This article was Posted on, 11. 26, 2005
 The Mercury News
Investors' paradise?
EXPERTS: HOUSE MARKET TOO HOT IN SAN JOAQUIN VALLEY
By J.N. Sbranti
Modesto Bee

Here's a new name for the San Joaquin Valley: ''Affordable California.''

That's what real estate economist Kenneth Rosen has started calling the valley, which attracts commuters and investors from California's high-priced coastal counties.

''A significant number of homes -- 20 to 40 percent of those sold -- are being purchased by investors,'' said Rosen, referring to transactions from Merced to Bakersfield. ``We're worried too many people are buying houses for investment, not occupancy.''

He warned that if interest rates rise, the valley's house prices may decline and investors could dump their investment homes.

Rosen spoke to nearly 500 business people last week at the 28th annual Real Estate and Economics Symposium, sponsored by the University of California-Berkeley's Fisher Center for Real Estate and Urban Economics.

Besides being chairman of that center, Rosen heads a real estate market research firm and an investment trust with $81 million in assets.

Home prices in the Northern San Joaquin Valley have soared more than 30 percent the past year. Stanislaus County's median sales price in October reached $387,000.

''Prices in the valley can't keep going up forever because they're going to become unaffordable even for people from the Bay Area,'' Rosen said after his keynote address.

During his speech, Rosen recounted a recent conversation he had with a limousine driver in the valley. The chauffeur told how he had purchased five valley homes to ''flip'' for a quick resale profit.

''The small-time investor thinks prices only go up,'' Rosen lamented. ''That day's about to end.''

He said too many people have forgotten what happened in the early '90s when California home prices plummeted. All they remember is that home values have been soaring for five years.

''It's really those low-interest rates that have pushed real estate prices up,'' he explained.

But because of rising prices, home affordability throughout California has become very strained.

''The only way people have been able to get into homes is because of easy credit,'' Rosen said. ``What they're doing is stretching.''

He said too many home buyers take out risky interest-only loans, put no money down and agree to so-called option adjustable-rate mortgages. Record numbers of homeowners also have been tapping their home equity with second mortgages.

''It's a recipe for disaster,'' Rosen cautioned. If interest rates rise, mortgage payments could soar and homeowners could be in financial trouble. ''We're stretched too thin. We've borrowed too much.''

Fortunately, Rosen expects the nation's economy to remain strong in the near future.

While California may continue its relative economic boom, these are not good financial times for many of the state's residents, according to another speaker at the symposium.

High housing costs are ''placing a severe economic squeeze on between one-quarter and one-third of all households in the state, ''said Anthony Downs, a senior fellow at the Brookings Institution and the former chairman of the Real Estate Research Corp.

Because of the housing crunch, Downs said there is a large-scale domestic migration out of California.

''The state is trading mostly middle-class residents who are leaving for many more poor immigrants from abroad,'' Downs said. ''So California's net population and poverty are both rising.''

Downs said housing costs are so high primarily because local government policies discourage new home building and construction of affordable multifamily complexes.

''Local governments determine how many and what kinds of housing units can be built, ''Downs said.

But since homeowners politically dominate almost all suburban governments, he said, too few developments are approved. That's because homeowners want to maximize the value of their own homes and prevent increased traffic congestion.

''The first goal is served by not permitting any more lower-cost housing to be built nearby. The second goal is served by preventing as much growth as possible,'' Downs said. ''To serve both goals, homeowners pressure local governments not to allow much new housing to be built near them.''

If that is allowed to continue, Downs said, ''There will be a permanent shortage of housing in California.''

To change that, Downs proposed mandatory zoning statewide that would require every home builder to create affordable housing units in a portion of every new development.

Downs said requiring 20 percent of new California homes be affordable could supply 24,000-to-40,000 additional low-cost housing units per year. That could include multifamily homes as well as small houses.

''State governments must assume a bigger role,'' Downs said. ''After all, the moral responsibility of the state government is the welfare of all its residents, not just the wealthiest or homeowners.''