Rock-bottom mortgage interest rates and continued strong demand for a limited supply of housing propelled the Southern California residential real estate market into the record books in 2002.
Despite a slumping economy and early predictions of a real estate downturn, the Southland last year saw median home prices soar a record 16.5%, and home sales posted near-record gains in the region's six major counties, according to DataQuick Information Systems, a La Jolla-based research firm.
A total of 339,584 homes and condos sold in 2002 in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. That marks the strongest sales count for the region since 339,962 homes were sold in 1989, and it represents an 11.6% increase over 2001. Owners of median-priced homes at $269,000 in Southern California "earned" $38,977 -- or $3,248 a month -- just by holding on to their properties in 2002.
"Last year's numbers were wildly unexpected," said John Karevoll, a DataQuick analyst. "Lower interest rates opened doors faster than the high prices closed them and brought in a lot of potential home buyers who were on the outskirts."
Riverside County posted the biggest sales increase at 18.8%, followed by San Bernardino County at 13.3%. Orange County sales rose 12%; Los Angeles County, 9.4%; San Diego, 9.8%; and Ventura County, 8.9%.
Driving the home-buying surge were mortgage interest rates that hovered around 6.2%. In October, the rates hit 5.69%, a 40-year low, according to the National Financial News Services.
"We've never seen anything like last year's mortgage interest rates," said Doug Duncan, chief economist for the Mortgage Bankers Assn. of America. "It's been a terrific year, and consumers have benefited hugely."
Strong demand for homes pushed median prices to record highs in the region's most populous counties. In San Diego County, the median soared 20.5% over the year before, to $323,000, followed by Los Angeles County, which saw a 17.4% increase, to $263,000, according to DataQuick.
Ventura County saw a gain of 16.9%, to $325,000; Orange County, 16.8%, to $354,000; Riverside County, 14.1%, to $210,000; and San Bernardino County, 9.5%, to $161,000.
Low interest rates and flexible loan programs opened the door to homeownership for large numbers of first-time buyers who couldn't afford the monthly payments previously.
First-time buyers made up 36% of the home-buying market in California last year, according to Leslie Appleton-Young, chief economist for the California Assn. of Realtors. She added that entry-level buyers, challenged by the steep spike in prices, sought homes farther from job centers.
But even those who flocked to the Inland Empire, where some of the most affordable homes are for sale, experienced sticker shock in 2002.
"It surprised me how smaller, entry-level homes went way up in price," said Harold Doshier, a Realty Executives agent in Riverside. "So many [people] can afford only under $200,000, and they were out of luck. Those homes are very hard to find, especially in good neighborhoods."
Southern California buyers who bought a median-priced home last year with 20% down and financed it with a 30-year fixed-rate mortgage paid $1,299 in monthly mortgage payments, 10.2% higher than the $1,178 for the previous year, Karevoll said.
Nonetheless, Southern California real estate agents report that more entry-level and mid-range buyers jumped into the market than at any time in recent memory.
"We're seeing first-time buyers in the $300,000 range," said Mike Cocos, manager of ERA North Orange County Real Estate in Yorba Linda. "It's funny to even say that. Move-up homes were $300,000 just a few years ago."
Home-price appreciation lifted more Southern California homes over the million-dollar mark last year. About 7,320 homes sold for a million dollars or more in the Southland in 2002, up 50.5% from 4,863 in 2001, according to DataQuick.
On the Westside, 276 homes sold in the $3-million range in 2002, compared with 196 the year before, said Betty Graham, manager of Coldwell Banker in Beverly Hills. In the $10-million-plus range, 24 homes sold from Los Feliz to Malibu, up from 16 properties a year ago.
As prices appreciated across the region, the number of homes going into foreclosure fell to their lowest level since 1992, according to DataQuick. About 45,500 notices of default were recorded in 2002, down 4.5% from 48,017 in 2001.
The mortgage banking industry saw record-breaking activity last year, as some homeowners refinanced multiple times amid tumbling interest rates. According to DataQuick, refinancing applications in Southern California climbed 50.5% to 970,000, from 644,627 in 2001.
"This year was one for the history books," said Doug Perry, first vice president of Countrywide Home Loans. For the second consecutive year, the company posted a record in total loan volume.
New-home construction in Southern California, which has lagged demand for a decade, increased last year, although it still fell far short of the area's need.
About 50,100 newly built homes were sold last year, up 13.5% over 2001, when 44,121 new homes were sold. That rise represents the strongest increase since 54,521 new homes were sold in 1989. The median price of a new home was $338,000, up 10.1% from $307,000 in 2001.
The Burbank-based Construction Industry Research Board projects a 3.7% increase in new-home construction statewide in 2003, with strongest growth in multifamily housing.
While economists generally are bullish about prospects for a healthy residential real estate market next year, some factors could dampen that outlook.
Job growth, a key factor in home-sale activity, slowed last month, as Los Angeles County lost 18,200 jobs compared with last year, and Orange County shed 8,600. Those losses were offset, however, by a gain of 22,000 jobs in the Inland Empire, where continued strong growth in the job and housing markets is expected this year, said Michael Carney, real estate professor at Cal Poly Pomona.
So far, the negative effect of job losses has been mitigated by low mortgage interest rates, but rates are expected to slowly inch up, peaking at about 6.8% nationwide in the fourth quarter, the MBAA's Duncan said.
"Rates would have to climb to 9.5% before home prices decrease, though," said Raphael Bostic, director of USC's Casden Real Estate Forecast. "But that's a long way from now."
Uncertainty, such as that generated by corporate scandals or the threat of war, can restrain consumers, especially those considering large purchases. A long engagement in Iraq, for example, could have an effect on the housing market, while a short-lived conflict could create a surge of consumer optimism.
Affordability is expected to worsen somewhat next year but will not reach the low levels of the early 1990s, when home prices dropped dramatically. Median home prices are expected to increase 9.5% statewide, Appleton-Young said, a drop of 2 percentage points from 2002. Home sales will drop about 5.2% in 2003, she said, however, it "still is going to be the fourth-strongest year on record."