Some Seepage in Home Bubble May Be Good

Staff Reporter

A very thin stream of air could soon start seeping from L.A.'s housing market in the coming year.

Median home prices this year continued what's been a torrid rise for more than three years and preliminary numbers for show strong price hikes in November. But beyond the cheery numbers are growing signs that the rate of appreciation, fueled by low supply, high demand and extremely low interest rates, finally may be ratcheting down.

The increases are expected to continue, but not at as great a rate because the stock is "overvalued" by 10 percent to 15 percent, according to the recent UCLA Anderson Forecast.

With mortgage rates expected to tick upward and the market fueling near-20 annual percent appreciation rates for the past few years, next year's median home price is projected to be 11.4 percent more than in 2003, with 2005 seeing just a 3.6 percent appreciation rate, according to the forecast.

"Most of that (11.4 percent) increase has already occurred," said Christopher Thornberg, senior economist at the Anderson Forecast, noting the continued hot market since the middle of the year.

Meanwhile, the California Association of Realtors released a report that found October's affordability index, measuring the percentage of households that can afford a median-priced home in the county, was 24 percent, the lowest level since 1991. The index uses prevailing 30-year mortgage rates and a 20 percent down payment.

Leslie Appleton-Young, chief economist at CAR, stopped short of calling its projection of 13 percent appreciation in 2004 a plateau but she did concede that the combination of a half-percent mortgage rate increase and a dropping affordability index "is going to cool the overall housing market."

Of course, previous projections of a slowdown in sales and prices have been proven wrong. Data for September and October showed a small decline in median prices, leading some to speculate that the housing peak had been reached. But November's numbers from DataQuick Information Systems show a 19.1 percent jump in L.A. median home prices from a year earlier, to $345,500. Sales in Los Angeles County rose 3.2 percent.

Still, there are indicators that the market is losing some resiliency. The CAR affordability index has been on a steady decline since hitting a recent high of 38 percent in January 2001. The index fell below 20 percent when the last real estate bubble began to pop in the late '80s, according to Appleton-Young.

Meanwhile, rising mortgage rates, which were around 5.76 percent in early December from a June low of about 5 percent, have already affected the refinancing market.

For the week ended Dec. 5, mortgage applications for purchases and refinancings were down more than 12.2 percent from the previous week and were at 36 percent of the levels six months earlier, according to Mortgage Bankers Association of America.

Thornberg notes that less refinancing and a home price plateau doesn't necessarily mean a bad thing for the local economy. The economic effect of less refinancing cash is likely to be counteracted by a return in business spending. Additionally, if home prices keep galloping by 20 percent a year, spurring further refinances, a popping of the bubble is sure to follow.

"If home prices don't start cooling off now, we're going to have another recession," he said. "(A price plateau) isn't a bad thing."

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