Sunday, December 26, 2004

A look back at the year -- owners pile up equity, rates still at rock bottom, agent ranks grow, industry battles online listings

House party 2004
A look back at the year -- owners pile up equity, rates still at rock bottom, agent ranks grow, industry battles online listings

- Kelly Zito, San Francisco Chronicle Staff Writer

First of two parts.

If you were fortunate enough to be at the Bay Area homeownership party in 2004, it seemed the drinks never stopped flowing. If you were on the outside looking in, however, it was one of the driest 12 months on record.

During the late spring and early summer, those who plunked "for sale" signs on their front lawns enjoyed a close facsimile of the 2000 frenzy, with all-out bidding wars and many contingency-free offers. But it was a tough year for first-time buyers.

Real estate agents regularly told of couples who wrote up offers on six or eight properties, only to be shut out time and again by the competition -- trade-up buyers armed with the healthy profit from another home sale.

It wasn't supposed to be that way.

Amid concerns about rising interest rates and a flagging economy, economists in 2003 had speculated that the U.S. and Bay Area housing markets would sag in 2004.

Instead, the nine-county region posted its best year ever, sailing past the records of 2003 and the halcyon days of the Internet boom. Strong demand, falling interest rates and signs of a tech turnaround buoyed the housing market amid a short supply of new homes.

"We've never really sensed that there would be a steep drop (in the market) like some forecasts," said John Karevoll, researcher at DataQuick, a real estate information firm in La Jolla (San Deigo County). "But we didn't expect it to be record breaking. Clearly there is more demand for homes than we thought."

An estimated 135,000 Bay Area homes and condos will have changed hands by Dec. 31, the highest number ever, according to DataQuick. The price for a single-family home in the region hit a record $560,000 in November.

If that weren't stunning enough, prices in some locales appeared to be fast closing in on the $1 million mark. In Marin County, the median price for a single-family home in November was a staggering $837,500.

If 2000 was the year paper millionaires ruled the real estate roost, 2004 was the year unforeseen lows in interest rates injected the market with an extra shot of adrenaline. But there were other factors at work: A chronic, tight supply meant there were more buyers than homes for sale.

The past 12 months also saw new developments in the way homes were bought, sold and marketed, as the number of real estate agents in the state and region soared and the Internet continued to exert its influence in an industry that hasn't always embraced technology.

Interest rates

With home prices soaring in 2004, interest rates and new types of loans kept mortgage payments in the realm of reality for many.

Earlier in the year, economists had expected the benchmark 30-year fixed mortgage rate to inch up to around 7 percent by year's end. Not only did a lack of inflation and a sluggish economy keep rates from rising, but they headed lower after peaking at around 6.34 percent in mid-May.

Last week, the average rate for a 30-year fixed loan stood at 5.75 percent.

"A lot of people expected inflation to go up, but it has stayed very tame, " said Doug Duncan, chief economist at the Mortgage Bankers Association, a Washington, D.C. trade group.

Even as rates on fixed-rate loans edged lower in the latter half of the year, more people turned to riskier adjustable-rate mortgages to offset higher home prices.

According to DataQuick, about 82 percent of homes purchased in the Bay Area in the second half of 2004 were financed with an adjustable-rate loan instead of a fixed-rate loan that has set payments for the length of the loan.

While the firm cannot tell what percentage of the adjustable-rate loans are interest-only, lenders such Wells Fargo and Quicken Loans say demand for that type of loan has increased.

Interest-only loans are attractive to financially strapped borrowers because during an initial period, borrowers can elect to pay only interest and no principal. Although the borrower isn't paying down the loan's principal as quickly as he would with a traditional loan, the monthly payments are lower. Once the principal comes due, however, borrowers can be slammed with much higher payments if interest rates rise.

Duncan and others worry that interest-only loans may be helping to artificially inflate prices in expensive markets, where those borrowers otherwise would be unable to afford a home.

But DataQuick's Karevoll contends lenders have calculated the risks, and banks are smarter about lending only to those who can make their mortgage payments.

