And yet, we fret
Ask economic and real estate experts about the notion of a current Southern California real estate market “bubble” and some just laugh.
“What bubble?” asked John Karevoll, an analyst with DataQuick Information Systems. “I don’t believe in bubbles.”
Dick Purvis, regional director with Re/Max, echoes the sentiment. “I don’t think there is such a thing as a real estate bubble.”
Nevertheless, while most experts make light of the notion of a bubble, many Southern California home shoppers, owners and sellers fear they are in one right now and it’s got to burst soon.
“People are nervous how long this market can go on,” said Jerry Berns, of Re/Max on the Boulevard in Encino. “I don’t have answers for them. I just say get on the merry-go-round.”
What’s pushing the panic button is the inching up of interest rates. Just the move from 5.96%, the national average for a 30-year fixed-rate mortgage in April, to 6.37% in June, according to HSH Associates, Financial Publishers, has provoked anxiety.
Sellers wonder whether now is the time to put their homes on the market, before rising interest rates push some buyers out. They agonize over whether they have waited too long and missed the peak. And buyers worry they’ve bought at the height of the market.
Take Kathleen Kovatch, 30, who recently moved to Los Angeles from Seattle, where she was a lead program manager at RealNetworks.
Kovatch suffered through the dot-com bust -- going from riches to rags overnight. Burned then, she fears she could be a victim again, this time of the real estate market. She called her recent home purchase a “surreal experience.”
“Initially, I thought, ‘I am not going to play this crazy L.A. game,’ ” she said. But because she felt her $2,400 rent was going to waste and she wanted to lower her income taxes, she jumped in.
After looking for a month, she recently paid $690,000 for an 800-square-foot home in Mar Vista.
Vying with five other buyers and being competitive, she went for broke, offering $41,000 over the asking price, and got the house.
“I am a businessperson,” said Kovatch, who works in digital entertainment for Sony. “I wanted to win. But I felt guilty enabling the insanity of this real estate market.... This was not a good business transaction.”
Kovatch financed her home with an interest-only 5.3% fixed loan that converts to an adjustable-rate mortgage in five years. Who knows where the market or interest rates will be in five years? she asked.
Like Kovatch, many buyers and sellers remember the mid-1990s: The median price for a Southern California home fell 16.7% from a peak of $189,000 in June 1991 to the low point in the market, January 1996, when the median was $157,000. Los Angeles County took an even harder hit. The median price for homes in the county peaked in May 1989 at $203,000 and then bottomed out in February 1995 at $158,000, a 22.2% decline.
Because of a sluggish economy, aerospace job losses and military-base closures, some homeowners suddenly found themselves unable to make their mortgage payments. As values dropped, many others found themselves owing more on their homes than they were worth. As a result, Southern California foreclosures -- grimmest during the first quarter of 1996 -- reached 30,529, more than four times the current quarterly average. By the close of 1996, a total of 109,123 homes were in foreclosure.
Those who fear a bubble point to the rapid run-up in appreciation, a hint of a speculative market (when buyers purchase and resell quickly for a profit), rising interest rates (especially worrisome for those with adjustable-rate mortgages), people owning homes that they probably can’t afford should there be an economic downturn and little inventory with strong demand.
Although creative financing by banks and mortgage lenders and historically low interest rates have helped many break into the housing market, some say these tactics could come back to haunt them.
“The lowering of interest rates was, in the short term, a good thing,” said Ed Leamer, UCLA Anderson Forecast director. “The Fed got concerned with a deflation animal lurking around the corner.”
But they “made a major mistake as far as I am concerned,” he added, because by keeping interest rates low, they created a situation that can’t be sustained.
Financing breaks and low rates have contributed to the new median-home record of $396,000 for Southern California recorded in May, according to La Jolla-based DataQuick. The region has had double-digit appreciation for 30 consecutive months. And in May, prices rose at their fastest pace in the 16 years the company has been compiling data.
As prices rise, fewer can afford homes. In Los Angeles County, for instance, the California Assn. of Realtors’ housing affordability index, which measures the percentage of households that can afford a median-priced home, dropped nine percentage points -- 29% to 20% -- from April 2003 to April 2004.
Leamer and other analysts are concerned that it looks as if the party may soon be ending. Interest rates are predicted to rise further, by an estimated 1% to 2%. And many experts say that interest rates of 8% will signal the end of the frenzy.
