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To two Bay Area residents who bought new homes this winter, it looked like a good time to make a move into something better.
And although each paid triple what the previous owners spent less than a decade ago, these buyers walked into a hot market well aware of the recent run-up in prices and emerged happy to have found a house or a condominium that fits their needs.
"I wanted to get in as soon as possible, especially with the way prices are going up in the Bay Area," says Carlo Cesar, a 34-year-old manager for Safeway. March 16, he moved into the two-bedroom, two-bath, 871-square-foot Antioch condo, for which he paid $295,000. Nine years ago, the same unit sold for $77,500, according to county records.
Many have profited from the Bay Area's recent real estate boom. Few can explain it.
Economists say house price appreciation normally reflects gains in income and employment. So what explains the 47 percent jump in the Bay Area's median price since the end of 2000, to $549,000 in February, during a period when the region's economy shed 450,000 jobs?
To some skeptical analysts, it appears that low interest rates -- the average interest on a 30-year fixed-rate mortgage has stayed below 6.5 percent since mid-2002 -- have produced a bubble of inflated house prices in the Bay Area and in some other hot markets in California and elsewhere. And while they bristle at the term "bubble," even optimistic market watchers expect rates to climb and house price appreciation to slow soon.
So far buyers have kept buying, softening the sting of high prices with the balm of cheap mortgages and inviting loan terms. With real estate values now widely viewed as immune to economic setbacks, buyers seem certain that no matter how expensive that bungalow in Bay Point or that mansion in Moraga is, it will command an even loftier sum a year or five years from now.
Also, a growing number of investors have jumped into the market. Real estate has replaced the stock market as the new millennium's sure-fire route to quick gains. To those intimidated by the risks and complexity of owning property, advertisements and free seminars promise quick lessons and eye-popping results in the speculation game.
Post-dot-com wealth
Before he bought in Antioch, Cesar learned the hard way about price appreciation. He recalls "kicking myself in the butt" for not pulling the trigger on a deal five years ago when he looked at condos ranging from $40,000 to $60,000. House and condo prices rose smartly in the past year, and he expects future appreciation to be even better.
But Brian Forschler, a 31-year-old salesman, has a more cautious outlook on house prices. "I'm not counting on a whole lot of growth," says Forschler, who just paid $975,000 for a three-bedroom, 21/2-bath, 1,800-square-foot house in Danville. Nine years ago, that same unit sold for $279,000.
Forschler has already benefited from the Bay Area boom. Three years ago, he and his wife bought a San Ramon townhouse for $391,000. Forschler estimates that its value has nearly doubled since. Without that run-up, he says, "we wouldn't have the down payment for the next place."
The Forschlers weren't the only ones to benefit from the real estate boom. From coast to coast, rising house prices boosted an otherwise sluggish economy. Homeowners cashed out more than $300 billion in equity through sales, refinancing or borrowing, according to Harvard's Joint Center for Housing Studies.
Californians led the way. The value of the state's inventory of 12 million houses and condos rose by $1.7 trillion during the past four years, according to UCLA economist Christopher Thornberg. With the smell of money helping to mobilize an army of agents, lenders, brokers and builders to serve the red-hot market, housing-related jobs accounted for more than half the growth in the state's private sector employment, according to Thornberg.
Real estate became the Bay Area's post-dot-com wealth machine. Between the first quarter of 2000, when the stock market bubble burst, and the end of 2004, the average price of single-family houses rose 76 percent in the East Bay, according to a house price index compiled by the U.S. Office of Housing Enterprise Oversight. During that same period, the Standard & Poor's 500 index of leading stocks fell 19 percent.
Getting into a home
Some attribute the rapid appreciation of real estate here to the shortage of land available for development. But last year real estate fever spread to the sprawling inland subdivisions around Sacramento, where prices rose 23 percent, and to Southern California, where prices in Riverside are up 30 percent. In the Las Vegas area, house prices rose 36 percent last year, according to OFHEO.
Such hikes in house prices can't go on forever, warns Christopher Cagan, an economist with First American Title Insurance Co.: "You should not assume you will get 25 percent price increase in a year."
Not that anyone but the most highly leveraged speculator would want that. The continuing real estate boom has already intensified worries that high housing costs will chase employers to lower-cost regions.
And with starter homes priced at $300,000 even in outlying areas, young buyers seeking to get into the house market now load up with debt and seek to put payments off into the future. "People are stretching more than they used to," Cagan says.
