Realty Times July 21, 2006

Lusk Explains Housing Market Shift
by Broderick Perkins

Redeveloped downtowns, apartments and more affordable smaller homes are coming into vogue.

Big backyards, unbridled spending and buying into long commutes are leaving town.

Just as the housing market boom left its mark on the economy and the nation's way of life, the new real estate market of flat and falling sales and prices is reversing those trends, often creating simpler, less complicated lifestyles.

An economic and real estate market research leader, the Lusk Center for Real Estate at the University of Southern California recently reached out to the media to help it explain to the public the underpinnings of today's housing market.

"We are constantly engaged in an analysis of the real estate market and thought we'd weigh in given the housing market is shifting into lower gear," said Stuart Gabriel, director of the Lusk Center.

While the research focuses on California, it has implications for the rest of the nation.

Here's what Lusk discovered.

  • Downtowns are hot. Much like the east coast was constructed before World War II, urban cores in the west are filling in with greater housing density to offer more affordable housing units, as well as new housing style choices. Limited land supplies and stringent entitlement requirements have always pushed up prices in the Golden State. Now, more expensive financing is making it ever more difficult for builders to profit from single-family homes. In response, home builders have spun off infill or urban housing divisions to develop more homes downtown.

    "A big factor is the recent run up in the price of gas. We live in a state where there's limited development in the transportation infrastructure and it's not going to get much better," Gabriel said.

    "People don't want four hour round-trip commutes. Building single-family suburbs all the way to Vegas is not a tenable idea. Coupled with demographic trends, it adds up to a 'densification' of development," he added.

  • People are trading in big back yards for balconies, just as they've traded in boom boxes for iPods. Often young professionals and the older "echo boomers" (Baby Boomers' kids), the new generation of home buyers, are choosing more affordable downtown living in high rises, close to jobs and cultural centers. They are marrying later and putting off child rearing so they don't generate pressure to move into a big house. Likewise, older boomers who've redefined retirement are snatching up smaller digs to keep going in work and at play. Condo conversions underscore that demand as second home buyers, investors and speculators all move to snatch up compact housing.

    "The idea that the downtown renaissance plays across income strata and age strata is the idea that there is opportunity for more affordable housing downtown and the opportunity for upscale attached housing. It's the mixing across cultures, ages and income groups that makes for some of the fun in downtown areas," Gabriel said.

  • The cooling market is cooling spending jets. The pace of consumer spending will slow as the housing market recedes from its recent highs, according to the preliminary findings of a study conducted by Lusk Center economists. Even as cash-out refi levels have grown, indicating owners are creating a financial safety net, total mortgage refinance activity has dropped sharply in recent years and more so in recent months. Consumer spending likely will continue to drop, especially on discretionary items including foreign vacations, luxury furnishings and entertainment.

    "It's slowing for a lot of reasons -- higher gas prices, higher interest rates, house prices stopped rising and compressed home equity extraction," Gabriel said.

  • Investors are again turning to apartments. While single-family markets cool in the western states, apartment markets are heating up. Apartment rents increased 7 to 8 percent in 2005, the first big jump in more than half a decade, Lusk says. Even while some home prices have flattened or fallen they remain too expensive for many.

    "Most people are betting that prices won't keep going up and they might even be falling, so there is no urgency to buy. It might be better to rent for a year and see where prices are then," Gabriel said.


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