Berkeley - Severe job loss and a decline in household wealth have turned the Bay Area housing market into a buyer's market, a situation that is unlikely to change until 2003, according to the latest research by Kenneth Rosen, a real estate professor, and Amanda Bishop, a research associate, both from the University of California, Berkeley's Haas School of Business.
Rosen and Bishop consider some economists' predictions of a speedy economic turnaround and a strong Bay Area housing market in 2002 "overly optimistic."
The Bay area economy is in a deep recession due to the technology industry downturn, and 117,000 more people are unemployed today than at the end of 2000. Job loss will continue as technology companies and others that fed off the technology sector's growth retrench, according to the report, "The Bay Area Housing Market: A Buyer's Market."
The current economic climate has turned the Bay Area housing market into a buyer's market for the first time since the early 1990s. When the cycle has been completed, Rosen and Bishop expect home prices to have fallen 15 percent from their peak and luxury home prices to have fallen 30 percent from their peak.
"Even with the worst part of the current recession behind us, the effects on the housing market will lag about a year," said Rosen, the California State Professor of Real Estate & Urban Economics and chairman of the Haas School's Fisher Center for Real Estate & Urban Economics. "The Bay Area housing market will not bounce back until 2003."
The Bay Area has seen extraordinary economic and job growth in the late 1990s, the report states, with employment in the area's six counties expanding by 13.2 percent, or 361,900 jobs, between December 1993 and 2000. During this time, the Bay Area became the epicenter for the Internet revolution, adding thousands of technology workers.
"It was clear to us, however, that the boom was unsustainable," write Rosen and Bishop. "The region's tech-heavy focus, which propelled the area's growth in the late 1990s and early 2000, contributed heavily to the region's economic downturn in 2001. As Nasdaq plunged, not only did hundreds of so-called dot-com companies lay off their staffs, but traditional companies that benefited from the Internet boom were also forced to downsize as demand for their products and services fell sharply from unsustainable levels."
Bishop and Rosen expect employment numbers to further decline and unemployment to rise during the first part of 2002, when companies that delayed firings until after the holidays further trim their staffs. "We expect the Bay Area labor force to contract a further 1-1.5 percent in 2002," they said.
In addition to unemployment, the housing market is further influenced by contraction of household wealth. During the stock market euphoria that ended in March 2000, many young entrepreneurs became millionaires seemingly overnight, as ordinary Americans invested in record numbers in the stock market. This contributed to inflated housing prices. When the market crashed, housing prices declined, and many new homeowners who found themselves with a mortgage they could no longer afford put their homes on the market. The luxury home prices are likely to continue to drop in the first part of 2002 and are expected to stabilize by 2003.
"The silver lining is that the Bay Area has become a homebuyer's market," said Rosen and Bishop. With mortgage rates at a 30-year low, Bay Area homebuilders and real estate agents report brisker activity in November and December (after a brief lull following the Sept. 11 terrorist attacks). The slow-down in building during 2001 made oversupply less of a concern. Finally, homebuilders report that the migration of companies and employers to Sacramento and the Central Valley, to escape the Bay Area's skyrocketing housing prices, has slowed.