Home Prices May Be at or Near Peak

Those wanting to know where Southern California housing prices are headed may find some clues in a study released Monday that looks at where prices have been.

Christopher Cagan, an economist who works for title insurer First American Corp., compared the recent run-up in the region’s home prices to previous cycles and concluded that prices today could be at or near a peak.

In a study of 116 U.S. metropolitan real estate markets, Cagan found that the Southern California market tends to run in eight-to-14-year cycles.

Cagan said prices in Southern California’s markets -- Los Angeles-Long Beach, Orange County, Riverside-San Bernardino and San Diego -- have been in an up cycle since 1998, running about 20% to 40% above their long-term average annual growth rate of 3.2% to 6.2%.

The last time prices jumped by so much was in 1989 to 1990 -- a year now widely regarded as the peak of Southern California’s last housing boom.

“We won’t be seeing 20, 25 or 30% appreciation rates anymore,” Cagan said.

The bottom of the last cycle came in 1995 to 1997, when prices dipped 10% to 25% below their historical averages.

Cagan isn’t forecasting such a dramatic short-term decline, but he cautioned that prices would probably flatten, with modest increases in certain neighborhoods and modest declines in others.

Indeed, since the summer, home prices, particularly in Los Angeles and Orange counties, have started to flatten on a month-to-month basis, according to seasonally unadjusted data based on closed transactions.

In January, after nearly two years of prices appreciating at least 20% each month year over year, the rate of growth slid into the high teens.

“There won’t be a crash,” Cagan said, “but there won’t be a surge either.”

A big reason is persistently low mortgage rates, which have made financing home purchases less expensive and driven more buyers into the housing market.

Also, the supply of available houses for sale has been unable to accommodate the strong demand, and that has helped to drive prices higher.

For example, the monthly payment on a $100,000 mortgage in 2004 was almost half what it was in 1988, when the rate on a 30-year fixed home loan was 10%. Lately, the 30-year fixed rate has been less than 6%.

But as mortgage rates start to tick higher -- as most economists, including Cagan, believe they will -- the ability of consumers to purchase property will decline, putting downward pressure on prices and clipping the double-digit gains in appreciation that many homeowners have realized in the last few years.

“If prices decline 5%,” Cagan said, “that’s not the end of the world.”