Tuesday, January 18, 2005

Market heading up or down? It depends on whom you ask


RONI GALGANO / Union-Tribune
Susan Marshall and Paul Devine watched their 11-month-old son Miles crawl in the front yard of their Normal Heights home, which they plan to sell next month.
With San Diego County's booming housing market showing signs of a slowdown, consumers are getting mixed messages about whether to expect a return of runaway prices, a steep drop in real estate values or something in between.

While the region can look forward to continued appreciation in housing prices, the customary annual gains of 20 percent and more are likely to taper off to more moderate levels this year, according to real estate professionals and most economists.

There is, however, a contingent of dissenters who say that housing prices will drop. Should that occur, the consequences could be greatest for heavily leveraged homeowners, who are counting on rising values to make large investments pencil out.

"We still have a shortage of housing, and as long as you have a shortage, the supply and demand factor kicks in," said longtime real estate agent Marjorie McLaughlin. "You probably won't see the huge jumps in appreciation we've had. It might be more like 6 to 8 percent per year."

San Diego County could be in a more precarious position than other areas because the most recent home buyers have relied on adjustable-rate loans, typically with low-cost introductory rates.

If home values start to slide and mortgage rates rise, those who bought at the peak of the market may find themselves unable to refinance their adjustable-rate loans, experts say.

Economists are predicting that interest rates this year will rise as much as 1 percentage point from their current level of about 5.7 percent for a 30-year, fixed-rate loan.

Anthony Downs of the Brookings Institution is advising Californians who are thinking of selling to do so quickly while the market is at or near its peak.

"I can't believe we can sustain this 20 percent annual increase," he said. "In the state as a whole since 1999, the median price has gone up 123 percent. That is three times as much as the country as a whole. Incomes have not gone up much at all."

Yale economist Robert Shiller, author of "Irrational Exuberance," is known as a naysayer who often gets it right. He says home prices here are poised to drop and he dismisses arguments that the low housing supply and diversified economy will keep prices strong. The gap between rising home costs and largely flat wages is so great that a sharp correction is inevitable, he said.

What pessimists fail to take into account, however, is the strong desire to live in Southern California, said Lawrence Yun, senior economist with the National Association of Realtors.

"Many contrarians who worry about the Southern California market will look to data like income but what they can't pinpoint is the desirability of living in California as opposed to living in Buffalo and Cleveland," he said. "And the migration trend has been toward warmer climates."

While prices in San Diego County continued to climb last year, the inventory of homes started to grow in the last half of the year, forcing some sellers to lower their prices. Consumers can expect more of the same this year, said agent K.J. Koljonen.

"I predict it's going to be more buyer-friendly where you can negotiate these deals and sellers don't hold all the cards," Koljonen said. "Buyers are in a position to negotiate a better price and come in lower on their offers. Sellers aren't getting top dollar now."

Tim Federighi, a veteran San Diego County real estate appraiser, maintains that the market has peaked. He sees signs of a sharp downturn in 2005.

"My gut feeling is we are going to have a market correction," he said. "The question is how long and how severe? When the median price is over $500,000, you are starting to price people out of the market. People can't afford the one thing everyone dreams of owning, and that's a home."

The University of California Los Angeles's Anderson Forecast rattled the real estate industry recently when it said San Diego County was experiencing an inflated real estate price "bubble" and that prices were due to drop. The full effect of that decline may not be felt until 2006, said UCLA economist Edward E. Leamer.

This year "will not be the year of pain," he said. "You can expect more problems in 2006 we believe; 2005 will be the slowing down of the overheated real estate sector."

However, University of Southern California economist Raphael Bostic disputes predictions of a housing bubble ready to burst. He believes demand will continue to outstrip supply, leading to an upward pressure on prices.

"The increase in mortgage rates will slow the rate of appreciation in the market. The question is, will it slow it by enough to where prices will actually fall," said Bostic, of the USC Lusk Center for Real Estate. "We're not likely to see that happen because excess demand has been so great and appreciation rates have been so high, we'd have to see real economic dislocation at a macro level."

Bubble or no bubble, Paul Devine and his wife, Susan Marshall, say they have to sell their tiny Normal Heights home and buy a larger house now that they have a baby. The continued run-up in housing prices does not concern them, although they know they need to look in areas of the county where they can get more for their money.

"The way I look at it, if you're planning to keep the house for a long period – more than 10 years – you're not affected by these short-term corrections," said Devine, who hopes to get as much as $440,000 for the 720-square-foot home he and his wife bought five years ago for $189,000.

"Our plan is to buy a house big enough for two kids, and that will hold us over for 10 years. If the market were to totally fall through the floor, we could continue to afford it. The value of the house is only the value the day you sell it."

With all the mixed messages, consumers may have a hard time reading the housing market in 2005, said John Karevoll, an analyst with DataQuick Information Systems.

"I don't think I have seen as wide a range of forecasts," he said. "You can find a forecast that tells you what you want to hear."