2Q 2004 REAL ESTATE WRAP-UP – THE STATE HOUSING MARKET REMAINS ON SOLID GROUND

Housing bubble? Think housing plateau. Here’s why:

According to the 2003 statistics recently U.S. Census Bureau, California remains the most populous state in the nation with 35.5 million people.

"Based on the state's population growth of nearly 600,000 a year, combined with the continuing lack of enough homes and apartments to meet the demand, there is little chance that the housing market will collapse," stated Alan Nevin, chief economist for California Building Industry Association. "Standing inventories of new homes are at essentially zero. You can't have a housing bubble if we aren't building enough houses to handle the demand."

The California Association of Realtors reported that half of the 10 cities and communities with the highest median home prices in California during the first half of 2004 were in the greater Los Angeles area. These areas include: Palos Verdes Estates with a median price of $1,350,000; Manhattan Beach, $1,350,000; Malibu, $1,250,000; Beverly Hills, $1,185,000 and Calabasas at $987,500.

Obviously, when they calculate Santa Monica, they factor in condominium prices, as more than 2/3rds of Santa Monica residential sales are condos. If they counted only the single-family home sold in Santa Monica between 01/01/04 to 06/30/04 they would have noted that the 166 single-family homes had a median sales price of $1,425,000, according to the Southern California Multiple Listing Service. Those 166 single-family homes are just 29% of the total 570 listings that changed hands in Santa Monica during the first half of 2004. Locally, 332 condos sold with a media sale price of $601,000. Additionally, 66 income properties traded hands, as did four pieces of land.

Family home prices around town increased 34% from a year ago, while condo prices increased 28.6%.

We have enjoyed an incredible real estate boom. And now, the local real estate market may be reaching a plateau. 

Russ Bergeron, general manager of the Southern California MLS, noted that inventory has increased considerably this year, and for-sale properties spending more time on the market. "If interest rates continue to go up and prices don't go down, this could quickly turn from a seller's market to a buyer's market," he noted.

Now, watch the prime rate. On June 30th, the Federal Reserve raised its target for key short-term interest rates a quarter-percentage point, the first such increase since May 2000. This raise could be the first of a series of hikes that could take the fed funds rate to 2.25 percent by the end of the year and, some analysts speculate as high as 3 or 4 percent next year.
As we rise out of the lowest interest rates in 40 years, we can reflect on how this  fueled a boom in housing demand and in mortgage refinancing. Homeowners refinanced at lower rates, cutting monthly bills and converting home equity into  cash, which helped to keep the economy afloat. Now just wait until those adjustable rate mortgages come due…..

By the books, we have now had several straight months of economic expansion, along with three months of job growth. Economists speculate that inflation is an increasing risk, especially with the fed funds rate below the rate of inflation.
"The core consumer price index (CPI) has risen by 3.3 percent annualized over the past three months," Steve Stanley, economist with RBS Greenwich Capital told CNN. "We'd all better hope that some of this is 'transitory.'"
If core CPI and other measures of inflation keep accelerating, the Fed may again increase interest rate at their August policy meeting scheduled for August.

"The Fed opened the door for a half-percentage-point increase in August, if it's needed," stated former Fed Governor Lyle Gramley, now a consulting economist with Schwab Washington Research.
“The summer months are typically a peak time for people to list their homes,” stresses Bergeron of the MLS. “The inventory levels after this peak season may be more telling than the current period.”

Growth continues. According to statistics from the California Building Industry Association, production of new single-family homes exceeded the pace set a year ago, when building starts were at their highest level since 1988.