YOU ARE HERE: LAT HomeCollections

Fear Factor at Work as Home Prices Soar Higher

Economy: Bidding wars in Southland continue, reviving memories of the collapse of a decade ago. But experts say this bubble is different.


Spiraling home prices, bidding wars for desirable and even not-so-desirable properties, panicked home buyers afraid they're about to be shut out of the market--Terry Harman of Long Beach has seen all this before.

That's what the Southland real estate scene was like in 1989, the last time Harman bought a home.

Now, as the 61-year-old water utility executive contemplates making full-price offers on $380,000 fixer-uppers with pea-green shag, he wonders if he might not be buying at another precipitous peak.

"In my gut," Harman said, "it feels like we're in a bubble."

Certainly, the numbers are enough to give any potential home buyer pause. The Southern California housing market is roaring, with prices hitting records almost every month for the last four years.

In Los Angeles County, the median home price last month rose 15% compared with a year ago, to $237,000, while in Orange County the median was up 11%, to $317,000.

The last time prices ran up this far, this fast, a spectacular crash was just around the bend. Home prices first slipped and then plunged, losing as much as 20% of their value each year as the defense industry collapsed, the Southland economy fell apart and people fled for better prospects elsewhere. Homeowners who remained were trapped in houses worth far less than their mortgages and neighborhoods were gutted by foreclosures. It was the bursting of a classic bubble--when prices are driven far above a level that can be sustained in the long run.

Will it be different this time? So far, economists and real estate experts see little evidence that such a massive crash is in the offing. They agree, however, that the residential market is showing some of the classic signs of overheating, as buyers battle ever more desperately for an inadequate supply of available homes.

"There could be a mini-bubble developing, but I don't think it's anything close to what we saw in the late 1980s and early 1990s in Los Angeles and Orange counties," said Ross DeVol, director of regional studies for the Santa Monica-based Milken Institute.

Conditions are different now, economists say, with lower interest rates, a more diversified local economy, less real estate speculation and plenty of entry-level buyers--all in sharp contrast to what the market faced in 1991. Still, bubbles are usually apparent only after they burst, and the twin fears of paying too much or being priced out of the market have many buyers running scared.

The thought that prices could keep climbing is what prompted Maryann Marks of Costa Mesa to outbid several other buyers on a home in the upscale Orange County neighborhood of Mesa Verde North earlier this month.

Marks, who recently sold her townhouse so she could move up to a single-family home in the $350,000 range, at first tried to be cagey by bidding below the listed price of houses on the market. But after losing several houses to other buyers who were willing to pay the seller's asking price, or more, she changed her tactics.

"I was afraid if I didn't [offer close to the asking price], prices would go up more, and I would be unable to buy," said Marks, who works at a land planning and landscape design firm in Irvine. "If I hadn't offered that amount, someone else would have."

Such desperation is leading to bidding wars in many neighborhoods, said David Stratton, an agent at DBL Realtors in Los Angeles, who said four of the seven homes he's currently representing in escrow drew multiple offers.

One Westwood home generated six bids in three days, including one from Stratton's client that pushed the price up by $100,000 over the $1.15-million asking price.

"It's a frustrating time for buyers," Stratton said, "because it seems when a good home comes on the market, a lot of people already are looking at it."

The typical home in Los Angeles or Orange counties sells in 27 days, about half the time houses have historically waited between listing and sale, according to the California Assn. of Realtors.

The inventory of existing homes is shrinking as well. At the current pace of selling, Los Angeles County has enough homes on the market as of today to meet demand for three months, compared with a historical average of 10 months. Orange County has less than a two-month supply--breaking the record low, and well below the usual nine-month supply.

Buyers Forced to Expand Searches

Thin inventories and rising prices are pushing clients from Silver Lake and Los Feliz--once a refuge for buyers priced out of Westside neighborhoods--to areas farther eastward in Mount Washington, Eagle Rock and west to the San Fernando Valley, said agent Hattie Ramirez of Los Feliz's Prudential California Realty. Buyers who start looking in Inglewood or the Crenshaw District, agents said, wind up grabbing homes in nearby South-Central Los Angeles.

Those who want to buy in Orange County are finding themselves scanning ads for homes in Corona and Riverside County.

Los Angeles Times Articles