Will L.A. home prices ever head up?

Yes, but foreclosures, demographics will make it a slow march

After a wrenching six-year decline, the good news is that Los Angeles house prices are no longer in a tailspin.

But here's the bad news: Experts anticipate no roaring rebound - and some worry that further drifting, or even declines, may be in the offing for many neighborhoods.

"People always ask me, 'When will I see my house worth what it was in 1989?' I tell them, 'It's going to be a while,'" said Fred Sands, president of Brentwood-based Fred Sands Realtors.

In L.A. County overall, home prices have fallen around 30 percent since 1990. But prices have been relatively stable in the last half of 1996.

A booming entertainment industry and a generally expanding local economy are finally placing a floor on prices - and even pushing up prices in some neighborhoods, Sands and others say.

"In Studio City, more than half of our buyers are in the entertainment industry," said Sands, adding that Beverly Hills is another hot spot.

Other stronger markets include Pacific Palisades, Santa Monica, Westwood, Brentwood and Bel Air.

The consensus is that homeowners in the leafier neighborhoods can expect to see a slight increase in prices, with the prices in more modest communities remaining flat or declining.

"I think we have another year of slightly negative changes for Los Angeles County as whole," said Michael Carney, executive director of the Real Estate Council of Southern California and a professor at Cal Poly Pomona.

George Rathman, chief executive at Prudental Jon Douglas, the largest residential brokerage in Los Angeles, said one good note is that sales are picking up.

"Usually, an increase in sales is the beginning of an increase in prices," said Rathman.

But economists caution that this real estate recovery is different from previous ones.

Specifically, high-cost housing is rising first.

In the third quarter of this year, for example, the pricier Westside-Santa Monica area posted a slight gain in housing prices - while prices in many parts of the San Fernando Valley and the Antelope Valley continued to decline.

That's not the way it usually happens. "Housing prices always start rising (and) recovering, in the entry-level housing first," said Walter Maloney, of the Washington, D.C.-based National Association of Realtors.

What's the explanation?

A continuing tide of foreclosures - including many in the quake-recovering San Fernando Valley - has gotten some of the blame for holding down appreciation in middle-class neighborhoods.

Through Sept. 30 of this year, the most recent data available, there were 27,700 foreclosures in Los Angeles County - putting the county on pace to easily eclipse the record 27,831 posted in 1995.

That compares to 2,600 foreclosures in 1989, according to Nima Nattagh, an analyst with Anaheim-based Experian Inc. a real estate research firm.

The rate of foreclosures, between 2,000 and 3,000 a month, is considered substantial when compared with the 5,000 to 6,000 houses sold each month in the county in 1996.

The data shows foreclosures are concentrated in the middle- and lower-priced housing, said G.U. Kruger, deputy chief economist with the California Association of Realtors.

The foreclosed homes, generally speaking, are re-sold by lenders - providing a steady supply of homes at fire sale prices and then softening the market for individual re-sellers.

"At this level of foreclosures, it will influence prices," said Nattagh.

There are other factors contributing to the soft market:

* The steep defense cutbacks of the early 1990s took many high-paying jobs out of the region, weakening demand for middle-class housing.

Foreclosures in L.A. County
(in thousands)

                             Number of
Year                       Foreclosures

1996(*)                        27.7
1995                           27.8
1994                           27.7
1993                           23.9
1992                           13.3
1991                            6.5
1990                            2.4
1989                            2.6

* Year-to-date, through September

Source: Experian

While the local economy is recovering, the number employed in the county remains below boom-time levels. There are now 3.9 million workers in L.A. County, compared with 4.2 million in 1989.

* The out-migration of people from Los Angeles, especially people in a position to purchase homes.

Evidence of this trend is fragmentary - and many economists believe that the number of residents leaving the county has, in fact, declined over the last two years.

But Gordon Pattison, senior vice president of Investors' Property Services Inc., a real estate management firm, said that for the year ended July 1, 1996, a net of 81,000 residents left L.A. County.

* Demographics. Just as demand for housing by baby boomers helped fuel escalating prices in the 1980s, the relatively fewer numbers of people in their home-buying years now contribute to a weaker market, said Ted Gibson, chief economist with the California State Finance Office.

In the 1970s, the number of Californians between the age of 25 and 34 - the typical entry-level home-buyer - surged by 58 percent, according to Department of Finance statistics.

By the 1980s, the growth rate tapered off to 32 percent. And in the 1990s, the number of 25-34 year olds actually is falling by about 5 percent, for the first time in the century.

As a result, Gibson said that while home prices appear to have bottomed out and may actually be inching up, they are unlikely to post a substantial, boost for another decade, when the next major population bubble - children of the baby boomers, or the so-called "echo-boomers" - hit the home-buying market.

"If you can hang on for another nine or 10 years, then you might see the market appreciate," Gibson said.

* Prices climbed too high in the first place.

In the 1980s, home prices in L.A. galloped far ahead of those in the rest of the country, climaxing in 1990 when an L.A. home cost a whopping 225 percent of the national average.

Even now, with prices having hit rock bottom, a house in L.A. costs about 40 percent more than the national average.

There are yet other obstacles to a real estate rebound, experts say - including the Federal Reserve Board's tight money policy designed to stifle inflation, as well as the availability of cheaper housing in other cities.

Despite the drop in Los Angeles house prices since 1990, local homes still cost dramatically more than the national average, or regional rivals.

For example, while a median-priced home in the third-quarter of 1996 nationwide cost $120,500, the median price in Los Angeles County was $171,580.

In Phoenix, a median-priced home costs $96,800; in Las Vegas, $113,500; and in Tucson, $100,500; and in Salt Lake City, $113,700, according to the National Association of Realtors.

Only the New York City area, Boston, Honolulu, San Francisco and Orange County have more-expensive housing than Los Angeles, according to the NAR.

In recent years, cooling local prices, yet rising national prices, have brought [TABULAR DATA OMITTED] national and local prices closer together.

But Gibson says he doesn't know if the trend will continue.

"Should there be a 40 percent premium on Los Angeles prices vs. the national median? 50 percent? I don't know, but I am pretty sure it shouldn't be double," he said.

Staff Reporter Larry Kanter contributed to this story.