Orange County’s median home price is expected to keep falling before rebounding by the end of this year, according to Chapman University economists led by President Emeritus Jim Doti.
The team released its economic forecast update on June 22 before several hundred guests at the Musco Center for the Arts on the Chapman campus in Orange.
On the national front, they stuck to their long-standing projection of a recession later this year: “All indicators point south.”
However, 2023 won’t be as bad economically as they predicted last December when it forecast a negative 0.4% for 2023. Now, a stronger than predicted first half caused it to revise upward its real GDP rising by 0.4% to $20.1 trillion this year.
Residential housing shows both negative points and good signs, according to the Chapman researchers.
They forecast that on a year-to-year basis the median home price in Orange County will slip from just over $1 million in 2022 to $930,000 this year—a decline of 8.8%.
Another Chapman statistic predicts OC’s median home price will fall 21% from its high of $1.087 million in the second quarter of 2022 to an estimated $857,000 in the third quarter this year.
Then it will rebound to $885,000 by the end of the year.
The Chapman forecast calls for a 6.6% decline in the number of building permits to 6,000 units this year.
That would push permit levels to about 6,000 units, roughly equal to that recorded during the COVID-19 recession year of 2020.
California’s 2023-24 budget for the general fund, which calls for a $9 billion surplus, will most likely record a $9 billion deficit, Chapman estimated.
‘Wreaking Havoc’
“On the residential property front, the lack of housing affordability is wreaking havoc on this all-important sector of the county’s economy,” according to the forecast update.
However, there are some signs of an easing of the market.
The Chapman economists predicted that lower mortgage rates will push up housing affordability somewhat in the second half of this year. It predicts the 30-year fixed mortgage rate will fall from 6.4% in the second quarter to 5.8% by the end of the year.
“While that’s not enough to lead to a meaningful recovery in home sales, it suggests that the worst may be behind us,” the researchers said.
According to Doti: “We see that home prices will level off.”
A big issue is the lower supply of houses for sale in OC and elsewhere.
“Homeowners are simply not putting their homes up for sale because they are sitting on sweetheart mortgage rates that they don’t want to give up,” Doti told the Business Journal.
“Why should they give up a 2% to 3% mortgage rate that they’ve been taking out over the last 10 years and swap them for 6% and 7% mortgage rates? So, there’s very little supply.”
Jobs Forecast
There was also a mixed message on the employment front.
The forecast calls for Orange County’s total payroll employment to rise on average by 1.4% from 2022 to 2023, for an increase of 24,000 jobs.
However, it added “the downward drift in job growth that began in early 2022 is forecasted to continue and turn slightly negative by year-end.”
OC business leaders have already been bracing for a recession, which has been predicted since last year.
“We have plans for investment and growth, hopefully recession-proof, for investment and growth into our future,” Tammy Cooper, the chief executive, chief financial officer and chairman of Irvine-based Technologent, told the Business Journal in March.
While clients of the Irvine-based accounting firm Haskell & White LLP are worried about a possible recession, “they are confidently moving forward with their strategic plans and adapting to change,” Managing Partner Wayne Pinnell wrote for the Business Journal last week.
‘Recessionary Forces’
The Chapman team reiterated its warnings about the need to attract more high-paying jobs in areas such as high-tech, software development, aerospace and medical products.
“Of greater concern than the short-run effects of recessionary forces is the long-run impact of Orange County’s deteriorating position in luring new advanced worker establishments,” according to the researchers.
Of 50 metropolitan-size areas studied for “advanced jobs,” OC was in the bottom 10 at No. 41.
The OC percentage of advanced workers decreased from about 2.5% in 2017 to just under 2.4% in 2022.
These establishments are an important indicator of generating high-value-added jobs that pay more than double the county average.
“On the brighter side, at least the county’s piece of the pie didn’t shrink as much as Chicago, Detroit, Los Angeles, or New York,” the Chapman economists said.
Doti and his team pointed the finger at the California tax burden as the likely main culprit for the poor performance in creating high-paying jobs.
The unemployment rate in Orange County was 3.2% in May 2023, up from a revised 3.0% in April 2023.
California, US
Doti and his team are among the most prescient economists in the nation. They ranked No. 1 on a list of 17 forecasters for real GDP growth from the period from 2004 through 2021.
They predict a U.S. recession will strike later this year as the economy will slow from 0.5% growth in the current quarter to negative 5.2% in the third quarter and then a 1.8% contraction in the fourth quarter, on a quarter-over-quarter basis.
Zeek Coleman, vice president of Americas of Tourism Economics, told a summit hosted by Visit Huntington Beach that his global research organization is bracing for a recession “but historically, it should be pretty moderate.”
Doti’s team also sees a weakening of the California economy.
Housing prices are one factor pushing people out of California, but not as important as high taxes and high business regulations, the Chapman president emeritus told the Business Journal.
The Chapman economists cited recently released IRS data indicating the total adjusted gross income (AGI) of tax filers in 2021 who moved to California was $21.3 billion as compared to $50.3 billion for those who moved out of the state. That spells a one-year net loss of $29 billion in AGI.
“Not only are people leaving the state but adjusted gross income is leaving the state,” Doti told the Business Journal.
On the national front, his team is “forecasting negative quarter-to-quarter annualized changes in real GDP during the third and fourth quarters of this year.”
Other presentations on the economy were made by Raymond Sfeir, a professor of economics, and Fadel Lawandy, director of Chapman’s Hoag Center for Real Estate and Finance.
Recession Ahead, OC Housing Recovery Signs
Here are some of the key points from Chapman University’s 45th Economic Forecast Update:
– Declining job growth and declining housing starts among the signs pointing to a U.S. recession this year.
n California job growth to slow to 1.3% from 5.6% in 2022.
– California net population decline increased to 407,000 in 2022, the highest level in the past six years, each of which reported an annual decline.
– Orange County jobs will grow by 24,000 from 2022 to 2023 but “downward drift” remains. Jobs are expected to grow 1.4% this year, down from 3.6% in 2021 and 5.3% in 2022. During 2020 at the height of the pandemic, they fell 8.5%.
– OC shows “deteriorating position in luring new advanced worker establishments.”
– “Our research suggests that the county’s (OC’s) dismal performance in generating new advanced establishments is mainly the result of California’s high taxes.”
– “On the residential property front, the lack of housing affordability is wreaking havoc on this all-important sector of the county’s (OC’s) economy.”
– Residential housing permits to decline 6.6% to 6,000 this year in OC.