Some areas already are experiencing an increase in the number of homes for sale.
“There is suddenly more inventory on the market,” said Alison McCormick, with Strada Properties in Newport Beach.
“Interest rates are bumping up, and people are saying to themselves, well, maybe we’ve hit the peak and now is the time to sell.”
Real estate professionals are seeing the rise in interest rates as a rescuer that will bring about a “market correction.”
“You can’t have 20% appreciation indefinitely,” said Leslie Appleton Young, economist with the California Assn. of Realtors.
For some, these conditions are a welcome relief.
“This market has been hard on all the participants,” said Betty Graham, president and chief operating officer of Coldwell Banker Residential Brokerage in Greater Los Angeles. “It’s been an emotionally tough market. It would be good to have things be a little bit calmer.”
Although experts predict a gentle stabilization of prices, buyers fear the rise in interest rates could start a nosedive.
“I am panicky and nervous,” said actor London Fields, 35, who with his fiancee, Isabelle Chalepas, 33, recently purchased a 1,400-square-foot home in North Hollywood for $389,000. “What if we are forced to sell and we can’t get what we paid?”
But analysts say that for home prices to tumble, a huge economic downturn must take place -- like the one that occurred locally in the late 1980s to mid-1990s, when 29 defense bases closed, costing the state $10 billion in lost revenue and about 100,000 jobs.
“Back then, things were really grim,” said DataQuick’s Karevoll. “Los Angeles was shedding jobs like crazy. The country was in a recession. Things were bad in the country, worse in Southern California and even worse in Los Angeles. It was a real triple whammy.”
During this time, many major aerospace industries moved away or shut their doors in Southern California, eliminating thousands of jobs. At the peak in 1986, Southern California was home to 290,000 aerospace employees. By 2000, that number had dwindled to 117,000, according to Jack Kyser, with the Los Angeles Economic Development Corp.
Although the Southern California economy looks stable, more military base closures -- an expected 20% to 25% of capacity -- are expected nationwide by 2007. If California is hit disproportionately hard, as it was the last time, the closures could mean the loss of thousands of jobs and affect the housing market.
“It’s easy to forget how impactful that could be,” said Tim Ransdell, executive director of the California Institute for Federal Policy Research in Washington, D.C. “If key installations were to move or close, contract work would additionally be moved or closed, and that could cause a ripple effect. California can cross its fingers and hope the impact will not be the same this time.”
For the moment, all appears to be well. Analysts and experts point to a stable Southern California recovery. Although unemployment in Los Angeles County, 6.2%, is higher than the national average of 5.6%, the Southern California economic outlook still looks good.
And that, predict experts, means there will be no crash in the real estate market.
“People are still moving here,” said Re/Max’s Purvis. “That is not a sign of a bubble but instead good economic conditions.”
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How to scan the horizon for a slowdown
A common question batted about at social gatherings these days is: How long will this seller’s market continue?
Realtor Sol Taylor, with Re/Max on the Boulevard in Sherman Oaks, offered this list of conditions that can point to a loosening up of the real estate market:
* Inventory: More homes are for sale than there are buyers. “The inventory in the Valley and surrounding areas in June is higher than it was in May,” Taylor said. “And in May it was higher than it was in April.” But the number of homes for sale is still comparatively low, and there seems to be no shortage of buyers.
* Increase in the number of days on the market: Homes for sale an average of more than 30 days could indicate a shift. The California Assn. of Realtors reports that homes in April, the most recent reporting period available, were on the market an average of 25 days.
* Price reductions: “Reduced Price” signs can indicate a move toward a buyer’s market. While conducting a search of 15 homes for a client, Taylor noted, “six of the listings have been reduced recently. Two months ago, only one of those properties would have been reduced.”
* Repossessions: Banks start to offer REO (repossessed) properties for sale.
* More real estate advertised: The volume of advertising listing homes for sale dramatically increases.
* Realtor incentives: Realtors begin offering trips to Hawaii -- or other prizes -- to entice buyers. “I haven’t seen that in a couple of years, but I have seen two of those recently,” Taylor said. “After a property has been on the market for 120 days or more, Realtors tend to get desperate.”
-- Allison B. Cohen
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Allison B. Cohen can be reached at a.cohen@ix.netcom.com.
