Milwaukee Bargain Real Estate by ynh56099

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									HAS THE FIRE BURNED OUT?
  The Return to a Normal Market
     Southern California: An Example Case
      A Mathematical Study of Real Estate Trends



         Christopher L. Cagan, Ph.D.
           Director of Research and Analytics
       First American Real Estate Solutions
         5601 E. La Palma, Anaheim, CA 92807
                     (714)701-2905
                  ccagan@firstam.com
                   October 27, 2004
The long-term national pattern is very consistent

                           National Median SFR Prices, 1968-2003

$180,000

$160,000

$140,000

$120,000

$100,000

 $80,000

 $60,000

 $40,000                                                Never a down year since 1968!
 $20,000

     $0
           1968

                    1970

                            1972

                                   1974

                                          1976

                                                 1978

                                                        1980

                                                               1982

                                                                      1984

                                                                             1986

                                                                                    1988

                                                                                           1990

                                                                                                  1992

                                                                                                         1994

                                                                                                                1996

                                                                                                                       1998

                                                                                                                              2000

                                                                                                                                     2002
                  Source: Internal data and National Association of Realtors®                                                               1
Some markets move smoothly without a cycle
                              OFHEO House Price Index,
                         Milwaukee, Wisconsin MSA, 1985-2002

    160

    140                                         No bubble here!
    120

    100

     80

     60
                                                           The Milwaukee real estate market
     40
                                                           has been essentially linear in
     20                                                    character rather than cyclical
      0
          1985

                 1986

                        1987

                               1988

                                      1989

                                             1990

                                                    1991

                                                           1992

                                                                  1993

                                                                         1994

                                                                                1995

                                                                                       1996

                                                                                              1997

                                                                                                     1998

                                                                                                            1999

                                                                                                                   2000

                                                                                                                          2001

                                                                                                                                 2002
                                                                                                                                        2
The long-term California pattern is more cyclical

                          California Median SFR Prices, 1968-2003

 $400,000


 $350,000

 $300,000

 $250,000


 $200,000

 $150,000

 $100,000

  $50,000


      $0
            1968

                   1970

                          1972

                                 1974

                                        1976

                                               1978

                                                      1980

                                                             1982

                                                                    1984

                                                                           1986

                                                                                  1988

                                                                                         1990

                                                                                                1992

                                                                                                       1994

                                                                                                              1996

                                                                                                                     1998

                                                                                                                            2000

                                                                                                                                   2002
                   Source: Internal data and California Association of Realtors®                                                          3
  California prices were not driven primarily by
  geopolitical events, but rather by the economic
  forces of the market cycle itself

                          California Median SFR Prices, 1968-2003

$400,000                                                            1990’s:
                                                                    •Low interest rates
                                                                    •Prosperity
$350,000                                                            •Tech boom
                                                                    •Few geopolitical fears
                                                                    •First Gulf War ends victoriously
$300,000                                1980’s:                     •Soviet Union collapses
                                        •Prosperity                 •Oil prices decline
                                        •Declining                  •CALIFORNIA REAL ESTATE DECLINES ANYWAY
$250,000                                interest rates              IN THE FIRST HALF OF THE 1990s, THEN
                                        •Rising stock               BEGINS TO RISE
                                        market
  1970’s:
$200,000                                •CALIFORNIA                                                                         Early 2000’s:
  •Yom Kippur War, 1973
                                        REAL ESTATE                                                                         •US stock market
  •Geopolitical “malaise”
                                        STAGNATES FOR                                                                       falls
$150,000
  •Oil embargo; gas
                                        HALF THE                                                                            •Recession in US
  prices double twice
                                        DECADE, THEN                                                                        economy
  •Recession and
                                        EXPLODES                                                                            •Terrorist
$100,000
  inflation
                                                                                                                            attacks 9/11/01
  •Ayatollah Khomeini
                                                                                                                            •“Axis of Evil”
  rises in Iran; hostages
                                                                                                                            speech, 2002
 $50,000
  •CALIFORNIA REAL ESTATE
                                                                                                                            •War in Iraq,
  GOES UP ANYWAY
                                                                                                                            2003-2004
                                                                                                                            •CALIFORNIA REAL
     $0                                                                                                                     ESTATE RISES
            1968

