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Home Market Boom Showing Some Strain

Housing affordability is at record lows in parts of the Southland, and some real estate experts say it could signal slower gains in sales and prices.

March 07, 2004|Don Lee | Times Staff Writer

Southern California's long-booming housing market is showing signs of strain, with low affordability and riskier loans raising concerns about the sector's ability to be a primary driver of the region's economic comeback.

Consumers' ability to buy homes, which has been weakening for some time as prices have shot up much faster than incomes, recently hit record lows in some Southland counties. Such low levels could signal peaks in home prices and sales, economists say.

In addition, more buyers are stretching their finances, contributing to a sharp rise in the use of adjustable-rate mortgages. Although that has allowed people to squeeze into the market with lower initial mortgage payments, it could subject them to much higher payments if interest rates rise as expected.

Less-expensive financing, however, isn't enough for many home seekers, especially young families.

First-time buyers -- vital to the market's overall stability -- made up just 30.6% of home purchasers in California last year, the lowest rate since the California Assn. of Realtors began tracking the data in 1981. First-time buyers provide the foundation for the rest of the market, because their purchases make it easier for existing homeowners to move up.

Together, these indicators suggest slower gains in sales and prices.

"We're piling on more and more layers of risk in the housing market," said G.U. Krueger, director of economic research at Institutional Housing Partners, a real estate venture capital firm in Irvine. "The question is, how long can this go on, and what will happen when interest rates rise?"

Most experts don't expect anything close to a downturn of the magnitude seen in the first half of the 1990s, when massive aerospace layoffs and overbuilding resulted in prices plunging 23% in Los Angeles County.

Most economists predict that home prices in the region will continue to grow at a healthy rate for the foreseeable future, although at a slower pace than the double-digit percentage gains seen in each of the last few years.

The region, experts say, is not threatened by the economic imbalances that led to the housing market crash of the early '90s. Instead of overbuilding, there is a shortage of homes. The regional economy has become more diversified, with less dependence on any single industry that could lead to severe job losses.

What's more, foreclosures and defaults remain under control. And mortgage rates have actually declined in recent weeks to the lowest levels since last summer.

"I don't see anything that frightens me or makes me very worried at this point," said Lenny McNeill, a senior vice president at Washington Mutual who oversees residential lending in California and other Western states.

Economists, however, remain concerned about the weak growth in jobs, particularly ones that pay well. If hiring picks up, that would help lift incomes. But that also would spur the Federal Reserve to nudge up interest rates, although no one expects a sharp rise in rates anytime soon.

Either way, the outlook points to an emerging slowdown in sales and building activity. Both have been major economic stimulants, especially in Southern California, where the housing market has far outpaced the rest of the nation.

Even as manufacturing and other industries have cut back in recent years, construction and other sectors tied to real estate, such as mortgage banking, lumberyards and home-improvement retailers, have added tens of thousands of jobs. Many consumers, meanwhile, have tapped their rising home equities for cash to support their hearty spending, adding further fuel to the economy in the Southland and elsewhere in the nation.

Anecdotal evidence suggests that the current frenzied pace can't be sustained.

Glenda Estrada, a 29-year-old schoolteacher in Downey, recently bought her first home. After a three-month search that included several fixer-uppers, she settled on a 900-square-foot home on a busy street in Lakewood. The house cost her $295,000.

With her stellar credit, she got in with no money down. But even with a low adjustable rate of 4.5% and a financing plan in which she is paying only interest, Estrada's monthly payment soaks up half her income.

"It just feels almost unfair that housing is this expensive," she said.

Yet Estrada counts herself as fortunate. Some of her fellow teachers, she says, are commuting from as far away as Moreno Valley in Riverside County, where homes are cheaper. Others are stuck paying increasingly high rents.

Nationally, six out of 10 households can afford to buy a median-priced home, based on incomes and mortgage rates, according to the National Assn. of Realtors. But in Orange and San Diego counties, the affordability rate has dropped to fewer than two in 10. It is slightly higher in Los Angeles County. Affordability in all three counties is lower than in Silicon Valley.

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