Building permits

Another factor helping to maintain the Bay Area's lofty prices harks back to one of the first lessons in Economics 101: supply and demand.

Although the number of housing units built statewide in the past 12 months is expected to top 200,000 -- the highest annual total in 15 years --

the Bay Area total is well below recent peaks.

Roughly 24,000 single- and multi-family units will be built in the nine counties in 2004, down about 15 percent from 2003 and 16 percent below 2000, according to the Construction Industry Research Board in Burbank.

Much of the decrease is due to the completion of several large projects in the South Bay in 2003, said Ben Bartolotto, research director the board.

But home builders blame the tight supply on restrictive state environmental codes, cities' reluctance to convert commercially zoned land to residential use and local rules requiring affordable units.

A study published this year by a libertarian think tank in Los Angeles found that so-called inclusionary housing policies have boosted home prices by up to $44,000 and quashed construction of 10,700 units in the Bay Area.

But advocates for low-income residents say such measures are the only way to close the widening affordability gap and achieve social, economic and racial integration.

A separate study by the Bay Area Council found that if trends continue, the region's housing deficit -- now at 36,427 units -- will balloon to about 300,000 by 2030. The figure represents the difference between the number of homes needed to keep pace with job and population growth and the number of units constructed.

"The effect (of the housing deficit) is what we're seeing -- higher housing prices and folks being less able to afford a median-priced home," said Jim Wunderman, president of the Bay Area Council, a business-oriented public policy group. "It also means greater traffic, greater pollution and a worse quality of life."

Online listings

As Bay Area residents, home builders, environmentalists and city leaders engaged in the familiar battle over what and where to build in 2004, the real estate industry had its own internal skirmish.

This one was over the right to display home listing information -- the bread and butter of real estate sales -- on the Web.

Facing competition from discounters and upstarts like Emeryville's ZipRealty, the National Association of Realtors created a policy that would have allowed brokerages to keep the richest listings to themselves.

The policy was widely seen as a way for traditional, large brokerages to use their clout in the marketplace to the disadvantage of smaller firms that often charge lower commissions.

But the group was forced twice to delay the implementation of the policy -- originally scheduled for Jan. 1 -- after the Department of Justice opened an investigation into the plan on grounds it may violate antitrust regulations.

Online real estate firms got another legal boost after a federal judge in Sacramento found it unconstitutional for the state Department of Real Estate to require to obtain a broker's license to advertise home listings.

Such companies are helping squeeze commission rates across the board. Although there are no local data available, real estate industry newsletter RealTrends found that nationally, the average commission dropped from 6 percent in the early 1990s to 5.12 percent in 2002.

Influx of agents

Despite the challenges posed by decreasing commission rates and do-it- yourself real estate outfits, thousands of people have turned to a career selling homes.

As of this summer, the number of Bay Area agents had grown by 44 percent in the last five years, from 21,700 to 31,200, according to the California Association of Realtors. (That figure is likely much higher, because the trade group represents only about one-third of the agents in the state).

In the same period, the number of home sales in the nine counties has increased only about 10 percent. That means there are four transactions per year for every agent in the region, compared with nearly 5.5 deals per agent in 1999.

While consumers benefit from the increased competition by negotiating lower commissions, agents -- who are typically independent contractors -- are finding it more difficult to land listings in an industry where the annual income in the first few years can amount to $35,000 or less.

One side effect of the bursting ranks of real estate agents in 2004 was a spike in complaints. The Department of Real Estate, which licenses brokers and salespeople, received more than 10,000 complaints in the fiscal year that ended June 30, up 29 percent from the previous year .

Although the agency's research did not provide specific data on the types of complaints, enforcement chief William Moran blamed the rise on the growing number of license applications. In addition to gripes from consumers, the agency counts as complaints those cases in which a license application is flagged because of a criminal conviction or other problems.

Since July, Moran said, the number of complaints has declined.

Next week: What's in store for the Bay Area real estate market in 2005 --

including the thinking about a potential price bubble, the direction of interest rates and the prospects for bringing housing supply more in line with demand.


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