                   1970

                          1972

                                 1974

                                        1976

                                               1978

                                                      1980

                                                             1982

                                                                    1984

                                                                           1986

                                                                                  1988

                                                                                         1990

                                                                                                1992

                                                                                                       1994

                                                                                                              1996

                                                                                                                     1998

                                                                                                                              2000

                                                                                                                                     2002
                                                                                                                            DRAMATICALLY IN
                                                                                                                            SPITE OF
                                                                                                                            EVERYTHING
                                                                                                                                            4
    After removing the effects of inflation, the
    cyclical nature of the California market is
    more apparent

                                   California Median SFR Prices in
                                Constant Dollars (based at 1982-1984)

$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
 $80,000
                                              Real estate is an excellent hedge against inflation.
 $60,000
                                              Prices rose in constant dollars in the environment of
 $40,000                                      the double-digit inflation of the 1970’s
 $20,000
     $0
           1968

                  1970


                         1972

                                1974


                                       1976

                                              1978

                                                     1980


                                                            1982

                                                                   1984


                                                                          1986

                                                                                 1988

                                                                                        1990


                                                                                               1992

                                                                                                      1994


                                                                                                             1996

                                                                                                                    1998

                                                                                                                           2000


                                                                                                                                  2002
       Correction for inflation based on Consumer Price Index (base 1982-1984)
       published by the Bureau of Labor Statistics
                                                                                                                                         5
What happens in different parts of the cycle?
                                                              BUBBLE PSYCHOLOGY –
                                                              (IF A BUBBLE DOES OCCUR):
                                                              IT’S UNSTOPPABLE! A NEW ERA!
 3.5                                                          THE RULES ARE OBSOLETE! IT’S
                                                              DIFFERENT THIS TIME! BUY
                                                              ANYTHING AND PAY ANY PRICE!
   3
                                       GENEROUS BUYING & LENDING                 WHERE DID
 SLIPPING, HOLD ON,
                                       (often too late in the cycle)             THE BUYERS GO?
 MAYBE
 2.5 IT’LL COME BACK,
 REMEMBER THE LONG RUN                          BULL MARKET
                                                PSYCHOLOGY
                    BEAR MARKET                 CONFIRMED
   2                PSYCHOLOGY
                    BEGINS
                                                           BULL MARKET
 1.5                                                       PSYCHOLOGY
                     FORECLOSURES                          BEGINS

   1
                                                    GRAB A BARGAIN
 CONSERVATIVE
 BUYING & LENDING
 0.5 too late in the cycle)
 (often
                                   BUYERS’ STRIKE
                                   LOW PRICES, BUT WE CAN’T BUY,
   0                               AND WHY DO IT ANYWAY?
       1

           4

                7

                      10

                              13

                                     16

                                          19

                                               22

                                                    25

                                                         28

                                                                31

                                                                       34

                                                                            37

                                                                                   40

                                                                                        43

                                                                                             46
Important note: psychology lags reality
   (it takes time for people to become convinced of something)                           6
                  Price Index, SFRs in Clark County, Nevada
                        August 2002 to September 2004
                             Based at 2001 = 100
 180
 170
 160
 150              Even in Vegas…
 140
 130
 120
 110
 100
                                                    Jun-03




                                                                                                          Jun-04
                Oct-02




                                                                      Oct-03
       Aug-02




                         Dec-02

                                  Feb-03

                                           Apr-03




                                                             Aug-03




                                                                               Dec-03

                                                                                        Feb-04

                                                                                                 Apr-04




                                                                                                                   Aug-04
After rising 50% in a single year, prices in Las Vegas have
leveled off. Can it be that the great bull market is finally over?
Source: Real Estate Trends beta version, First American Real Estate Solutions
                                                                         7
                                                        Median SFR Prices, Los Angeles County
                                                                                        January 1985 to September 2004

$450,000

$400,000                                    That was quite a wild ride…
$350,000

$300,000

$250,000

$200,000

$150,000

$100,000
                                                          But is the bull market finally over in LA?
 $50,000