Allen Barnes Jr., a 26-year-old accountant, recently bought a three-bedroom, 21/2-bath, 1,280-square-foot house in Pittsburg for $350,000. Planning to leave their rental unit in Union City by the summer, Barnes and his wife thought about moving to Modesto but felt lucky to make the winning offer on their new Pittsburg house, which was only the second they had looked at.
Barnes and his wife chose a five-year adjustable-rate mortgage and a financing package for the full price of their new house "just to get in," he said. "From what I've been hearing, that's what people have been doing" to cope with high house prices, he added.
Last year in California, 28 percent of all house buyers -- and one in three first-time buyers -- opted for adjustable rate mortgages, according to a survey by the state Realtors association. Those buyers passed up the opportunity to lock in slightly higher fixed-rates, even though most experts view current rates as historically low and unlikely to be available in coming years.
Shocks ahead
Growing use of new lending products constitutes a worrisome trend, according to Economic and Real Estate Trends, a real estate risk forecast produced by Walnut Creek-based PMI Mortgage Insurance Co. The forecast expects increases in the benchmark interest rates that determine the adjustments to variable rate loans. "This could potentially lead ... to payment shock, because borrowers with imperfect understanding and limited information are not fully aware of the extent to which their monthly payments can rise," according to the forecast.
The shock could be even worse to bullish investors who have taken out loans to place bigger bets that house prices will go even higher.
There seems to be plenty of new players. In 2004, a record-high 1 in 6 house buyers surveyed by the California Association of Realtors said that they "bought primarily for investment and tax considerations." The 2004 rate of 16.2 percent surpassed the previous high of 15.3 percent in 1991, just before the state's housing market fell into a multi-year funk.
New investors see plenty of enticements. A full-page advertisement in the Times recently offered "a life-changing free seminar" on "how real estate investing can make YOU a fortune" and "how to get in the game." A brokerage in the red-hot Las Vegas market trolls for attendees at a free seminar with Mayor Oscar Goodman topping the bill of speakers. Mass e-mails invite investors to pony up $6,000 to join "a stock market of real estate."
Caution flags raised
So where is the market going?
The California Association of Realtors sees signs of another good year for those with a stake in real estate. "The outlook for 2005 is largely dependent on the trajectory of interest rates," the association observed in its recent report on the state of the housing market.
Yet even the normally bullish Realtors seem puzzled by the recent strength in the market. Their report describes 2004 as "a year of apparent contradictions" and notes that "home sales and price appreciation were robust despite a weaker-than-expected job market."
That can't go on either, says Thornberg, an economist at UCLA's Anderson Economic Forecast. "The housing sector's ... current growth path both in building and prices is clearly unsustainable," he wrote in a March 15 assessment of the state's economic prospects.
Industry insiders are also waving caution flags. PMI estimates that there is about a 50 percent chance that house prices will broadly decline within the next two years in the East Bay and other core counties of the Bay Area.
Cagan, the First American economist, recently published a report that tried to identify areas of risk in the nation's housing markets. It found that during the past 16 years long-term growth in house values has been broken into up and down cycles in some markets, including the Bay Area.
Cagan says the recent sharp rise in house values and the likelihood that mortgage interest rates will rise indicate that the up cycle may end soon, bringing in a period of flat or declining prices. "The cyclical markets are pretty close to peak," he says.
But the Bay Area may have "a little more room to go," with relatively high incomes and episodes of price flatness in recent years likely to cushion any local slump in real estate, he says. House markets in Alameda and Contra Costa counties have remained "healthy" at all price levels even as demand slowed for the most expensive houses in the region's most pricey markets, he adds.
Ron Atkins, a Pleasanton Realtor, says that although Tri-Valley real estate remains a sellers' market, with a shortage of houses listed for sale, he is watching for signs of a slowdown. "When it happens, it will happen quickly," he says.
Recent appreciation rates won't be sustained, he predicts. "As a knowledgeable homeowner, I am looking for a 5 percent to 8 percent (rise in house values) this year," he says. "There will come a time when it will dead flatten out."
Housing booms most often roll into periods of price stagnation, according to a recent historical study by the Federal Deposit Insurance Corp. But busts -- price declines, in one case of 40 percent -- did occur over the past 25 years when stagnation was accompanied by "rather severe, localized economic shocks that tended to affect major employers," the FDIC found.
These days the FDIC, which insures bank customers against losses, sees some worrisome signs. "There are reasons to think that history might be an imperfect guide to the present situation," its study says. "Foremost among these are changes in credit markets that are pushing homeowners -- and housing markets -- into uncharted territory."
So where does Barnes, one of those new homeowners, think the market is heading? "It beats the heck out of me!"
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