Overbuilding created too many new houses and condominiums in once-hot areas and is behind price declines in Arizona, Nevada, Florida and parts of California, said Stuart A. Gabriel, the director of the University of Southern California's Lusk Center for Real Estate. "The condominium markets in Orlando and San Diego are examples of significant overbuilding," Gabriel said.
In California, Gabriel said, supply got ahead of demand in inland cities, including Sacramento, San Bernardino, Riverside and segments of San Diego County where development pushed the cities into deserts and farmland. Prices declined from the second to the third quarter of the year in nearly half of California's cities. Yet prices continue to climb in the state's highly sought-after coastal cities and towns -- Laguna Beach, Newport Beach, parts of Malibu, Santa Barbara -- where there's not much room or permission for new building, Gabriel said.
Mixed into these analyses are assumptions -- or hopes -- about other pieces of the economy, namely that employment will continue to be relatively high and oil prices will not take a sudden back dive, as in last summer. A downturn in oil or jobs could touch off a recession with deeper, more long-lasting implications for housing, Gabriel says.
"What would worry me is if there is evidence of sharp weakening in economic activity or any indication of a slowing in labor markets as evidenced in rate of payroll growth or the unemployment rate," says Gabriel. "I do think that the economy is performing well at the moment. It certainly is slower than it was, but we continue to see moderate economic growth."