    $-
                                 May 1986




                                                                  May 1988




                                                                                                    May 1990




                                                                                                                                     May 1992




                                                                                                                                                                      May 1994




                                                                                                                                                                                                       May 1996




                                                                                                                                                                                                                                        May 1998




                                                                                                                                                                                                                                                                         May 2000




                                                                                                                                                                                                                                                                                                          May 2002




                                                                                                                                                                                                                                                                                                                                           May 2004
           Jan 1985




                                            Jan 1987




                                                                             Jan 1989




                                                                                                               Jan 1991




                                                                                                                                                Jan 1993




                                                                                                                                                                                 Jan 1995




                                                                                                                                                                                                                  Jan 1997




                                                                                                                                                                                                                                                   Jan 1999




                                                                                                                                                                                                                                                                                    Jan 2001




                                                                                                                                                                                                                                                                                                                     Jan 2003
                      Sep 1985




                                                       Sep 1987




                                                                                         Sep 1989




                                                                                                                          Sep 1991




                                                                                                                                                           Sep 1993




                                                                                                                                                                                            Sep 1995




                                                                                                                                                                                                                             Sep 1997




                                                                                                                                                                                                                                                              Sep 1999




                                                                                                                                                                                                                                                                                               Sep 2001




                                                                                                                                                                                                                                                                                                                                Sep 2003
 Source: Real Estate Trends beta version, First American Real Estate Solutions
                                                                          8
   Let’s use maps to visually see how the real estate
      business cycle works in Southern California over
      many years – from 1985 to 2003, studied yearly.

   1. These maps display changes in median sale price from year
      to year, by zip code.
   2. The maps do not include zip codes with fewer than 24 arms’
      length, market-value sales in a year.
   3. Zip codes where prices are rising are displayed in hot, red,
      fiery colors.
   4. Zip codes where prices are falling are displayed in cool, blue,
      icy colors.
Data source: Real Estate Trends beta version, First American Real Estate Solutions
    Maps prepared from the price data using MapInfo® software.
                                                                            9
    From 1985 to 1986


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1985-1986 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                  10
     From 1986 to 1987


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1986-1987 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                    11
     From 1987 to 1988


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1987-1988 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   12
      From 1988 to 1989


           Ventura


                                                          San Bernardino

                                           Los Angeles




SFR Price Appreciation
   1988-1989 by zip code                                                   Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%                      Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
                           Universal bull market 1988-1989
      Below -10%           Watch for when this happens again!
                                                                                13
      From 1989 to 1990
Surprise! The market suddenly dried up in 1990.
Watch for when this happens again!

           Ventura


                                                  San Bernardino

                                Los Angeles




SFR Price Appreciation
   1989-1990 by zip code                                           Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%           Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                        14
     From 1990 to 1991


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1990-1991 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   15
     From 1991 to 1992


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1991-1992 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   16
      From 1992 to 1993
The deepest drop in the cycle, as foreclosures hit the market


            Ventura


                                                   San Bernardino

                                  Los Angeles




 SFR Price Appreciation
    1992-1993 by zip code                                           Riverside
       Over 25%
        20% to 25%
        15% to 20%
        10% to 15%            Orange
         5% to 10%
         0 to 5%
        -5% to 0
       -10% to -5%
       Below -10%
                                                                        17
     From 1993 to 1994


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1993-1994 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   18
    From 1994 to 1995


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1994-1995 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   19
     From 1995 to 1996
Amidst the general gloom, some buyers picked
up bargains in affluent coastal areas

           Ventura


                                               San Bernardino

                                Los Angeles




SFR Price Appreciation
   1995-1996 by zip code                                        Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%           Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                    20
   From 1996 to 1997


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1996-1997 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   21
   From 1997 to 1998
The bull market began to catch on


           Ventura


                                               San Bernardino

                                 Los Angeles




SFR Price Appreciation
   1997-1998 by zip code                                        Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%            Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                    22
   From 1998 to 1999


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1998-1999 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   23
    From 1999 to 2000


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   1999-2000 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                    24
   From 2000 to 2001


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   2000-2001 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   25
  From 2001 to 2002


           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   2001-2002 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                   26
       From 2002 to 2003
The whole map was on fire again!

