Living La Vida Local
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constrain sales in 2006 at a greater rate than we’ve previously experienced, especially in markets where there are higher price points compared with the state as a whole,” Appleton-Young continues. “Not all areas of the state will continue to experience the unprecedented double-digit median price increases of the past five years. Some high-cost areas, especially those in the more costly coastal regions, face a potential leveling off of median price gains compared with the 10 percent gain we expect for the state as a whole.”

C.A.R. goes on to predict that the median home price in California will increase 10 percent to $575,500 in 2006, up $523,150 this year. Sales for 2006 are projected to reach 630,610 units, falling 2 percent from 2005.

Of course, things are different in Santa Monica. According to the MLS the median price of a single-family home in 2005 was $1,575,000 up from $1,400,000 in 2004 and $1,042,500 in 2003. This year, 295 homes sold in Santa Monica. In 2004, 328 homes sold. In 2003 it was 386 homes. In the condo market, the median sale price was $675,000 in 2005, as compared with $621,500 in 2004 and $467,000 in 2003. 596 condos sold locally in 2005, 664 sold in 2004, 715 in 2003.

Economists say that the double-digit appreciation that California has experienced for the past five years will continue due to the continuing shortage of housing across much of the state. In 2005, Santa Monica saw an average appreciation rate of 13.8%.

"The market will be coming off of a five-year boom and experience a soft landing next year," advises David Lereah, chief economist of the National Association of Realtors. "An uptrend in mortgage interest rates will cause some slowing of the sales pace, but we forecast 2006 to be the second-highest year on record and housing will continue to support the overall economy."

Another factor that will keep housing prices strong is that California typically gains nearly 250,000 new households annually; the state will build about 200,000 new housing units in 2006, creating a shortfall of about 50,000 units…and those low construction numbers will continue. Inman news reports that single-family building permits are down 18% and multifamily starts are down 36.1% since November 2004.

2006 is expected to bring additional uncertainty when Federal Reserve Chairman Alan Greenspan retires in January after 18 years, leaving the esteemed, but unproven Ben Bernanke to guide the economy.

"A housing price slowdown, in part triggered by the Federal Reserve's policy actions, will become more pronounced as the year 2006 progresses, placing consumer spending, credit-quality, and job creation at some risk," notes Wells Fargo senior economist Scott Anderson.

Anderson predicts that rising mortgage rates will affect housing demand, inventories will rise, and the pace of sales and construction will slow. He feels the main risk for the economy in 2006 is that the slowing housing market could dampen consumer spending, credit quality and job creation.

"We expect the fixed mortgage interest rate to rise to 6.4 percent next year, and the adjustable rate to hit 5.1 percent, which will make it more difficult for many families in California to be able to afford a home," confirms C.A.R. President Jim Hamilton. "While still near their historic lows, up-ticks in interest rates coupled with the continued increase in the median home price will push affordability in California to a new all-time annual low of 15 percent next year.”

Exotic loan products such as interest-only loans will figure into the slowing housing cycle.

"People with adjustable-rate mortgages, will probably do everything they can to hold on to their house, as long as their mortgage payment doesn't go up too fast," observes Delores Conway, director of the Casden Forecast at the University of Southern California Lusk Center for Real Estate. "But, if you have a speculator who took out an interest-only loan, planning to flip the property for profit in a short time, and the prices go down, they might just walk away from it."

Another possible panic for real estate is the plan that was presented to the President's Advisory Panel on Federal Tax Reform on Nov. 1, calling for replacing the mortgage-interest deduction with a more limited 15 percent tax credit, among other things.

The best thing that could happen in 2006? "A situation where the U.S. economy continues the modest job growth it has produced over the last year is the best-case scenario," predicts Mark Dotzour, chief economist at Texas A&M University's Real Estate Center. "Modest job growth creates underlying demand for housing and very little threat in the way of inflation, that's what keeps interest rates at low levels like the ones we've enjoyed for the last five years. If we have moderate job growth resulting in low inflation and in turn a low mortgage interest rate environment, the U.S. will have another successful year."

Joining the chorus of moderates, Christopher Cagan, director of research and analytics at First American Real Estate Solutions, states, "The best scenario would be to go back to a healthy, normal, sustainable market going up 6 percent, 8 percent (home prices), with mortgage interest rates remaining where they are or perhaps a little higher."