Real estate is California's new gold rush

By Simon Avery
Associated Press

LOS ANGELES — The number of California households able to afford their own home plummeted to 27 percent in May, down from 34 percent a year earlier, as prices were driven higher in part by investments diverted from the struggling stock market, according to a new industry report.

Home prices have spiraled out of reach for many would-be buyers, rocketing 25.5 percent in May to $321,130, up from $255,860 a year ago, the California Association of Realtors said.

Other factors affecting the affordability index released yesterday are low interest rates and tight housing supply.

With mortgage interest rates remaining near a record low, buyers have lower monthly payments, meaning they can bid more for the house they want.

The average contract interest rate for 30-year fixed rate mortgages was 6.66 percent at the end of May. That compares with rates of 7.16 percent during May 2001 and 8.52 percent in May 2000.

Home prices are also rising as disgruntled shareholders move assets from the stock market into real estate. With economic conditions remaining uncertain, Americans now consider residential real estate the investment of choice, much as they favored gold in the 1970s, according to a study by the Milken Institute.

Residential real estate has become the "psychological equivalent of gold," the report from the Santa Monica-based economic think tank said. titled "A New Kind of Gold? Investment in Housing in Times of Uncertainty," the report notes that real estate has a long record as a positive investment.

On average, house prices nationwide have increased by a compound annual rate of 5.6 percent over the past 25 years.

In recent months it's become more than twice as difficult to afford a home in California compared with the rest of the country, according to CAR.

Nationwide, favorable financing conditions and higher incomes helped make it considerably easier for people to afford homes in the first quarter of the year compared to the same period a year ago.

Nearly 65 percent of all new and existing homes sold between January and March were affordable to households earning the national median income of $54,400, according to the National Association of Home Builders. That compares with 56.9 percent in the first quarter of 2001, based on an analysis of more than 580,000 completed home sales in 191 metro markets nationwide.