Forecasters at Chapman University are asking the same question many Orange County residents are wondering: Who can afford to buy a house here?

The school’s semi-annual economic outlook, released Thursday, June 23, calls for a 14% reduction in the local average selling price through June 2023, one of the first predictions of a significant decline in home values. The average house price in Orange County is projected to rise from $1.03 million in the first quarter of 2022 to $891,000 by mid-2023. This year alone, sales will fall by 20%.

The home depreciation formula relies heavily on higher-priced mortgages, creating huge affordability issues after prices rose 30% in the first two years of the pandemic era. Mortgage rates will rise from less than 3% in 2021 to Chapman’s forecast of 7% ahead of the country’s looming recession.

Yes, the county’s overall economic recovery from the coronavirus-related business problems is progressing. Chapman expects local bosses to add 81,000 jobs this year — a fast 5.1% job growth — after hiring 47,000 (up 3.1%) in 2021.

But Orange County’s projected 1.66 million workers this year will still be 14,000 fewer than before the 2019 pandemic. And Chapman’s economists are concerned that about half of recent hires work in the leisure and hospitality industry, where salaries tend to fall far short of those of homebuyers.

And don’t forget the county’s declining population—four years in a row, an average of 6,000 fewer residents—as another constraint on housing demand.

“Look at how many days it takes on average to sell a home,” says Jim Doty, a Chapman veteran who oversees the Orange County economy. “It has more than doubled in just a couple of months, right? So the market is definitely changing, and the main reason is mortgages, the impact on payments, and why affordability is falling.”

Chapman’s previous forecasts were one of the few nationwide forecasts in which questionable inflation came from a sustained economic recovery from the pandemic-driven business crisis. How did so many “experts” miss the effects of an overstimulated economy – and the obvious next step – higher interest rates?

“I can’t answer that question other than to say that people don’t know the story and don’t believe in it,” says Doty. “That brings you to the tulip mentality, bitcoin mentality, that the markets are just going to keep going up.”

The Fed’s cheap money policy was coming to an end. Mortgage financing will rise in price. Home buying should have slowed down.

“We said we would get out of the 2020 recession quickly with strong growth,” says Doty. “But such rapid growth in spending and COVID-19 relief checks given out to businesses, states and individuals will lead to higher inflation. It was easy to do that.”

Rising rates should also spur real estate investors to consider the safety of government bonds, which are now earning 3%, compared to suddenly risky housing investments that may be worth 4%. Doty says that if investors want real estate deals to increase yields up to 5% to offset the additional risk, that means a 12% drop in property rental prices.

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