           Ventura


                                             San Bernardino

                               Los Angeles




SFR Price Appreciation
   2002-2003 by zip code                                      Riverside
      Over 25%
       20% to 25%
       15% to 20%
       10% to 15%          Orange
        5% to 10%
        0 to 5%
       -5% to 0
      -10% to -5%
      Below -10%
                                                                    27
The last 18 months in slow motion:
1. The following maps display the rate of change each
   quarter, converted to an annualized rate.
2. Because the number of sales in a quarter is smaller
   than in a year, the quarterly zip code maps will be
   much more irregular than the yearly maps.
3. The market rose at an incredible and unsustainable
   pace in the first half of 2004, often over 5% per
   month, requiring the use of new purple colors on
   the map. But then the market suddenly turned in
   the summer of 2004 and flattened out.
                                                     28
In the second quarter of 2003 the general market was sizzling.
The irregular granularity of the color map is due to small sales
counts in single zip codes over only three months instead of a year.

               Ventura


                                                       San Bernardino

                                         Los Angeles




SFR Price Appreciation
 Annualized rate 2nd quarter 2003

         Over 50%
          35% to 50%                                                    Riverside
          25% to 35%
          20% to 25%
          15% to 20%
          10% to 15%                 Orange
           5% to 10%
           0 to 5%
          -5% to 0
         -10% to -5%
         Below -10%
                                    From 1Q2003 to 2Q2003
                                                        29
The conflagration continued in the third quarter of 2003



              Ventura


                                                      San Bernardino

                                        Los Angeles




SFR Price Appreciation
Annualized rate 3rd quarter 2003

        Over 50%
         35% to 50%                                                    Riverside
         25% to 35%
         20% to 25%
         15% to 20%
         10% to 15%                 Orange
          5% to 10%
          0 to 5%
         -5% to 0
        -10% to -5%
        Below -10%

                                   From 2Q2003 to 3Q2003
                                                       30
Some affluent areas took a breather in the fourth quarter of
2003, but the general market trend was still positive


              Ventura


                                                      San Bernardino

                                        Los Angeles




SFR Price Appreciation
Annualized rate 4th quarter 2003

        Over 50%
         35% to 50%                                                    Riverside
         25% to 35%
         20% to 25%
         15% to 20%
         10% to 15%                 Orange
          5% to 10%
          0 to 5%
         -5% to 0
        -10% to -5%
        Below -10%
                                   From 3Q2003 to 4Q2003
                                                       31
In the first quarter of 2004, prices again rocketed upward



              Ventura


                                                      San Bernardino

                                        Los Angeles




SFR Price Appreciation
Annualized rate 1st quarter 2004

        Over 50%
         35% to 50%                                                    Riverside
         25% to 35%
         20% to 25%
         15% to 20%
         10% to 15%                 Orange
          5% to 10%
          0 to 5%
         -5% to 0
        -10% to -5%
        Below -10%

                                   From 4Q2003 to 1Q2004
                                                       32
The second quarter of 2004 was the very hottest part of the boom.
Prices rose at 5% a month or faster! Properties often had multiple offers
their first day of listing, and often sold above their asking prices. This
intensity, with many areas rising at over 50% annualized, “blew everyone
away” while it lasted, but was unsustainable on a long-term basis.
                 Ventura


                                                         San Bernardino

                                           Los Angeles




  SFR Price Appreciation
   Annualized rate 2nd quarter 2004

           Over 50%
            35% to 50%                                                    Riverside
            25% to 35%
            20% to 25%
            15% to 20%
            10% to 15%                 Orange
             5% to 10%
             0 to 5%
            -5% to 0
           -10% to -5%
           Below -10%
                                      From 1Q2004 to 2Q2004
                                                          33
Surprise! In the summer (third quarter) of 2004, the market suddenly
lost steam. Inventory offered for sale was much greater, and price
growth slowed down or even reversed. The market turn was most
pronounced in the affluent coastal areas, as the affordable inland
regions continued to do well. Compare this with the 1990 map.
         Ventura


                                                         San Bernardino

                                           Los Angeles




  SFR Price Appreciation
   Annualized rate 3rd quarter 2004

           Over 50%
            35% to 50%                                                    Riverside
            25% to 35%
            20% to 25%
            15% to 20%
            10% to 15%                 Orange
             5% to 10%
             0 to 5%
            -5% to 0
           -10% to -5%
           Below -10%


