Market slows, but it’s still a go
Southern Californians who expected their home values to tumble mightily in the first half of the year can breathe a sigh of relief. Home prices remained high even as the rate of appreciation slowed and home sales fell slightly.
The median price of a Southland home rose 17.2% to $444,000 in the first half of 2005, compared with the same period in 2004 -- a slowdown from the high-flying appreciation rates of 24.7% the year before -- according to DataQuick Information Systems, a La Jolla-based service that tracks property transactions. The median is the price at which half of all homes sell for more, and half sell for less.
The number of homes sold across the Southland from January through June might not have kept up with the record-breaking sales of 2004, but it was still formidable. Not surprisingly, sales in Riverside and San Bernardino counties, where prices are still relatively affordable, accounted for about 31% of all Southern California home purchases.
Though in January the region saw price appreciation gains of 21%, that rate slowed to 14.5% in June, which, analysts say, isn’t necessarily a bad thing.
“The fact that prices are going up more slowly means the likelihood of the market crashing is less,” said John Karevoll, DataQuick’s chief analyst. “A soft landing is the more probable scenario.”
Several analysts predict that the rate of appreciation in the Southland will slow to between 6% and 9% by the end of year.
San Diego County already has entered that territory. Prices there rose just 6.3%, to a median price of $493,000 in June, compared with 19% a year ago; sales declined 8.8%. That represents the slowest rate of appreciation in Southern California’s six largest counties and may be a harbinger of a more widespread slowdown.
So far, however, overall sales of houses and condominiums in Southern California remain strong. They were down just 2.1% from January through June, compared with the same period a year ago -- still among the highest on record.
“The market exceeded our expectations, and through March and April was very, very strong,” said Leslie Appleton-Young, chief economist for the California Assn. of Realtors.
Despite the soft landing some economists predict, market pessimists still worry about some troubling signs: California home prices that have outpaced wage growth, the expectation that interest rates will climb and the specter of a massive sell-off of homes that were purchased by barely qualified buyers who can’t make the payments on their interest-only mortgages when rates go up.
In many of California’s markets, income growth severely lags housing price growth, according to several studies, but it would take a year of rising unemployment and slumping wages to burst the state’s housing bubble. That recessionary picture is not on the horizon.
Mortgage rates, which were forecast to rise during the last year and still are expected to climb, have remained low. It’s anybody’s guess when they will increase, Appleton-Young said. Federal Reserve Board Chief Alan Greenspan signaled last week that short-term rates, which historically have influenced mortgage rates, will continue to inch up; the Fed has raised them incrementally to 3.25% from 1% in the last year.
The surge in interest-only mortgages -- the single fastest growing segment of the mortgage industry -- has some economists worried. The popular option allows buyers who would not qualify for 30-year fixed mortgages to get approved for these loans, which offer low fixed rates for three or five years, but then convert to sharply higher payments. That could force some owners to sell their homes, possibly flooding the market.
Fears of rising interest rates already have prompted some borrowers to refinance, said David Soleymani, managing director of First Capital Mortgage in Santa Monica. Borrowers who were three years into an interest-only loan fixed at 4.25% for five years recently switched to a mortgage that is fixed at 5.87% for 10 years, he said. They traded a $3,400 monthly payment for one that’s $4,700 but guaranteed not to budge for 10 years.
“They’re paying a huge premium, but they’re getting 10 years’ protection instead of the two they had left,” Soleymani said. “They can now ride out a whole interest-rate and housing cycle without worrying about an increase in their payments.”
If long-term mortgage rates rise no more than 2 percentage points, the real estate market should experience few shocks, economists say. A more precipitous climb could result in an increase in foreclosures and a reverse in housing activity.
“I don’t see anything likely to cause any radical changes in the market,” said Michael Carney, finance and real estate professor at Cal Poly Pomona. “If people start getting panicky about the bubble business, that can have a psychological effect on the market. But that’s not happening.”
If anything, buyers are jumping at opportunities to get into houses, even at the high end, where sales fluctuated during the first half of the year. In Calabasas, a waiting list for properties in New Millennium Homes’ the Oaks development is 60 buyers long. The luxury homes, from 3,500 to 6,500 square feet, sell for about $1.8 million to $2.5 million.
“This has been an incredible market,” said Geri Schonberg, director of sales for the company. “We’ve had people fight over these homes. Demand is that strong.”
