Pace seen slowing, not collapsing. (L.A.'s Homebuying Craze -- How High, How Long?).

THERE is only so high something can climb before gravity, reality or common sense starts to pull it back down.

Such is the case with the residential real estate market, which set record-high median price levels in every month of the year through June, the last month for which data is available. In the middle of a recession, no less.

But it appears that if prices are to recede, the air will leave the bubble with a hiss rather than a pop.

The fundamentals of the marketplace--continued strong demand, limited supply and low interest rates--are unlikely to change dramatically, and that, said economists, is going to cushion any falloff in home values.

"I basically see a slowing national economy, which means unemployment, and L.A. County has been showing the same signs as the U.S.," said Michael Carney, professor of finance and real estate at Cal Poly Pomona and director of the Real Estate Research Council of Southern California. "By a year from today, we'll see the increases in home prices disappear (but) we're not going to see prices dropping off a cliff."

By any measure, the heights to which home prices have climbed are precipitous, particularly in recent months.

Median L.A. County home prices increased by 14.5 percent through the first six months of the year, according to DataQuick Information Systems, and now stand at $269,000. The median home price increased 16.5 percent in 2001, ending the year at $233,000.

While $269,000 is far from cheap, especially for buyers who had counted on once-inflated stock holdings to finance a downpayment, in some ways it remains less expensive to own a home today than it was a decade ago.

Interest rates for 30-year mortgages stood at 6.49 percent in July--the lowest in decades and 2.76 percent below 1991, the last of the Previous boom years.

By taking inflation into consideration and assuming an 80 percent mortgage, the monthly mortgage payment on a median-priced home today is $1,360. That compares to $1,800 in inflation-adjusted 1991 dollars and $1,815 in inflation-adjusted 1988 dollars (when interest rates were more than 10 percent), just as prices started to jump.

"We were just seeing prices go up and up, so we decided to put the heat on in December," said Jordan Thau, a medical administrator who bought a three-bedroom home in the Mar Vista area for $520,000. "Because of the interest rates, we figured that if we could make the monthlies, pricing wasn't as big of an issue."

No stop

"There isn't anything resembling a stop sign in this market place," said Robert Bailey, president of California Association of Realtors. "Is there any indication that this is a bubble? I don't think so."

Or, as Carney said, "It's easy as hell to get a loan. The government promotes this and lenders have seen home prices go up, so they'll keep lending."

If anything looks to put a break on sales activity, it's corning up with the downpayment for pricier homes.

Only a third of the county's population can afford the median-priced house today, down from 43 percent in early 1999 (assuming that a buyer's monthly income is three times the amount of a monthly mortgage). When the real estate market topped in 1991, less than a quarter of the population could afford the median-priced house.

"I would be looking for numbers under 20 percent before the thing cracks," said Christopher Cagen, director of research and analytics at First American Real Estate Solutions in Anaheim.

Notably absent from the market are the speculators who helped inflate housing prices in the late 1970s and, to a lesser extent, the late 1980s.

"The term 'price bubble' would refer to when speculators are drawn to the market because of expectations of higher returns and quick payoffs," said Bailey, who said that the double-escrow situations of the late '70s are not occurring today. "Only about one in 10 home buyers are purchasing for investment purposes."

Even if his home was to appreciate another 10 to 15 percent in the next year, Thau has no plans on flipping the property. "I saw the fees the escrow process generates--that's an expensive transaction (for the seller)," said Thau. "Besides, if our place goes up, so do other places."

Housing shortfall

There would appear to be little room for speculators.

Between 1990, two years before median home prices began dropping during the last recession, and 2000, Los Angeles County added 656,000 people (7.4 percent). Its housing stock in the same period increased by 107,500 units (3.5 percent), according to Census figures.

"We're seeing more people moving into Southern California than ever before," said Sung Won Sohn, chief economist at Wells Fargo & Co. "The natives are actually leaving but the foreigners are more than making up for the fall."

As a result, the countywide homeowner vacancy rate, representing the number of homes vacant and for sale, fell to 1.6 percent in 2000 according to the U.S. Census Bureau. Homes now sit on the market for less than three months, according to Bailey, who said if that time increased to six to 12 months it would indicate prices had gone too high.

Because of the continuing population growth, median home prices will continue to rise for the next five years, albeit at a more conservative rate (2 to 3 percent) than this year's 13 percent bump or last year's 12 percent increase from 2000, according to Sohn.

Despite the feel of an overheated market, drawing comparisons between today and the early 90s would be a mistake.

"There were huge aerospace cutbacks after the Cold War ended and the Japanese economy went into the tank in 1990," said Carney, noting that Southern California was far more dependent on defense spending and Japanese investment than the country as a whole.

As a result, countywide unemployment figures jumped to 10 percent in July 1992 from 5.1 percent in January 1989. By comparison, L.A. County unemployment was 6.7 percent last month. With the local economy far more diversified than it was 10 years ago, "I don't see anything that will bring (a similar demise) about," said Carney.

Shock to the system

Still, the 1990s can give pause to homebuyers who feel they are getting in at the top. In 1991, the median home price in L.A. County had increased for the third consecutive year, and, at $193,000, was 22 percent higher than 1988's median of $158,200.

By 1995, that gain was all but eliminated, with the county's median dropping back down to $162,000. With the equity of homeowners who got into the market during the boom dried up, foreclosures hit record highs, jumping to more than 52,000 in 1995 from less than 36,000 three years earlier.

"Everything crashed," said R.J. Thomson, relocation director at ReMax Centre in Calabasas. "I was doing foreclosures all the time. People were just bailing out of their homes."

This boom has been even more pronounced, with 2001 being the fifth consecutive year of median price increases and 2002 expected to top last year's levels. At $223,000, last year's median was 38 percent above the $162,000 figure of 1996, the year before the current boom began.

While stopping short of predicting a housing price meltdown, Carney noted that even the most pessimistic of analysts fail to acknowledge substantial economic downturns until they actually happen.

"You can't tell you're in a housing bubble until afterwards," said Carney. "Did anybody see a big drop in prices in the '90s coming? No."

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