                                      From 2Q2004 to 3Q2004
                                                          34
The slowdown started at the high end
1. Generally, the high end leads the market. High-end
   desirable locations usually are where a bull market
   starts, as people pick up bargains. Less expensive
   areas catch on later.
2. In the last map, the cooling began in the affluent
   coastal areas. Affordable inland areas are still hot.
3. The graph on the next slide shows how less
   expensive zips tended to be “hotter” in the third
   quarter of 2004 than the costlier areas. The group
   of points slopes “down” on the scatter plot.
                                                      35
                               Annualized Growth Rate of SFR Prices
                               For Zip Codes, 3rd Quarter 2004
                         60

                         50

                         40

                         30
Growth Rate in Percent




                         20

                         10

                          0

                         -10

                         -20
                         150000      250000   350000   450000   550000   650000   750000


                               Median Price                                                36
The slowdown started at the high end
  1. A look at the percentiles of SFR prices in
     Orange County shows that the higher tiers of the
     market lost steam during the summer of 2004,
     while the lower, more “affordable” tiers
     remained firm in price. This is shown on the
     next slide.

  2. The summer “soft spot” is small in impact in the
     middle levels of the market but becomes more
     and more pronounced going up the scale.

                                                   37
Source: Real Estate Trends beta version, First American Real Estate Solutions,
         “Percentile” module.
                                                                         38
The business cycle turns
•   Next, we’ll compare the price index for four Southern California
    counties. The SFR price level in each county is set at 100 for the
    base year of 2001.
•   Orange County, the most affluent of the four, led the group for
    much of the two-year period graphed on the next slide.
•   San Bernardino County, the least expensive of the four, lagged
    behind at first, but then caught up as prices of its “affordable”
    housing rose explosively while the market in Orange and Los
    Angeles Counties slowed down.
•   The “affordable” Riverside County market also surged in the
    third quarter of 2004 while the Orange County market weakened.

                                                                  39
                                 SFR Price Index by County, Based at 2001 = 100

200
190
180
170
                                                                                                                            Los Angeles
160
                                                                                                                            Orange
150
                                                                                                                            Riverside
140
                                                                                                                            San Bernardino
130
120
110
100
               Nov-02




                                                                      Nov-03
                        Jan-03




                                                    Jul-03




                                                                               Jan-04




                                                                                                          Jul-04
      Sep-02




                                  Mar-03


                                           May-03




                                                             Sep-03




                                                                                        Mar-04


                                                                                                 May-04




                                                                                                                   Sep-04
 Source: Real Estate Trends beta version, First American Real Estate Solutions,
          “Price Index” variable.
                                                                                                                                 40
 Within Orange County itself, the “affordable” condo
 market outpaced the pricey SFR market.

                                  Orange County Price Index, SFR and Condo,
                                            Based at 2001 = 100

 200
 190
 180
 170
 160
                                                                                                                              SFR
 150
                                                                                                                              CONDO
 140
 130
 120
 110
 100
                Nov-02




                                                                        Nov-03
                         Jan-03




                                                      Jul-03




                                                                                 Jan-04




                                                                                                            Jul-04
       Sep-02




                                    Mar-03


                                             May-03




                                                               Sep-03




                                                                                          Mar-04


                                                                                                   May-04




                                                                                                                     Sep-04
Source: Real Estate Trends beta version, First American Real Estate Solutions,
         “Price Index” variable.
                                                                                                                               41
What fueled the boom?
•   Clearly, low mortgage rates had a lot to do with it!

•   Inventory offered for sale had been only one or two months’
    worth of sales – leading to houses receiving multiple offers
    their first day of listing, often selling for well over asking
    price – and at the height of the boom, prices went up at
    unsustainable rates of 5% per month or even faster.




                                                               42
What ended the boom?
•   Mortgage rates have risen only slightly since their 45-year lows in the
    summer of 2003 – so that wasn’t it.

•   Affordability was the biggest reason prices stopped rising. In Los
    Angeles County only 17% of the households could purchase the median-
    priced home. In Orange County, that figure was only 11%.
    Affordability this low is characteristic of a market top. Although over
    half of buyers used adjustable mortgages and other creative financing,
    this did not solve the affordability problem completely.

