Realtors Expect a Strong 2005

The California Assn. of Realtors on Monday predicted another strong year for real estate, with the state’s median home price slated to rise 5.6%. But there’s a big caveat: It all depends on how far and fast interest rates rise.

The same dynamics that marked 2004 -- rising prices, tight supply and stubbornly low mortgages -- are expected to be in force again this year, the Realtor group said in its annual market survey.

The trade group, like many in the housing business, predicted that the 30-year fixed-rate mortgage would come close to 7% by year’s end, up from the current 5.75%, as the economy strengthened.

But if economic conditions heat up faster than anticipated, rates could start accelerating beyond the forecast, said Leslie Appleton-Young, the group’s chief economist.

“This is the biggest risk facing the housing market in 2005,” she said.

Already, potential home buyers are facing escalating prices and many are stretching financially to obtain a mortgage, the group said. In 2004, the median price of a single-family house reached $495,000, from $400,000 a year earlier, based on the group’s random sampling of transactions during the second quarter. This year, the price could reach $522,930, the group said.

On one hand, the tremendous appreciation handed homeowners wealth in the form of equity and afforded many a chance to move into bigger homes or purchase second properties. Median net cash to sellers rose 36% to $204,386, the survey found. That liquidity was a factor buoying the state’s property market.

At the same time, the share of first-time buyers dropped to a low of 26%, the Realtors said. A rise in mortgage rates and higher prices this year would push down that number even more.

Those who did buy a house had to borrow more, resulting in a 33% increase in the median first-mortgage amount to $304,000. And a growing number of first-time buyers took on second mortgages, pushing the share of first-timers with secondary financing to 57.2% last year, from 36.4% in 2003.

First-timers also used smaller down payments, the Realtors said. The median down payment dropped 27.6% to $18,450 last year from $25,500 in 2003.

With less money, first-timers relied more on lower-rate adjustable-rate mortgages, or ARMs, the survey said. The proportion of buyers who financed their purchases with ARMs nearly tripled to 33.3% from 11.9%.