For homeowners, 2004 record prices amount to a three-peat

For the third straight year, Southern California home prices broke records in 2004, soaring 23% from 2003, thanks to low interest rates and plenty of buyers. Prices rose even as the pace of sales held virtually unchanged from the year before.

The outlook for 2005 is still good for homeowners, but the rate of appreciation is unlikely to match the red-hot pace of recent years. Prices for homes listed at more than $1 million are expected to fluctuate 2% to 3%, while entry-level and move-up houses may command 15% to 20% more this year because there are more buyers than sellers, industry analysts say.

“The market will slow from 2004’s precedent-setting year” in prices, said Leslie Appleton-Young, chief economist for the California Assn. of Realtors. With interest rates expected to rise, some potential buyers may hesitate to invest in houses.

Or maybe not. This market has defied the typical housing-cycle pattern. The prolonged slump in interest rates unleashed a buying frenzy and made many homeowners rich, although job growth remained sluggish until last year. Even with continued job growth, uncertainties about inflation and interest rates could change the housing picture.

“It’s impossible to predict how this will play out,” said John Karevoll, an analyst at La Jolla-based DataQuick Information Systems. “But economic pressures out there must be addressed.”

In 2004, mortgage interest rates didn’t rise as was widely expected, holding close to the previous year’s record-low levels. Thirty-year fixed-rate mortgages averaged 5.8% in 2004 -- the second-lowest rate, behind 2003 when they averaged 5.44%.

The low rates helped sustain a sellers’ market, sending median home prices in Southern California up 23% to $395,000 for 2004. The median home price is the point at which half sold for more, half for less. Prices for new and resale homes and condominiums in L.A. County rose 24% to $396,000; in Orange County they climbed 24.6% to $522,000; Ventura County, 27% to $494,000; and in San Diego County, 21% to $459,000, according to DataQuick.

Prices for homes listed for more than $1 million peaked in the third quarter of 2004, then started to level off by year’s end, even beyond the usual seasonal decline, according to agents and analysts who track such data. Prices in that range may further flatten out in 2005, Karevoll said.

First-time buyers seeking lower prices flocked to the Inland Empire. But even there, buying was a stretch for those entering the market. Riverside County saw the steepest gain in Southland prices in 2004, rising 28% to $323,000, followed by San Bernardino County, which rose 27% to $249,000.

About 357,000 homes and condos were sold in 2004 in the six counties, down less than 1% from 2003, according to DataQuick. The average Southern California home increased in value by $87,332, “earning” homeowners $7,278 each month.

But for those who wanted to buy a home, the competition was fierce. Amy and Rafael Sanchez offered $500,000, the asking price, for a South Pasadena home last May without even seeing the interior. The house was being remodeled and was closed to prospective buyers, they were told. Adding to their stress, other bids were on the table for the 1,651-square-foot house, pushing the price up to $565,000.

Outbid, the couple, who had wanted to keep their 7-year-old son in the same South Pasadena school, bought an Alhambra home in August. The $470,000 price allowed them to landscape the property, and they are planning to paint and make additional upgrades.

“After all was said and done, the experience last summer left me sad,” Amy Sanchez said. “It’s just a cutthroat business transaction, rather than an exciting and rewarding experience. Wanting to plant roots in South Pasadena didn’t matter -- it was all about the money.”

Southern California agents benefited from the strong sales and high prices but say the overheated market forced them to work much harder.

Century 21 A Better Service Realty in South Gate posted a $2-million gain in commissions last year compared with 2003, representing a 29% rise in profits, said broker David Sarinana. The veteran Realtor said he saw many more buyers interested in purchasing in urban areas last year, where prices were lower, but the supply was down.

“We serve some of the poorest neighborhoods in the nation,” Sarinana said, “but even with that, we had an explosive year.”

The Westside, like most of Southern California’s coastal areas, had its share of disappointed buyers. Brett Vratil, a ZipRealty agent in West Los Angeles, was sure his clients were going to be selected in a recent multi-bid appeal for a two-bedroom, 1,400-square-foot home near La Brea Avenue and Washington Boulevard in Mid-City.

The seller was delighted with the young parents, who wrote a letter expressing their keen interest in the home. But as offers for the modest home, priced at $450,000, crept ever higher, the seller opted for the highest bid -- $20,000 over the asking price -- and the couple lost out.

Condos and townhomes provided an entry point for some Southland buyers, a trend that is expected to continue this year, said Jeff Masters, a real estate attorney at Cox, Castle & Nicholson. Downsizing boomers and young professionals not averse to living in denser housing complexes are leading the demand for the less-expensive, lower-maintenance lifestyle, including units in downtown centers of Los Angeles and Orange counties.

Builders such as KB Home Corp. are attracting first-time buyers to the condo market by offering amenities including clubhouses, exercise trails and entertainment rooms in their attached-home developments, extras most apartment dwellers do not have, said KB Home Chairman Bruce Karatz.

Overall in California, construction began on about 210,000 homes and apartments last year, up 6.6% from 2003, according to the California Building Industry Assn. Those totals mark the first time since 1989 that production topped the 200,000 mark.

Low interest rates provided mortgage bankers with a near-record $2.8 trillion in total loan volume nationwide, said Doug Duncan, chief economist for the Mortgage Bankers Assn. Home buyers were able to choose from a wide array of loans -- zero-down loans as well as “hybrid” loans, which allow buyers to lock in at a fixed rate for the beginning of the loan, then switch to an adjustable rate later.

Interest rates are expected to increase to 6.4% for a 30-year fixed-rate mortgage in 2005, according to Duncan. Those rates are low enough to keep buyers in the market, he said. Adjustable-rate mortgages, which make up 35% of the market share, will maintain their popularity.

In any event, economists say, 2005 will not disappoint.

“2003 was the mother of all years,” Duncan said. “2004 was an excellent year. 2005 will be a good year.”