•   Inventory levels increased in the summer of 2004, often to historically
    normal levels of six months’ worth of sales. In this “normal” market,
    buyers could take their time instead of making a “panic purchase.”
    Sellers had to price their properties more carefully and often had to wait
    longer for an offer – which frequently came under the asking price.
                                                                              43
              CAR Affordability Index, Los Angeles County

50
45
40
35
30
25
20
15
10
5
0




                                                                                                                                   2002(Apr)

                                                                                                                                               2003(Apr)

                                                                                                                                                           2004(Aug)
     1984

            1985

                   1986

                          1987

                                 1988

                                        1989

                                               1990

                                                      1991

                                                             1992

                                                                    1993

                                                                           1994

                                                                                  1995

                                                                                         1996

                                                                                                1997

                                                                                                       1998

                                                                                                              1999

                                                                                                                     2000

                                                                                                                            2001
            Source: California Association of Realtors®
                                                                                                                                                                       44
                    CAR Affordability Index, Orange County

50
45
40
35
30
25
20
15
10
5                                                                                 This can’t go much farther!
0




                                                                                                                                    2002(Apr)

                                                                                                                                                2003(Apr)

                                                                                                                                                            2004(Aug)
     1984

            1985

                   1986

                          1987

                                 1988

                                        1989

                                               1990

                                                      1991

                                                             1992

                                                                    1993

                                                                           1994

                                                                                   1995

                                                                                          1996

                                                                                                 1997

                                                                                                        1998

                                                                                                               1999

                                                                                                                      2000

                                                                                                                             2001
              Source: California Association of Realtors®
                                                                                                                                                              45
What has happened? What will happen?
•   What has happened is a return to normal market conditions
    after a very long and powerful bull market. The traditional
    interaction of buyer and seller will go on.
•   The near future will not bring a market crash.
•   The near future will not bring a new buying frenzy.

•   The near future will be much less exciting – a simple return
    to normalcy. Sellers will have to judiciously price their
    properties instead of expecting an offer beyond their wildest
    dreams on the first day of listing. Buyers will look at one
    residence after another until they choose one to bid on, just
    as has gone on for many years. Buyers and sellers will
    negotiate prices just as always. Life will go on!
                                                               46
What is my outlook for 2005?
•   Mortgage rates will probably be higher than now, but not so high as to
    seriously damage the market (that would need 30-year fixed rates of
    7.5% or 8%).
•   In affluent areas prices will be the same as they are now, or slightly
    lower.
•   In affordable areas prices will be higher than they are now, as the rising
    market has not yet reached its peak there.
•   Prices will not go up – or down – dramatically from 2004 levels.

    •   There isn’t “affordability room” for another 20% or 30% price
        increase, especially with mortgage rates expected to rise.
    •   With rates still historically low, and a healthy economy, there is no
        reason to expect a dramatic price drop in 2005.
    •   That is, 2005 will likely be a “sideways” year, with market rises and
        market dips, but no huge move up or down.
                                                                             47
What is my advice for 2005?
•   For sellers – it’s a great time to sell, at good prices. But make sure you have
    planned where you will be moving to!
•   For buyers – it’s still a good time to buy, because mortgage rates will still be
    historically low – lower in 2005 than they will be in later years.
•   A warning to buyers – do not use creative financing to overstretch yourself
    into buying a property you really can’t afford.
    •   Think about what your payments will be several years from now when the
        introductory period of your mortgage ends, or as the interest rate adjusts.
    •   Do not assume or “bet” that you can easily sell or refinance based on automatic
        price rises of 20% or 25% every year. Forcing yourself into such an optimistic
        scenario can sting you – because this time it “ain’t gonna happen.”
•   Advice to buyers – buy a residence you can live in for several years!
    •   A fixed-rate mortgage is preferable (30 or 15 years).
    •   Try to put 10% down (20% would be even better).
    •   Then you won’t have to worry so much about what happens to mortgage rates or
        to prices over the next few years. You’re set. Just live your life and be happy.
•   Enjoy your home and laugh at the world!                                       48
For further information,

Please contact

Christopher L. Cagan, Ph.D.
Director of Research and Analytics
First American Real Estate Solutions
(714) 701-2905
E-mail ccagan@firstam.com.


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