Housing markets in California have made a stunning about face: Lenders there now may face a housing shortage instead of the glut of a few years ago. In a recent paper entitled, "Thinking the Unthinkable: Housing Shortage on the Way?" the California Association of Realtors warns that a scarcity of affordable housing could dampen economic growth, now that more Americans are expected to move to the state than leave. For the first time in five years, net domestic immigration to California will be positive in 1998, as residents of other states flock to thousands of new high-tech, entertainment, and software jobs, according to the Business Forecasting Project of the Anderson School at UCLA, Los Angeles. "Serious supply shortages are already emerging in areas where economic growth has returned the fastest and are likely to spread as the California economic expansion broadens," writes the Realtors' deputy chief economist, G.U. Krueger. The group is worried because the new building permits, which fell precipitously in the '90s, are projected to increase only slowly for the rest of the decade. For lenders, though, a tighter housing market in a state that last year accounted for 17% of all mortgages would be good news. Scarcity already is driving up the value of homes that collateralize the loans. That means larger-and safer-home loans, says Mark Zandi, chief economist of Regional Financial Associates, West Chester, Pa. For homeowners who hit a financial roadblock and want to bail out of the mortgage, appreciating home prices are a big plus, says Terrance G. Hodel, president of North American Mortgage Co., Santa Rosa. They can sell the home and repay the loan, he says. Falling home prices during most of the '90s have left owners holding mortgages larger than the value of their homes, and many financially troubled borrowers have opted for foreclosure. A housing scarcity and price gains also boost the demand for related lending, such as construction loans to builders and home equity loans to newly enriched homeowners. Eventually steep price increases could pave the way for a painful correction. California "has a history of developing price bubbles that eventually pop," Mr. Zandi notes. But he adds the state has "a ways to go before we see a speculative house price bubble developing." Since 1991, 90,000 to 110,000 permits have been issued annually. Permits, which peaked at 238,000 in 1989, will increase to only 144,000 permits in the year 2000, according to the UCLA Anderson Forecast. That's not fast enough, Mr. Krueger argues, to keep pace with California's population growth. Higher population density and steep price appreciation are already surfacing in the state's northern half-in San Francisco and the Silicon Valley county of Santa Clara, for example, agrees Tom Lieser, associate director of the UCLA Anderson Forecast. "San Francisco has reached the point where (a) lack of affordable housing could be a real constraint to the growth of business," Mr. Lieser says. Seattle, Los Angeles and Sacramento may siphon some of the growth, he says. Mr. Krueger and others blame the anti-growth stance of the state's metropolitan areas for the fact that permits won't pick up faster. Many counties require builders to help pay for schools, roads and water lines, he says. Expensive legal challenges by neighbors to new developments also slow the pace of building. Mr. Lieser of UCLA thinks another factor is at work as well-developers are still nursing memories of the real estate crash of the early 90s. "It's kind of difficult to kick a new housing boom off. Builders first need to be persuaded profitability has returned," he says. He adds another reason: "There may been some reluctance by banks to finance what might have been until recently a premature construction cycle." Some California-watchers think this talk of impending housing shortages is overblown. "I just don't believe it," scoffs Michael Carney, professor of finance and real estate at California State Polytechnic University, Pomona. Except for a handful of northern counties, most still have weak home sales and lots of foreclosures, Mr. Carney says. If the strong price increases in Northern California spread to the rest of the state, "builders will respond, and we'll have a big surge in housing permits." Still, he too, worries there are too many constraints on new home building. Eventually, the market will respond, Mr. Krueger agrees-but with a lag of two to three years: "Its timing will not be what you need in a modern economy."

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