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Strong Home Values a Shelter for Economy

Real estate: The residential market is helping Southern California avoid a repeat of the recession of the early 1990s.

January 20, 2002|STUART SILVERSTEIN and DARYL STRICKLAND | TIMES STAFF WRITERS

Southern California's buoyant residential real estate market and rising home values are a key factor shielding the region from recession. That marks a sharp contrast with the early and mid-1990s, when falling prices and slow sales contributed to the area's worst economic collapse since the Depression.

The strength of residential real estate also is benefiting other U.S. metropolitan areas. But few, if any, have enjoyed rebounds as dramatic as Southern California's.

It is a major reason Southern California is suffering only a slowdown while the San Francisco Bay Area, hurt by a deep downturn in high technology that has deflated home prices lower, is in recession.

Real estate has remained a stable source of jobs for the local economy, including employment for construction workers, lenders and real estate agents. Even more important, analysts say, is how rising home values have supported consumer spending.

Strong home values and low interest rates have combined to spur a wave of refinancing. That has enabled consumers to cut monthly mortgage payments, and sometimes take out cash as well, providing a local economic stimulus.

"If you cut your mortgage payment, it's just like a monthly tax rebate check. It's a big deal for maintaining purchasing power," said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy.

Economists say high home equity, particularly in areas such as Southern California, also has kept consumer confidence from falling further amid the U.S. recession. As a result, they say, consumers continue buying cars, homes and other items.

All the same, the local real estate business hasn't been enough of a force to prevent a slowdown in the region's growth. And it could become less of a prop for the local economy, with home building in the region expected to decline moderately this year and most of the mortgage-refinancing surge apparently over.

For now, though, Southern California's residential real estate business is providing economic staying power and helping the region resist the national recession.

"It has translated into spending we didn't see in the last downturn," said Fred Furlong, an economist with the Federal Reserve Bank of San Francisco.

In other cases, such as that of Virginia Bock, home equity has provided a financial safety net. After Sept. 11, Bock knew her job as a product manager for an airline services company in Orange County was in jeopardy. She responded by quickly refinancing the mortgage on her Irvine townhouse, reducing her monthly loan payment to $1,300 from nearly $1,500. As part of her new loan, Bock obtained a $100,000 line of credit allowing her to borrow money by drawing on her home equity.

Bock was right about her job--she was dismissed Nov. 1. By relying on her savings and the benefits of her new home loan, Bock said, she can stay in her townhouse and survive financially until at least this fall, if she can't find a good job before then.

''I'm really not in a bad situation,'' she said.

Real estate specialists such as mortgage broker Edward J. Rosenblum, co-owner of Flagship Mortgage in the San Fernando Valley, say the difference is striking between the situation today and the devastating Southern California recession of the early 1990s.

Then, Rosenblum ran a mortgage finance operation in the Antelope Valley and worked with home builders. One of the big problems, he said, was that would-be home buyers balked at going ahead with purchases, despite plummeting prices, because they sensed that prices might go even lower.

Some Antelope Valley home builders couldn't persuade people to buy even with offers of free swimming pools and allowances of $20,000 to $25,000 for upgrades.

Things were so grim that at one failed housing development in Lancaster, unfinished homes were sold to the filmmakers of "Lethal Weapon 3" and used as the background in a simulated inferno scene. (The homes weren't actually burned down, but they were bulldozed after filming was over.)

In other cases, homeowners handed the house keys to their mortgage lenders because they owed more on their mortgages than the homes were worth.

These days, Rosenblum said, people eager to buy homes stream into his office, and refinancing deals remain an active part of his business. In fact, lenders locally are fighting for refinancing customers--unlike a decade ago, when plummeting prices left many Southern Californians with little or no equity to tap.

"If you have equity in a house, and you have a pulse, somebody will make you a loan," Rosenblum said.

And homeowners are plump with equity. That reflects skyrocketing home values in Southern California, including the five Los Angeles-area counties and San Diego County. DataQuick Information Systems Inc., a La Jolla firm that tracks real estate trends, said the value of a median-price house in Southern California climbed $2,468 a month last year.

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