Selling (Out) Sierra Madre

There isn’t a housing shortage in California. Sure, according to Dr. Christopher Thornberg, former head of the UCLA Anderson Forecast, there’s a “shortage of low rent apartments, for low income households, mostly from Latin America.” But, other than that, there’s a glut. Thornberg points out that in 2005 there were 2.5 new homes built for each new household in this state. Around 10% of those 5.7 million vacant homes The Wall Street Journal reports are in California.

We are awash in empty, available homes. So why are the developers so anxious to build high-density condominiums in downtown Sierra Madre, in the slowest real estate market in a decade? The answer is simple. During the real estate boom, home prices got driven to levels far beyond what the economic fundamentals, i.e. incomes, jobs, etc., would support. Exotic financing also helped. But the phenomenon that drove the boom was psychological. People paid outrageous prices for homes because they expected them to go even higher. So now we have a bubble, and our economic salvation lies in letting the air out slowly.

The UCLA Anderson Forecast expects home prices in California to remain constant for the next 5 years, a soft landing. Their one exception is for homes in areas where there’s new construction. And their reason is, with highly inflated prices, developers can sell new homes in existing neighborhoods at deep discounts and still make obscene profits, while pulling the rug out from under current home prices.

The effect is two-fold. The developers make a fortune off the condos while crashing the market and providing a buying opportunity for speculators.

What bothers me most, though, is that certain members of our City Council and City Administration keep acting in favor of developers and speculators while placing the interests of Sierra Madre homeowners in greater and greater peril. They justify this by saying they need more revenue.

But property tax revenues went up right along with the median home price and record home sales during the boom. It’s been a revenue windfall for the government. So, what’s up? Why are some of our city officials throwing caution to the wind?

At the very minimum, there is an appearance of impropriety in their behavior. I’ll go into that further next week. In the meantime, I suggest you watch an informative and entertaining presentation by Dr. Christopher Thornberg that’s available through Google Video. Just go to video.google.com and search on the name “Christopher Thornberg”. It’s called “Economic Roundtable.”

Watch it, and you’ll get an excellent education in real estate economics. If you have trouble finding it, send an email to me at SierraHombre@verizon.net, and I’ll send you a direct link. (This is the direct link.)