A Slower Pace for Rising Prices

By DARYL STRICKLAND

Aug. 3, 2002 12 AM PT

Housing prices in Southern California are expected to rise much more slowly in coming months, reducing the exceptional gains that sellers have been enjoying this year.

Although no one is forecasting a drop in housing prices, market observers say median prices, which in Southern California have been rising by about 20% this year, probably will rise by about 10%.

“Prices will still increase, but not at 15% or 20% a year,” said Boyd Martin, chief executive of Market Profiles Inc., a real estate consulting firm in Santa Ana.

To be sure, the housing market remains muscular by almost any measure. Median prices in Southern California jumped in June by their fastest rate to an all-time high of $273,000. Mortgage rates remain near historical lows. Buyers are abundant amid a small pool of homes on the market.

But several factors are converging now, leading some analysts to believe the market is cooling, though not to the point of the rapidly declining prices of a decade ago.

Today in some communities, agents are advising clients to set prices toward the middle or lower end of the market.

“I don’t think we’ll see a market that tanks as it did in the early 1990s,” said Nima Nattagh, research director at FNC Inc., a consulting firm to the mortgage industry. “But there are grounds to believe that the appreciation we’ve seen for the last three or four years will not continue through the end of this year.”

An unusual burst of sales earlier this year cut into this summer’s pace. In June, for instance, analysts said sales growth in Southern California was flat for the first time.

Even though the housing market usually cools during the fall and winter months, the slowing in the coming months is expected to be more pronounced because last year prices and sales were unseasonably strong.

The California Assn. of Realtors has revised its latest statewide forecast, predicting prices and sales to rise in the 8% range in 2002, well below results through the first six months of the year.

“We are projecting that the increases in home prices will not be anywhere close to the monthly 20% increases we’ve seen,” said Robert Kleinhenz, a CAR economist.

The market also is likely to cool because home prices have been rising at a faster rate than household incomes, said Mark Robbins Boud, the principal at Real Estate Economics, a consulting firm in Laguna Niguel. Moreover, he said, a weaker job market, particularly in Los Angeles County, will temper appreciation.

The recent drumbeat of negative news also could affect confidence of home buyers. Some analysts say corporate scandals, a tepid economic recovery and a volatile stock market could shake the faith of potential buyers and cause them to reconsider.

“Anything that creates uncertainty works adversely against consumer confidence and has the potential to slow things down even more than we were expecting,” Kleinhenz said.

Another drawback could be mortgage rates that are expected to drift higher. Long-term fixed rates, after tumbling to a 35-year low, moved up this week to 6.43%, according to a national survey by Freddie Mac, the secondary mortgage investor.

Frank Nothaft, Freddie Mac’s chief economist, has revised down his year-end projection for mortgage rates to 6.7%. Such a rate, well under the 30-year average of nearly 10%, is not expected to have a significant effect on sales though every uptick in rates removes potential buyers from the market.

If mortgage rates moved up to 7.5% or higher, which is believed to be unlikely this year given the economy’s slow rate of recovery, affordability would plummet and demand would sharply fall.

The torrid rate of appreciation of housing prices in Southern California and elsewhere helped buoy Americans’ confidence about the economy and kept consumers spending through the stock market correction and the recession. But a possible slowing could mean housing would be less of a safety net during an economic slide and undermine consumers’ confidence.

The risk of a major drop in prices is much smaller now than in the late 1980s, Boud said, because key factors are less pronounced, given the lower rate of overpriced new homes, fewer job losses, lower mortgage costs and smaller housing supply.

In Los Angeles County, for instance, new home prices are overpriced by 5% compared with the peak of 55% a decade ago, he said.

“The last time around, we were suffering huge job losses and building homes at record levels,” said Boud. “It was a perfect menu for disaster. Those same elements are not around this time.”

Still, not every analyst is convinced the market will slow down. John Karevoll, an analyst at DataQuick Information Systems Inc., said prices will stay on their current course a bit longer.

“Until there’s a better balance between supply and demand,” he said, “I think rates of appreciation will stay about where they are right now.”

But he expects rising prices will prompt more owners to put their homes on the market. Sellers would have less room to raise prices as for-sale signs pop up on more lawns, which could slow the rate of growth, he said.

Even though current housing data show no evidence of a cooling market, some brokers said they are seeing signs, particularly in move-up and luxury-home categories.

A few months ago, buyers were paying top dollar for homes costing $1 million or more. But now they are balking at steep markups and taking longer to make purchases.

And some agents are advising clients to set prices toward the middle or lower end of the market, said Tom Dunlap, branch manager of Prudential California Realty in Beverly Hills. “I don’t think we’re going to see prices spiraling like we did in the first half of the year,” he said.

In the San Gabriel Valley, homes priced at a premium above $400,000 are staying longer on the market, said Marty Rodriguez, who owns a Century 21 franchise in Glendora. “People are a little unsure about the stock market and their jobs,” she said, “making some buyers hesitate a little bit more.”

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Up, Up and Away -- For Now

Southern California home prices grew at a rapid rate in the second quarter but are expected to slow in the coming months.

Price Sales Median Community Zip code appreciation* growth* price

Agoura Hills 91301 9.1% 21.1% $376,000

Alhambra 91803 12.3 5.6 242,500

Bellflower 90706 11.8 4.1 223,000

Boyle Heights 90033 0.7 0.0 151,750

Buena Park 90621 35.1 27.3 269,500

Claremont 91711 14.1 15.2 319,500

Commerce 90040 31.1 -23.1 187,500

Corona 92880 12.6 79.4 275,750