Expert Predicts Plunge in Local Housing Market : Construction: High prices and an aging population are expected to reduce the need for new homes in Orange County to the lowest levels in 40 years.

ORANGE —  Demand for housing in Orange County over the next five years will plummet to the lowest levels since the initial population boom of 1950, a prominent local economist predicted Monday.

One result of the predicted housing bust, Chapman College economics professor James Doti warned industry leaders, will be the demise of dozens of area residential developers.

But the housing bust could be good news for home buyers, who may see a reduction in the average price of new homes, Doti said in an interview before his speech.

In the worst case, according to Doti’s figures, demand would be slashed from about 15,000 new and resale homes in 1989 to 4,800 this year.

And no matter what is done to improve the situation, he said in a speech to the local Building Industry Assn., it is likely that the county’s home builders are facing several extremely lean years.

The precipitous decline in demand, Doti said in the interview, has three basic causes:

- Years of furious price escalation have made the median price of existing and new homes here--about $250,000--more than twice the national norm. The average price of new homes alone is nearly $334,000.

- The disparity between home prices here and elsewhere discourages people from moving into the county, resulting in a slowdown in population growth from immigration.

- A sharp decline in the number of 25- to 34-year-olds, the prime home-buying group, as the Baby Boom generation ages.

In stark contrast to Doti’s numbers, Kenneth Laventhal & Co. predicts 17,000 new housing starts a year in Orange County during the next five years, said Michael L. Meyer, managing partner in the Newport Beach office of the national accounting and real estate consulting firm.

Meyer said the optimistic projection is based on the beliefs that builders are trying to keep a lid on home prices and that the area’s desirability as a place to live and do business offsets many price concerns.

Doti said his predictions were based on a study by himself and other economists at the Chapman College Center for Economic Research. The study was launched, he said, because financial deregulation and the rise of a global marketplace have greatly reduced the impact that economic changes traditionally have had on local housing demand.

“When you look at housing and ask why Orange County price appreciation runs so much higher than the national rate when the economic variables are now the same all over,” Doti said, “you see that the causes are things intrinsic to the county--things like the population mix, migration, the birthrate and local income.”

He said a comparison of historic data on personal income, housing prices and population growth in the county shows a 2% increase in population from in-migration for every 1% that the per capita income in the county exceeds the national per capita. The data also showed that there is a 1.5% decrease in in-migration for each 1% that local housing prices exceed the national norm.

Since 1980, the Orange County per capita income has ranged between 30% and 40% higher than the national average, Doti said. But the housing price gap has been much wider, with median prices 120% above the national norm.

That, he said, will result in a population change: Migration into the county will fall from a gain of about 10,000 this year to a loss of 10,000 a year through the first half of the ‘90s. Growth from the natural birth rate will keep the county from actually losing population, he said.

But the state Department of Resources’ population research unit projects that the 25- to 34-year-old age group in Orange County will diminish substantially, dropping from a growth of 5,000 in 1985 to a loss of almost 10,000 a year by 1993. And that could be a major disaster for the home building industry, Doti said.

The principal factor in creating demand for housing is the size of the county’s 25- to 34-year-old age group, he said, “because those are the prime years for household formation, when people get married, have children and want a house of their own.”

Those first-time purchases--often of resale homes--create the market for the upscale “move-up” housing that has become the staple of the county’s builders.

To offset declining demand on their businesses, Doti said, local builders are likely to cut profits; build more condominiums and fewer detached single-family homes; construct homes with fewer amenities; and pressure local governments to allow them to build at higher densities.

They also are going to have to augment their Orange County business by doing more development in outlying areas in Los Angeles, San Diego, Riverside and San Bernardino counties.

While most builders will tend to look at Doti’s predictions as too pessimistic, many agree that the industry is headed into a period of reduced demand.

“We are predicting a 10% to 12% decrease from last year’s volume of new homes sales, said Elliot Light, a housing market researcher in Garden Grove. “But we see a soft landing because there are things being done to mitigate the situation . . . and because we have relatively stable interest rates and lots of mortgage money available. So there still are buyers in the market.”

Light also predicts that as housing demand softens, land prices--a major factor in housing costs--will decline a bit.

And builders who had been specializing in luxury single-family homes are turning to less-expensive condominiums to help keep prices down.

“Doti is probably somewhat right,” said Magda Hanna, president and chief executive of Newport Pacific Development Corp. “The industry will go to smaller units and more condos and apartments. It seems the condo market really has taken off.”

Newport Pacific, traditionally a luxury home builder, currently has nothing but condominium projects in the works, he said. “We are switching to smaller condos in the $150,000 to $190,000 range.”

And, Hanna said, some in government are beginning to look at higher densities as a way to provide affordable prices.

“I recently met with a member of the Anaheim Planning Commission who said he was willing to consider for-sale housing at nearly the same density as apartments in some areas of the city,” Hanna said.

If such a rule were approved, it would increase the city’s maximum density for condos from the current 14 units per acre to as many as 36 per acre.