Crash in California real estate prices 'very unlikely,' Fed economist says

January 27, 1991|By Jamie Beckett | Jamie Beckett,San Francisco Chronicle

SAN FRANCISCO -- A crash in California real estate prices -- widely predicted by many observers -- is "very unlikely," economist Randall Pozdena of the Federal Reserve Bank of San Francisco said last week.

That's because California housing is tied so closely to the state's overall economic activity, he said. California housing prices would fall drastically only if the state's economy goes down hill -- which Mr. Pozdena considers unlikely.

"If we are in a recession, we can expect some softening of prices, but nothing more dramatic than the

weakening of the economy itself," he said.

That puts Mr. Pozdena in opposition to recent predictions made in Forbes magazine and by Prudential-Bache Securities.

For example, Prudential-Bache analysts George Salem and Donald Wang project a price drop of 25 percent or more in California real estate by the end of 1991. The state's "great real estate boom is over," they declared.

Not so, Mr. Pozdena said. The sixfold increase in home prices in the state over the past 20 years was not fueled by speculation but rather by a growing population and a high level of economic activity, both of which are likely to continue, he argues.

The state's high productivity offers another sound economic reason why California real estate prices are so high compared to national averages, he noted.

California's gross state product of about $7,500 per acre is three times the national average of $2,500 per acre.

In past economic downturns, housing prices have dropped in proportion to the economy as a whole, Mr. Pozdena said.

He also dismissed worries about the impact the troubles of the defense industry might have on the state's economy or housing market.

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