Residential Home Prices Flat for the Next Year in Select Southern California Cities

Johannes Moenius Analysis, Housing, Topics

This figure depicts how prices in six selected Southern California cities influence each other.

Research by the Institute for Spatial Economic Analysis (ISEA) forecasts home prices for six selected cities in Orange, Riverside and San Bernardino Counties until June 2014.

While there may be some signals suggesting that the national housing market is improving, the results found in a recent housing price study by the Institute for Spatial Economic Analysis (ISEA) at the University of Redlands indicate that forecasts of home prices in the Inland Empire are not as encouraging. The local economies in six cities noted in the study are still suffering from high unemployment rates and an increase in the number of discouraged workers. The depressed labor market together with rising mortgage rates will, according to the ISEA (pronounced “eye-see”) study, continue to have “spillover effects” in Riverside and San Bernardino Counties.

Dr. Mak Kaboudan, professor of economics and statistics at the University of Redlands and ISEA faculty fellow, reports in his housing study that Inland Empire residential home prices are likely to remain flat for another year.

“Researchers, politicians, investors, homeowners and potential homebuyers have sincere interest in current as well as future directional changes in home prices. That interest has increased over the past three or four years after most of us realized that economic health is deeply dependent on that of the housing market –and we again see signals of a weak residential housing market in the areas analyzed,” said Dr. Kaboudan.

The cities featured in the ISEA study are Corona and Riverside in Riverside County, Redlands and San Bernardino in San Bernardino County and Anaheim and Irvine in Orange County. According to Dr. Kaboudan, the cities were selected because they are relatively close to each other so he could see if price movements across cities influence each other, or, in his own words, “if price movements are contagious.” Moreover, the six cities represented three contiguous counties allowing him to study whether county boundaries mattered for this effect. The forecasts prepared average prices representing each city separately and using “genetic programming,” a type of artificial intelligence technique to produce the forecasts. Use of this method has proven to fit the nature of housing markets fairly well in the past, according to Dr. Kaboudan, who pioneered the use of this technique for such reports. The results obtained were also used to measure if home prices in contiguous cities influence each other or as statisticians call it are spatiotemporally correlated. The results suggested that house prices in the analyzed cities only weakly mutually influence each other.

Over the next year, home prices in Riverside County will remain basically unchanged. However, the analysis suggests that house prices in Riverside respond more both to changes in unemployment and mortgage rates than Corona. Thus, stronger than expected changes in only one of the two influencing factors may affect Riverside more than Corona – as a consequence, Riverside home prices are less stable and harder to predict.

Over the same period, the picture is substantially worse in San Bernardino County. Prices are expected to decline in three of the next four quarters. By the end of the one year forecast, prices in the city of Redlands are expected to fall by about 3%; while those of the city of San Bernardino are expected to fall 15%. The researcher, however, indicates in his report that this number has to be taken with a grain of salt: San Bernardino city home prices seem to be strongly influenced by changes in mortgage rates. If rates increase less than predicted home prices in the city of San Bernardino will not react by as much either.

Finally, home prices in Orange County are expected to see some modest increases. Home prices in Anaheim may increase 5%, and Irvine may see a small increase of about half a percent. The difference can again to some extent be explained by how the housing market in the two cities respond to changes in unemployment and mortgage rates: as compared to Anaheim, Irvine seems to be much more responsive to both, and with mortgage rates predicted to go up, Irvine sees a smaller change.

The rather modest – if not pessimistic – predictions reflect the recently observed changes in the economic environment: mortgage rates have gone up substantially, and, as recent ISEA studies document, employment growth has been modest and in some areas even negative in Southern California. Combine this with recent substantial increases in house prices in almost all locations analyzed, these three factors dampen attractiveness of real estate specifically for investors. Eventually, these factors have to reflect on the housing market. If mortgage rates increase and the labor market stays week, the outlook for housing cannot be great either.

Generally, in assessing current 2013 conditions, unemployment rates remain high even though the monthly unemployment rate has declined from over a year ago. Unfortunately, employment growth in Southern California has weakened recently and labor force participation is at low levels. Therefore, economic conditions must still improve more substantially before the housing market starts to regain strength. New homes construction remains slow and while recent evidence suggests that banks are not quite as strict on their lending conditions anymore, rising mortgage interest rates have likely more than compensated for the effect of easier credit access. With mortgage rates bound to increase further, much of the burden on improving the housing market is now on employment growth and lending standards.

Download this news release

ISEA Housing News Release – September 2013

Download the full report

Inland Empire Housing Forecast Report, 2013-14

About the Institute for Spatial Economic Analysis at University of Redlands

The Institute for Spatial Economic Analysis (ISEA) serves regional, national and global business and government leaders in their needs to better understand how socio-economic phenomena affect their communities. A division of the University of Redlands School of Business, ISEA publishes ongoing, timely reports covering retail, employment, housing, logistics and other special topics. A key distinction is its ability to illustrate economic trends and patterns through the use of geo-spatial mapping techniques. In addition, ISEA’s ability to provide Zip code level analysis for many of its reports provides unprecedented detail. Current ISEA economic data and interactive maps may be found at http://isea.redlands.edu/.

Contact

Media contact: Johannes Moenius, isea@redlands.edu, 909-557-8161
Director, Institute for Spatial Economic Analysis,
University of Redlands, School of Business