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Will L.A.'s Real Estate Bubble Burst?

No, Because There Isn't One. There's Just Too Much Demand, Not Enough Supply and No Room to Build. None of That Will Change.

November 02, 2003|Eryn Brown | Eryn Brown is a Los Angeles-based freelance writer.

"Let's start here," Ross Novie says, as he steers his Honda onto Federal Avenue. He and his wife Agnes want to buy a home. It's Sunday. They're trolling the open houses.

Between them, the Novies bring in more than $100,000 a year, which puts them in the top fifth of wage earners in California. They're looking to spend around $450,000, and they're hoping to stay on the Westside, near Ross' job as an assistant director on the Fox TV comedy "Arrested Development." The couple are prepared to buy a house that needs some TLC, but any renovation work will have to be finished by the spring, when Agnes, 36, gives birth to their first child.

"People say you have to have reasonable expectations," 32-year-old Ross says. "I think we do."

They drive south and east through West L.A., past rows of low-slung stucco houses, some well-kept, others shabby. Ross occasionally peeks at a page he has torn out from the newspaper, with three or four ads circled. But before they reach any of those houses, he spots a sign. It's on Granville Avenue, north of National Boulevard, in front of a smallish, nondescript house. "Ah!" he says. "I do get a kind of bitter joy when I see an open house sign." He pulls over.

"It'll be $500,000," he says as he climbs out of the car.

"$650,000!" bets Agnes.

Just inside the entryway they find a flier. The owner wants $699,000. Agnes rolls her eyes. Ross takes about a millisecond to look around the house. It is freshly painted and has hardwood floors and built-in shelves. "This is nice," he says. "But this is for wealthy people."

They turn and walk back out the front door. A small plane, following the flight path into Santa Monica Airport, buzzes the little house. It sounds like a dive-bomber closing in.

Everyone knows that the housing market in Southern California has gone, if you'll pardon the pun, through the roof. As of August (the most recent figures available), according to the California Assn. of Realtors, the median price of a home in Southern California was up sharply from last year:

* Los Angeles County: up 24%, from $300,980 to $374,720

* Riverside and San Bernardino counties: 28% to $ 231,300 (numbers from July)

* Orange County, 20% to $523,600

* Santa Barbara County: 18% to $479,540

* San Diego County, 17% to $444,230

Since 1969, home prices in California have appreciated an average of 8.3% per year. These days, they can go up almost that much in a month. It's not uncommon to hear of houses--modest houses, like the ones the Novies are checking out--selling for $25,000 to $50,000 more than they would have just days before.

The reason is simple: Record-low interest rates are attracting buyers in record numbers, and there's much more demand than supply. It's a seller's market--perhaps like never before seen in Southern California. And no one knows when, or if, it will let up.

The price increases have been a bonanza for the half of Los Angeles County residents who already own their homes and who've watched the value of their property, and the equity they hold in it, soar. The same is true, though less dramatically, in many parts of the country. Economists say it's the strength of the real estate market that has helped pull the U.S. economy out of its doldrums--that by refinancing their rapidly appreciating homes, people have been able to buy all those recession-busting SUVs, granite countertops, flat-screen TVs and designer jeans. The real estate boom has, by and large, been a godsend for middle-class America.

But there's a dark side. For every happy household enjoying the fruits of the boom in Southern California, there's another that's been priced out of moving into the bigger house it needs, and yet another that's having trouble breaking into the housing market at all. Nationwide, 56% of people can afford to buy a median-priced home in the communities where they live. But only 24% of Los Angeles residents could afford to, as of August, according to the Realtors association. The minimum household income required to buy a median-priced home in California--based on a 30-year, fixed-rate mortgage with a 20% down payment--is now a whopping $93,490. Only 21% of California households earn that much.

Obviously, the problem is most dire for people in the lowest income brackets--who struggle to put a roof over their heads, much less find a home to buy. But it's also hard for middle-class families to own their piece of the American Dream. These days affordability is a problem for single people and married people, for young people and old people, for black people and white people, for first-time buyers looking for $150,000 condos and for longtime homeowners looking in the million-dollar range.

According to the Realtors association, sales of existing single-family homes in the state hit a record 645,720 in August, but the percentage of first-time buyers has been steadily declining since 1995, when it was more than 50%. It is currently 30%.

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