 20 percent.
Bostic:So you're saying a 20 percent drop for the average house in Orange County? That's insane. When we think about the housing markets we've got to think about them as more than just equity properties. There is an investment motive to this, but there is also a consumption motive. When households buy their present home, they are consuming them. They don't have to sell them, and, in fact, there are a lot of transaction costs that will make it unlikely that they will sell them.
There are another couple of issues in housing that I think are important. One is supply. We are not building nearly enough housing to match the supply, and we know - as a basic tenet of economics - when the supply stays fixed and the demand goes up, the price is going to go up. So we shouldn't be super-surprised if the price continues to rise.
John Prichard, chartered financial analyst:It does not mean real estate (prices) can't go down. We've proven that with lots of bubbles. But supply is so limited in Orange County, and I think it's at least as important to understand how the supply is limited.
Adibi:At Chapman we forecast a decline in home prices this year, and obviously our rationale has been that rates are going to go up faster than they have been. I believe the argument that there's a limited supply is overblown by people, by journalists. We said prices will go down on average 6 to 7 percent this year. And so far it's been going up an average of about 9 percent.
Year-over-year, I still think you're going to see some negative numbers by the end of the year. But what makes me worried is this herd mentality which right now exists in buying a home, and it is fueled by some people in real estate and by some journalists. Once it changes to the other way around, watch out. People who have primary residences, you are absolutely right, they are going to do anything possible to hold it. But those who bought those second homes, those who are investors, once they want to get out, it could be very bad.
Prichard:If you talk about a 6 percent to 7 percent drop, I think they would still buy. There's an embedded (tax) advantage to owning real estate.
Adibi:(Buying your own home) is a good investment - but over time. If you look at average home prices before this run from 2001 and after, average home-price appreciation, even in Orange County, was 6.5 percent, 7 percent.