'FOUND MONEY' FIGURES INTO HOUSING DEMAND IN AREA.

Byline: GREGORY J. WILCOX

When it came to forecasting this year's residential real estate market, the forecasters apparently low-balled one item. Call it the wealth factor, or found money factor.

In economic circles it is known as unearned income, a rarer commodity in most cases than the money for which we work. It comes in several forms, like an inheritance, a great stock bet or equity from the kind of gravity defying rate of appreciation in the California residential marketplace since the late 1990s.

``We're starting to wonder if we have underestimated the wealth side of the equation. The market demand is not just generated by household income but also ... the unearned income side,'' John Karevoll, an analyst at DataQuick Information Systems, said last week while explaining another month of strong sales counts and big gains in price appreciation.

For example, the median price of a previously owned, single-family home in the San Fernando Valley soared an annual 24.1 percent to $495,000, or $96,000 in equity during November, according to the Southland Regional Association of Realtors.

In Los Angeles County the median gained an annual 24.2 percent to $474,540, or $92,380.

So once again, residential real estate remained a bluer chip to bet than the venerable Dow Jones Industrial Average components.

This year, a previously owned home in California will probably end up appreciating 22 percent, said Leslie Appleton-Young, vice president and chief economist at the California Association of Realtors.

By comparison, with five trading days left in 2004, the venerable Dow Jones Industrial average had increased 3.5 percent.

``We're thinking perhaps those who have money to invest have decided homeownership is probably a good place to have that invested,'' Karevoll said.

A couple of reasons come readily to mind.

When you buy a house, the cost of the investment can be written off at tax time.

Sometimes when you buy a stock, you just end up writing it off. If you profit from a stock sale, you pay tax on it. If you profit on a home sale, up to $500,000 of profit can be tax free.

Sometimes the money invested in a stock is simply written off.

Analysts say the real estate market still has some legs.

Demand, especially in metropolitan areas like Los Angeles, was strong in 2004 and is expected to continue that way because the area has been under- built for years.

It's hard to quantify the wealth factor, though.

``There's no way to capture that data,'' Appleton-Young said.

And next year it might play a smaller role, especially if interest rates increase as expected and the rate of appreciation finally slows in California, as has been expected.

The move up is not expected to be huge, though.

Appleton-Young thinks a spike of .75 percentage point is likely.

Frank Nothaft, Freddie Mac vice president and chief economist, pegs the increase at half a percentage point.

``If most of your investments are in real estate, you might want to look further at other investments,'' he said.

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com