The median price of a single-family home in California is expected to rise 15 percent next year to $522,930, on the heels of a 22 percent rise in the median price from 2003 to 2004, the California Association of Realtors announced today. And housing affordability is expected to reach a record low in the state next year.
“Home buyers next year will face slightly higher mortgage interest rates, approaching 7 percent by year’s end, which will make it more difficult for many families in California to be able to afford a home,” said Ann Pettijohn, association president. “Coupled with rising home prices, affordability in California will fall to an all-time annual low of 16 percent next year.”
The median price in the current year is expected to reach $454,720, and a shortage of housing is expected to fuel continuing increases in price appreciation. California typically gains nearly 250,000 new households each while building about 200,000 new housing units this year, the association reported.
Leslie Appleton-Young, vice president and chief economist for the association, is scheduled to deliver a housing market forecast for the state today at the association’s expo in Santa Clara, Calif. Appleton-Young said earlier this week that she expects a gradual slowing next year in the state’s roaring housing market.
“We are starting to experience what I would consider more natural market conditions,” she said. “We see affordability starting to constrain some communities.” She said that she expects a “soft landing,” with 2004 representing a peak and 2005 representing “a slight pullback.”
“While the increase in interest rates will be enough to moderate the pace of home sales in 2005, population and household growth will continue to put pressure on home prices, resulting in greater price appreciation in California compared with the nation,” she said.
Year-to-date sales in Southern California are down this year, while there has been more robust sales growth in inland parts of the state, she said. Statewide single-family resales are expected to reach 619,300 this year and then dip slightly to 603,700 in 2005.
“Regionally, the areas with the greatest potential for home sales growth are the inland regions of the state – the Central Valley and the Inland Empire region in Southern California, which have experienced significant population gains in recent years as well as robust new home-building activity,” said Appleton-Young.
“The Southern California housing market in 2005 is likely to slow from the torrid pace of sales and rapid price appreciation that we experienced throughout most of this year,” she said. “The San Francisco Bay Area housing market, which advanced at a more measured pace than other regions in the state this year, is likely to see less slowing in 2005 compared with other areas of the state.”
Appleton-Young said there “has been a distinct change in the tenor of the market over the last five or six months” in some markets that had previously experienced rapid price-appreciation, such as Orange County and parts of Los Angeles County.
Condominiums continue to be a popular choice for first-time home buyers because they are generally more affordable than single-family homes, she said.
Any major changes in interest rates could skew the housing forecast, Appleton-Young said. “The interest rate risk is really the biggest risk in any forecast,” she said, as some consumers are highly leveraged and are increasingly relying on variable-rate and other unconventional loans. In 2003, about 44.9 percent of the jumbo loan (which are loans that exceed the maximum amount set by Fannie Mae and Freddie Mac) originations in the nation were in California, she said.
Also, according to the association’s 2004 survey of Realtors in the state about the most recent real estate transaction that they handled, about 63.4 percent of respondents said the transaction involved a fixed-rate loan, compared to 82.4 percent in 2003. And about 28.3 percent of respondents this year said the transaction involved an adjustable-rate loan, compared to 10.3 percent in 2003.
While the rate of population growth and unemployment is expected to remain fairly steady next year, the association expects the rate of job growth to increase from 1 percent this year to 1.9 percent in 2005.
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