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The Honolulu Advertiser

Posted on: Friday, October 8, 2004

2005 outlook darker for California homebuyers

By Alex Veiga
Associated Press

LOS ANGELES — California homebuyers will be squeezed further in the coming year, as higher home prices and mortgage interest rates make it tougher to afford a home, a real estate trade group predicts.

Janet and Greg Schieber are shopping for their first home in Los Angeles. The California Association of Realtors estimates the median home price will be $454,720 by the end of this year and will keep rising.

Damian Dovarganes • Associated Press

The median price of a single-family home in California, which on average has risen by double-digit percentages the past four years, will increase by 15 percent next year, according to a forecast by the California Association of Realtors.

The forecast, based on computer modeling of real estate and economic data crunched by CAR economists, estimates the median home price in California will hit $522,930 next year. The organization's projected median home price for this year is $454,720.

The shortfall of housing in California and increases in population will continue to drive demand and contribute to rising prices, CAR said.

Meanwhile, the average rate for a 30-year fixed mortgage, which has been below 6 percent for most of the year, will approach 7 percent by the end of 2005, CAR predicts.

"Coupled with rising home prices, affordability in California will fall to an all-time annual low of 16 percent next year," CAR President Ann Pettijohn said.

The number of homes sold next year is expected to show a 2.5 percent decline, mostly due to the anticipated increase in mortgage interest rates.

Previous forecasts have sometimes been off, mostly because economists failed to predict how low mortgage rates would go and how often they would drop despite occasional increases.

"This year, we may hit it right," said Leslie Appleton-Young, CAR's vice president and chief economist. "This market has been really tough to get a handle on and it has outperformed our expectations."

Historically low mortgage rates have enabled many homebuyers who otherwise might not have been able to afford a home in California, particularly in pricey coastal areas, to enter the market.

All along, however, home prices have continued to rise, setting record median prices month after month.

In recent months, many buyers have begun pulling back. Now homes are staying longer on the market and bidding wars among buyers have lessened somewhat, particularly in Southern California.

Appleton-Young said only a major recession with job losses is likely to pull down prices significantly, but warns that the 15 percent appreciation won't be sustainable forever.

"Incomes are not keeping up and at some point rates are going to go to their long-term equilibrium level," she said.

The most rapid appreciation will likely occur in the inland counties of Southern California and the Central Valley, which have grown in recent years as more people move in, generating more demand for housing, Appleton-Young said.

"The San Francisco Bay Area housing market, which advanced at a more measured pace than other regions in the state this year, is likely to see less slowing in 2005 compared with other areas of the state," she said.