Sunday, January 30, 2005

It's not a bubble, just a slow leak

By Gregory J. Wilcox, Columnist, Daily News

Looks like we can lock the real estate bubble-bursting scenario away in the attic with its economic hobgoblin cousins, at least for a while.

One thing is certain, though. The residential real estate market of the foreseeable future will be similar in many respects, and different, from today's.

That seems to be the consensus of a flurry of market reports, forecasts and analysis that arrived throughout last week.

The best news for current owners is that the price bubble probably won't be bursting. It came during a panel discussion at the Los Angeles County Economic Development Corp.'s yearly forecast.

The news seemed grim at first because economist G.U. Krueger of IHP Capital Partners was going to talk about the housing bubble. And when someone is going to talk about a bubble right away there's expectation of a very big pop.

Not gonna happen, though.

Krueger's company invests in real estate and helps advise the California Public Employees' Retirement System where to put its considerable amount of money. They are still going to invest in residential real estate.

And we have to be careful about how we characterize a bubble, too.

What may happen with this price bubble can be summed up in three words: a slow leak.

"I don't think prices will come down. But we call it a bubble ... and get all bent out of shape," he said.

Others agree with him, including Jack Kyser, chief economist at the Los Angeles Economic Development Corp.

Owners probably won't get those 20 percent annual returns on their investment of the past few years. It may be close to 10 percent.

Kyser thinks by this time next year, the 30-year, fixed-rate mortgage may be around 6.5 percent. That's where they were expected to be by now and that's a level still considered manageable.

"As we move into this year you are not going to see the double-digit rates of appreciation. It's going to really simmer down," he said.

That's the leak.

There are areas of concern, though, notes the Los Angeles-based California Association of Realtors.

But most people trying to buy that first house will likely find it a daunting experience because prices are going to keep rising. Last year only 26 percent of the buyers were first-timers, and that is expected to keep sinking, the association predicts.

It's going to take more cash and creativity to get into a home, too, if last year's market is any indication.

Here's what a typical first-time buyer profile looked like last year.

Between the ages of 30 to 40 years old with the median age of 32.

Nearly half were married and about 33 percent single.

More singles pooled resources and co-owned properties. Shared purchases increased 13.2 percent last year.

The annual salary was $75,000 and the median price of the house $401,500.

During 2004 the median amount of that first mortgage increased 33 percent. And more first-time buyers took out a second mortgage, too. This kind of financing increased to 57.2 percent last year from 36.4 percent in 2003.

And adjustable rate mortgages jumped almost threefold, to 33.5 percent last year from 11.9 percent in 2003.

Leslie Appleton-Young, the vice president and chief economist at the association, said that this year first-time buyers are going to have to exercise options like never before.

"They are either going to have to get loans from family members, they are going to have save longer and more aggressively to get a down payment or they are going to have to compromise on size or location," she said.

And hopefully they can capture some appreciation before the bubble really does burst.


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