A housing shortage once the market fully recovers is one of the biggest concerns facing San Diego real estate, according to an economic forecast delivered to local agents by the chief economist at the National Association of Realtors (NAR) on Friday.

Reiterating many issues familiar to anyone in the local market, Lawrence Yun — speaking at the San Diego Association of Realtors’ Real Estate Summit — said the shortage of housing created by the historic lows in new home construction pose a potential crisis two to three years from now.

He said the conditions for an economic recovery in San Diego are in place, though it’s unclear what the recovery’s pace will be.  And if the job situation improves considerably, the all-time lows in homebuilding will be a big problem.

“I’m concerned with the lack of new housing,” Yun said. “There’s always volatility in home prices in coastal areas due to the difficulty of building. It’s possible if the job situation gets better, we could face a shortage when the distressed inventory is out of the system.”

This scarcity of supply would result in quickly escalating home prices that would be good for current homeowners, but bad for the industry.  “There would be more people priced out of the market and far fewer transactions,” he said. “Home building needs to reflect population growth.”

Before his speech, Yun said it was possible for San Diego to recover much faster than the rest of the country. “Coastal markets recover a little faster in terms of prices. All of real estate is local.”

“America is fortunate that it can print money and not have inflation, because foreigners still trust the dollar,” he said. “If the low-probability event happened and countries started to distrust the dollar, mortgage rates would increase very fast.”

On the national market, Yun observed that the mortgage crisis hit VA loans far less than others, even though VA loans don’t require any down payment.  “If people stay in budget, you will be OK,” he concluded.

He predicted that Fannie Mae and Freddie Mac will not exist as currently constituted in a few years.  “Fannie and Freddie got arrogant,” he said. “Twenty or 30 years ago no one knew they were alive they were (so) in the background. Then they created a huge hedge fund.”

He called for a return to their original business models, in which they used their implied government backings to borrow money cheaply and pass it along to consumers who couldn’t otherwise afford a home.  “Without government backing, things would dry up real fast,” he said.

Yun said he was pleasantly surprised that mortgage rates were capable of reaching their current lows.  He doesn’t anticipate an inflationary period, despite the Fed’s monetary policies.

Yun’s baseline forecast for the national economy included moderate GDP growth for the next two years of 2.5 percent, less than the historic average of 3 percent, but growth nonetheless.

He predicted the economy would add 1.5 million jobs annually, cutting unemployment to 8 percent by 2012, and eventually reaching the healthy watermark of 6 percent in 2015.

“Directionally, the worst is over,” he said.

Home values won’t move substantially in the next two years either locally or nationally.

He predicted that housing starts would jump 40 to 50 percent in 2011 to 900,000, still far short of the historic norm of 1.5 million.

He offered a best-case scenario forecast, as well: 3 million jobs created annually, with 4 to 5 percent yearly GDP growth resulting in an explosive increase in pent-up housing demand.

Answering an audience question on the oft-discussed shadow inventory of distressed homes, Yun said he believed the delay in their reaching the market wasn’t strategic, but a product of banks not having the personnel to complete necessary paperwork.

“The question will be if there are buyers willing to pick up the properties without a tax credit,” he said. “If not, naturally that will put downward pressure on prices.”

Repeatedly referring to the current market as being in a “period of pause” following the expiration of the homebuyer’s tax credit, Yun said an indication of general market health in the short term will be the market’s performance in the traditionally slow season from October through December.

If the market is 10 percent below those three-month periods in 2002 and prior — with adjustments for population growth — that would indicate that the market is recovering.

It would be cause for concern if the market performs 30 to 40 percent below those periods.

He included the 2009 fourth quarter as a relevant comparison as well.

It would be a positive indicator if the market is only slightly worse than last year, despite the absence of the tax credit that drove demand then.


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