California home prices surge to new highs in May

By Michael Liedtke The Associated Press
Tuesday June 25, 2002

SAN FRANCISCO — California home prices surged to another record high in May, a real estate research service said Monday, magnifying worries that hyperactive buyers are creating an investment bubble by shifting money once earmarked for the sagging stock market into the state’s housing market. 

The concerns about absurdly high housing prices are particularly acute in the San Francisco Bay area, where a mid-priced home in May sold for $413,000, a 9 percent increase from the same time last year, according to DataQuick Information Services. The May figure eclipsed the previous high of $402,000 reached in April. 

Prices are rising even more rapidly in Southern California, where a mid-range home sold for $264,000 in May, a 17 percent increase from last year, DataQuick said. But the risks of a bubble developing in Southern California appear lower, largely because prices remain so much less expensive than in the Bay Area. 

A mid-priced home in the Bay Area now costs $84,000, or 25 percent, more than in March 2000, generally considered the stock market peak for the high-tech mania that forced housing costs to skyrocket in the nine-county region. 

Meanwhile, the Nasdaq stock index — the primary yardstick for measuring high-tech investments — is 71 percent below its March 2000 high. 

The tremendous wealth generated by the run-up in tech stocks during the last half of the 1990s is considered the main reason why Bay Area home prices are so much higher than in Southern California, where deep cuts in defense spending a decade ago devastated the region’s aerospace industry. 

Bay Area home prices dipped briefly last year amid the ruins of the high-tech wreck, but they have bounced back quickly to reach new highs with the help of the lowest mortgage rates in a generation and a spreading conviction that California real estate is a better bet than the stock market. 

Buying a Bay Area home “has always been a solid, long-term investment and people are a little more interested in that now,” said Steve Hanleigh, a San Jose real estate agent and president of the Santa Clara County Association of Realtors. 

Despite a history of steady price appreciation in the Bay Area’s housing market, the recent run-up appears unsustainable, according to a report released last week by economist Edward Leamer of the UCLA Anderson Forecast. 

Leamer reasons that home prices ultimately are driven by a cost-to-benefit analysis similar to the price-to-earnings ratio widely used to value stocks. The price-to-earnings equivalent for a home is the rent-to-price ratio, Leamer said. If it would cost $25,000 annually to rent the same kind of home that sells for $500,000, then the home has a rent-to-price multiple of 20. 

With home rents coming down at the same time ownership prices are rising, the Bay Area’s housing market is now 6 percent above its previous “bubble” peak of 1989, Leamer estimated. In contrast, rents in Southern California are still rising, leaving the region’s home ownership market 17 percent below its 1989 peak, Leamer said. 

“Buying a home in the Bay Area right now is like investing in the Nasdaq at 4,000 after it came down from 5,000 because you thought you were getting a really good deal,” Leamer said Monday. 

Other observers downplay the chances of a real estate bubble developing in the Bay Area. 

Unlike a few years ago, Bay Area buyers aren’t getting into cutthroat bidding wars that push the sale price far beyond the asking price, said Will Carrillo, who runs several Re/Max Real Estate Services in the Silicon Valley. “It’s not as hot as it was a couple years ago.” 

And even though Bay Area home prices are higher than a couple of years ago, the real costs aren’t as great because a sharp decline in long-term interest rates have pushed 30-year mortgages well below 7 percent. DataQuick estimated the typical Bay Area monthly mortgage payment in May stood at $2,075, still 2 percent below the peak monthly payment of $2,124 in May 2000. 

“I know everybody is talking about a bubble in the Bay Area real estate market, but I don’t see it yet,” said John Karevoll, a DataQuick analyst. “If there is one, it’s still a long way off.” 

The DataQuick report factors in the sales of all homes, including condominiums, recorded by counties. The California Association of Realtors, a trade group, is expected to show even higher May prices this week when it releases its study, which is limited to single-family homes and doesn’t include all recorded transactions. 


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