Might L.A.'s rebounding real estate market be too much of a good thing?
Amid last week's scare on Wall Street over the prospect of the Fed boosting interest rates, analysts were quick to cite the inflationary effect of rising home prices pointing specifically to Southern California, where prices are expected to rise at least 8 percent to 10 percent annually over the next few years.
But according to housing and inflation figures, L.A. has a lot of catching up to do before inflation becomes a real threat.
"The increases in property values we have seen are still only compensating for the losses (suffered in the early 1990s)," said Nima Nattagh, a market-research analyst at Experian Information Solution Inc.
"If you compare today to last year, then your home price rose 5.8 percent," he said. "But if you bought a home in January 1990, you have still incurred a loss of over 20 percent."
Median home prices in L.A. County stood at $180,600 in March, according to the California Association of Realtors, up 10.5 percent from a recession low of $163,370 in December 1996, but still down 21.2 percent from a peak of $229,260 in May 1991.
Overall inflation in L.A. also remains below the national average, and even farther behind San Francisco's rate.
The annualized rate for Los Angeles Country over the six-month period ended Feb. 28 averaged 1.4 percent, according to U.S. Department of Labor figures, compared with 3.7 percent for San Francisco. U.S. annualized inflation over the period averaged 1.8 percent.
Inflation in housing costs also remains tame in Los Angeles compared with other parts of the nation.
L.A. housing costs rose at an average annualized rate of 1.8 percent over the six months ended Feb. 28, compared with the like period a year ago. That compares to 5.5 percent in San Francisco, where Silicon Valley's booming high-tech industry has been driving up prices, and 2.3 percent nationally.
Even if the Federal Reserve decides to boost interest rates at its next meeting on May 21 and there's no consensus among economists on that prospect such a move would not have a major effect on the local economy, economists said.
"We have a 1 percent rise in rates factored into our forecasts, and our models don't show anything but continued growth," noted Tom Lieser, executive director of the UCLA Anderson Forecast.
A small interest rate rise could actually end up stimulating the housing market, economists said, because people who were hesitating to buy might decide that rates are trending higher and jump into the market before it is too late.
The California Association of Realtors is forecasting that L.A. County home prices will rise between 4 percent and 5 percent in 1998. That figure, though, is understated because it does not take into account the improved market conditions of the last few months, said CAR deputy chief economist G.U. Krueger.
The median L.A. home price will increase by at least 8 percent this year and in each of the next two years, he said.
While the situation bears some resemblance to the torrid market of the late '80s, today's economy is more stable than it was 10 years ago and thus better able to sustain a rapidly appreciating property market.
"Last time, the crash was driven by outside economic events," said Krueger, referring to aerospace downsizing that had a devastating effect on home prices.
In addition, L.A. property had become so expensive that people and companies relocated to cheaper cities. Today, those markets outside L.A. are equally or more expensive.
Los Angeles is ranked by the California Building Industry Association as the nation's 14th least affordable metropolitan area. But it is more affordable than San Francisco, Portland and San Diego, and on par with Salt Lake City.
While a slight upward move in rates by the Fed would not hurt the local housing market, a sharp rise in rates could be devastating, industry sources said.
"If we see a 300 basis-point (3 percent) rise in mortgage rates, the party is over," Krueger said.
But such a spike is unlikely, economists say, especially following figures released April 30 showing that the Employment Cost Index, which measures labor costs nationwide, rose by a smaller-than-expected 0.7 percent in the first quarter vs. an increase of 1.0 percent in the fourth quarter of 1997.
Mike Penzer, national economist at BankAmerica Corp. in San Francisco, saw the Fed's leak to the media that it might raise rates as an attempt by Greenspan to mollify other Federal Reserve board members who are more concerned about the threat of inflation.
"It was a gift to the hawks," he said.
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