Orange County Housing Market Showing Signs of Life

The once white-hot housing market in California's Orange County has finally turned back up following its alarming collapse of the early 1990s, according to mortgage bankers and regional economists.

That's good news for the mortgage industry because the county is in many ways a mirror of the California market, which accounts for perhaps a quarter of the nation's home loan volume.

This is not to say that the Orange County market has returned to the boom that began after World War II and lasted until 1990, a period when homeowners could be assured of big profits whenever they sold. That boom turned speculative, and the bubble burst in the local recession.

"In the last 90 days, we have seen a slow but steady increase in Orange County purchases," said Tom Halley, executive vice president of the western division of Countrywide Home Loans Inc. "There's nothing dramatic but it's heading in the right direction."

Virtually all of the strength is in resales, economists say. New construction, they add, remains in the doldrums, a hangover from the 1990- 91 recession.

On the surface, however, housing permits seem to be zooming ahead in the county, climbing 20.2% in this year's first seven months compared with the year-earlier period. "But that growth comes from a very low base," warns G.U. Krueger, senior economist for the California Association of Realtors. "Housing construction has not played any role in Orange County as an engine of economic growth."

"This is a different kind of recovery for Orange County and the state where housing hasn't led the way at least initially," said Howard Roth, regional economist for the Bank of America.

Mr. Roth and Mr. Krueger are unable to offer an explanation for this drag. But they note that most other major sectors of the country's economy are advancing, including high-tech manufacturing, transportation business services, international trade, and entertainment.

"The economy is being driven by its economic base," says Mr. Krueger. This, he says, is providing a strong underpinning for new housing long term. "This economy must really have legs because it is not depending on any underived demand," Mr. Krueger said, noting that home builders are not back in the market prematurely.

Indeed, all important economic indicators are showing strength in the county. For example, the unemployment rate is 4.5%, compared with 7.6% for all of California and 5.4% nationally. County jobs rose 2.6% in July to 1.17 million, approaching the peak of 1.18 million reached in December 1990, according to the California Employment Development Department.

The dearth of new construction, of course, gives resales a boost. Unsold inventory is down sharply, from a 25-month supply in summer of 1995 to just 11 months in July, according to the California realtors group.

The resale recovery actually began in early 1991, but only in terms of units. Much of the early activity was driven by bargain hunters taking advantage of home values that had collapsed during the last recession.

Due to what had been the speculative nature of the market, prices continued to decline even after the economic downturn ended in March 1992. But last July, prices declined just 3.2% - to a median level of $211,700. "You no longer have to worry that you're home is going to be worth less next month than this month," said Tom McKnight, vice president and head of California retail sales for BankAmerica Mortgage Co.

Resales rose 34.9% in the second quarter compared with the year-earlier period, and they gained 19.6% in July compared with the previous July, the state realtors group said.

"We continue to see strength in the purchase market," Mr. McKnight says. "We don't see any slowing down."

Refinancing, on the other hand, remains stagnant, says Dan Hanson, senior vice president and division manager for Norwest Mortgage Inc. "Everyone who could refinance did it in 1992-93 at low interest rate levels."

He estimates refinancing in Orange County accounts for 10% of his business, compared with 50% in 1993.

Another contributor to stabilization of home prices is the county's emergence from bankruptcy last June in relatively good financial shape. Most creditors were being made whole.

Due to the resurging economy, the likelihood of a tax increase to cover the county's huge investment losses remains remote. "The bankruptcy had caused turmoil in retail prices," said Mr. McKnight.

To be sure, no one expects the new-home market to remain in the dumps forever. In fact, two north-south toll roads are being built in southern part of the county that should open up raw land for future development, says Mr. McKnight.

Currently, that area is served by only one major highway, where Freeway 5 and Freeway 405 merge from Los Angeles before continuing on together to San Diego, Mr. McKnight says. "It's been gridlock for at least five years during rush hour," he said.

Some mortgage bankers say that Orange County has learned its lesson and will avoid the speculative overbuilding that had led to the housing market's collapse. "People were selling houses out of escrow," McKnight recalls. "That's unwanted speculation."

"Those days are long gone," says John Lacagnina, senior vice president and regional manager for Southern California-Nevada for North American Mortgage Co. "Absolutely gone. We have a very good, stable market."

Mr. Heffernan is a freelance writer based in Atlanta.

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