The housing market is looking like a complex puzzle that will take some deciphering.

That's the word from Dallas-based Metrostudy, a think tank that closely follows residential sales and construction.
The problem begins with a national economic picture that's full of contradictions, Metrostudy President Mike Inselmann said in a news release. Job growth is strong, but GDP growth isn't. Inflation is troublesome, but the Fed is expected to leave interest rates where they are.
Mortgage rates remain low, but the subprime cloud is a shoe waiting to fall.
"Almost every metropolitan market is experiencing a slowdown in new home construction driven by public builders' retrenchment and the need to reduce new home inventory," Inselmann said. "It's difficult to generalize much except to say that the national total of home starts this year will see a slowdown in activity for the second straight year."

That slowdown is expected to last into 2008.

"It looks like it will be next year before the market even stabilizes," said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. "We have a strong economy and affordable rates, but the issue of what happens with the subprime lenders is a major one."

Kyser said there were several differences between the current downturn and the one in the early '90s. We don't have the recession or the economic restructuring of the early '90s, and builders have learned from their overconstruction back then.

"We don't have the wild overbuilding now that we had then," Kyser said. "There has been some overbuilding, but not nearly as much."

Steve Johnson, the director of Metrostudy's Southern California office, says the local market has been slammed three times in the last three years.

"Both the new and resale market were hit, first by the bubble talk of 2005, then by the withdrawal of speculators in 2006 and now by the change in lending practices and the abandonment of subprime loans in 2007," he said. "Fortunately, this challenge to the market is occurring when the overall economy continues to provide demand for housing, although at a slower pace."

Johnson said one problem developers face in California is the length of the approval and development cycles.

"They are so lengthy in California that it is almost impossible to shut down large development projects," he said. "Thus, even in a tightening market, we continue to produce a significant number of lots."

Indeed, the cost of land, entitlement, development, infrastructure and fees will keep prices from falling too far, Johnson said.

"Those who have been on the fence need to recognize this market is different than any we have experienced before," he said. "Nobody is certain about the duration of the downturn."

A few observations on the local housing market from Metrostudy:

– Southern California's unemployment rate of 4.5% is better than the state's 4.8percent rate and close to the national rate of 4.4%.
– Housing starts in the six-county area were off 30% from the first quarter of 2006.
– 47% of Southern California housing starts were in the Inland Empire.
– The highest volume of starts was in the $325,000-$424,000 range, mostly high-density detached homes, condos and townhomes.