Want to sell your house for less than what it cost you?

Owners are increasingly caught in a financial trap

For generations, Southlanders have considered it a birthright to sell their homes for more than what they paid. But no more.

In the three-month period ended July 31, nearly one-fifth -- 17.6 percent -- of home sellers in Los Angeles County lost money when unloading the homestead, according to La Jolla-based Dataquick Information Systems.

And as the two-year-long recession's shadows lengthen on the Southland, the fraction of home sellers who are seeing California gold turn to lead is on the rise.

In the like May-July period last year, just 8.6 percent of home sellers lost money, and two years ago only 2.3 percent of sellers were in the red.

Of homes sold for a loss, this typical picture emerges: The house was bought in November 1989 for $233,000, and sold between May and July for $216,000, according to John Karevoll, a Running Springs-based real estate data expert who extracted the figures from Dataquick's files.

"These are hard figures," he said. "There is no problem with a change in the mix of housing sold, which could confuse the data. Many people are selling their houses at a loss."

To be sure, most homeowners still have equity in their properties.

Indeed, most who bought their homes before 1989 could still sell at a profit, said Esmael Adibi, professor at Chapman University in Orange and director of the Center for Economic Research at the school.

"People who bought in 1988 or before still have equity left in their home. Basically, housing prices have been pushed back to 1988 levels," said Adibi.

Still, the change in real estate values -- most importantly, the change in direction of real estate values -- will require a major, psychological adjustment on the part of homeowners, many of whom have become used to having hundreds of thousands of dollars of equity stored up in their homes, said experts.

"The house (price) slump means lots of instability psychologically, which leads to consumers and businessmen holding back," said Stan Plog, a trained psychiatrist and chief executive at Reseda-based Plog Research Inc., a marketing consulting firm.

"That will mean a very slow economic recovery," Plog said.

Added Adibi: "It is the wealth effect. People who take paper losses cut back expenditures. People spend by the amount of wealth and income they have. And now their wealth has been reduced."

About half of Southland homes are owner-occupied, according to the U.S. Census Bureau, and homeowners are generally more affluent than renters. Consumer tenderfootedness by homeowners would have a major impact on the economy here.

For the already struggling Southern California economy, the prospects of a prolonged house price slump are dire, said David Hensley, director of the UCLA Business Forecasting Project.

In a recent report, he wrote that a "vicious cycle" may be emerging in California, with some households running out of cash reserves, and thus reducing expenditures, while homeowners suffer paper losses on their homes, and subsequently also curtail spending.

"The most plausible driving factor behind (a prolonged recession) would be a significant, renewed fall in home prices," wrote Hensley.

In fact, retail sales in Los Angeles County are already badly lagging. In June sales were off about 7 percent from a year earlier, after adjustment for inflation.

Nor are homeowners the only ones to suffer from tumbling property values. Many owners of small and medium-sized industrial properties have seen values become uncertain, said Mike Meraz, of downtown Los Angeles-based Magnum Properties. "For a lot of these guys (property owners) their bottom-line net worth is tied to their property. When it is worth less and less, they feel insecure."

For thrifts, banks and other lenders, the prospects of a continued slump in property values are alarming -- already foreclosure and notice-of-default rates are up, and eating into lender profits.

The major New York bank, Citibank, has been alerted to Southland risks recently by a confidential report authored by Berkeley real estate expert Ken Rosen. According to the Los Angeles Times, one part of the pessimistic report cited Los Angeles' dirty air, traffic congestion, relatively high cost of housing and crime -- particularly in the wake of the April riots -- as factors that hurt housing here.

The $64,000 question in Southland real estate circles is: When will real estate prices bottom out and begin to rise again?

Opinions are mixed, but few see a rebound soon.

Citing a tight federal money policy and the relatively high cost of Southland housing, Michael Bazdarich, head of MB Economic in La Canada, said. "These days you buy a house for shelter; don't have the delusion it's an investment. The best case is that house prices will stabilize. ... I think housing prices will move lower for the next few years."

Larry Kimball, UCLA economist, also cites lower housing costs in other regions as a major, long-term depressant on Southland housing. "I don't see an equilibrium in housing prices here soon," he said. "In the late 1980s, people justified paying a lot for a house on the theory the price would go up further. Now you don't have that."

Kimball recently studied the regional economy of Pittsburgh, a city that lost its steel industry -- a business that defined that city -- in the 1970s and 1980s. Los Angeles is undergoing a similar wrenching change with aerospace and general manufacturing in decline.

Pittsburgh eventually replaced the lost steel jobs with employment in finance and services, noted Kimball, although the process took six years.

But the region lost population, and Kimball noted, "Their house prices were never as overpriced as Los Angeles."

By Los Angeles standards, housing in Pittsburgh has stayed at bargain-basement prices. Even today, an existing single-family detached house in Pittsburgh sells for a median $80,100, according to the National Association of Realtors in Washington, D.C. That's less than half of Los Angeles' median price of $195,000.

"We still have a long way to go," said Kimball, in calculating how much local house prices would have to decline to begin to be competitive with those in other regions.

A little more optimistic on house prices was Adibi of Chapman University. While he foresaw no house price appreciation until 1997, he said the regional economy should begin to pick up in 1993, and house prices then should at least firm. "The same thing happened in 1982" following the 1982 recession, he said. "You had a period where house prices rose after 1982, but only slowly. Then in the late 1980s, they went up again."