Article by Maria Zate Judy Pirkowitsch paid $ 244,000 for her house in Santa Barbara in 1994, back "when no one wanted to buy houses," she recalls. But times have changed, and she could easily sell her house now at triple the price. Rapid home price appreciation in recent years, however, is beginning to worry Ms. Pirkowitsch and others who say that the current housing market frenzy resembles the stock market mania of the late 1990s. "Back then stock prices were out of control and home prices seemed reasonable," said Ms. Pirkowitsch, a financial adviser with American Express. "Now stocks are coming back to affordable levels, but home prices are just going nuts." If historical cycles repeat themselves, as often happens in the stock market, the South Coast housing market also could be entering a period of flat to declining prices. While that's welcome news for those wanting to buy a home to live in, it could spell trouble for recent investors who bought homes, condos and apartments with the expectation of big price jumps over the next year or so. As some people who bought "hot" stocks in the late '90s have learned all too painfully, what goes up can come down, and bull markets eventually give way to bear markets. The same holds true for real estate. The rise of the median home price on the South Coast has jumped by double digits each year in the last five years, climbing from $ 359,900 in 1997 to a whopping $ 769,000 in 2002. Many now believe that homes make "the best investment" -- a label once attached to stocks. Although the South Coast median price escalated by 114 percent over five years, many economists said the area is not in a price "bubble" similar to what the stock market experienced. Bubbles occur in markets in which prices have been pushed to sky-high levels simply due to speculation. That means the majority of people are buying homes for an investment only and not to live in them. These investors usually expect to sell their property shortly after buying them to reap a big profit. Rapid price gains aside, the majority of people buying homes on the South Coast want to live in the area. But while the South Coast may not fit the bubble definition, historical cycles show it's due to enter a flat period for home prices. In 2002, the region completed six straight years of rapid price gains, and data going back to 1970 shows that the cycle has lasted only about seven years. After the seventh year of rising prices, the area has experienced a cooling-off period in which the median remained flat or declined, before starting another upward hike. Home prices in the early 1970s were flat before taking off on a seven-year run. Then soaring interest rates that topped more than 16 percent put a hold on the South Coast median price for about four years. As mortgage rates dropped, the median started to climb again in the '80s. Interest rates dropped from 16 percent to 10 percent, creating a frenzy for homes that drove the South Coast median from $ 149,000 in 1983 to a peak of $ 334,000 in 1989. The price leaps didn't last, however, as the recession in 1990 crippled the area's defense and aerospace companies. Many people were forced into unemployment and had to move out of the area. Homes for sale flooded the market. "We had a very large supply of homes at that time. It was common to see two or three for sale signs per block," said Bob Hart, owner of Century 21 A Hart Realty in Santa Barbara. After reaching a peak in 1989, home prices on the South Coast stayed flat or declined, with the median falling about 13 percent to hit bottom at $ 290,000 in 1993. "We did see home values drop in the early 1990s," Mr. Hart added. "During that time we had to tell people, 'Your neighbor's home sold for $ 330,000 last year, but you're probably going to get only $ 300,000 for yours now.' " The next leveling-off period will probably lack the severity of the last boom and bust cycle, analysts said. Interest rates are expected to stay low this year, which will continue to stoke demand for homes, especially those priced on the low end. But price gains should cool from their red-hot advances of recent years, with analysts predicting the median to rise only about 5 percent to 8 percent in 2003. Single-digit increases could be mighty disappointing for those wanting to sell their homes, said Keith Berry, real estate agent with Coldwell Banker in Santa Barbara. "If the median price has been going up 16 percent a year for five years and then levels off for two years, most people in Santa Barbara will think we're in a depression," said Mr. Berry, who has been selling real estate on the South Coast for 39 years. Many people selling their homes also misunderstand what the median price means, said Dan Encell, an agent with Prudential California in Montecito. This causes disappointment when sellers' expectations don't match the headlines, he added. Median price marks the point where half the homes on the market sell for more and half sell for less. It reflects the mix of homes sold, rather than price changes on individual homes for sale. "A lot of people take the increase in median price that they read in the paper and mistakenly think they can increase the selling price of their home by the same amount," Mr. Encell said. He added that this belief has led to the overpricing of some homes in the high-end of the market. But prices have started to come down to more reasonable levels recently on high-end homes (loosely defined as those commanding $ 1.5 million or more), said several agents. If the trend continues, the median could back down from the 30-year high of $ 769,000 set in 2002. At this point, no one predicts home prices to fall drastically in the next cooling-off cycle, since interest rates are at a 40-year low and unemployment is still low by historical standards. Favorable interest rates and jobs form the foundation of a strong housing market, said Raphael Bostic, an economist at the University of Southern California Lusk Center for Real Estate. Mr. Bostic was among the speakers at an Inman News conference held in Los Angeles in January titled "The Housing Bubble: Fact or Fiction?" The wild card for the economy and the housing market turns on global events, such as a possible war with Iraq or terrorist acts, he told the audience. Mr. Bostic dismissed the idea that the nation's housing market was caught in a situation comparable to the stock market bubble. "The reason home prices fell in the early 1990s in Southern California is because we had a supply overhang (over supply of homes) and because of economic conditions," he told the audience. "I would never call that time a bubble. The fundamentals of the economy were disturbed causing prices to fall." Mr. Bostic added that the stock market bust in 2000 was caused by people who "gambled and viewed the market as a game." "We may have some touch of that in the housing market, but if prices did fall, most people would be able to wait (by living in their homes) until prices came back up again," he said. For those who bought a home recently and expect to live in it for many years, a period of flat prices may seem unimportant. People who purchased investment property at peak prices -- with expectations of quick profits -- may see problems. Rampant "spec" buying carried a large part of the blame for the huge rise and then fall of home prices on the South Coast in the 1990s. "There was a certain amount of speculation happening here back then. That's always a factor to watch, because it tends to artificially inflate prices," said Mr. Berry of Coldwell Banker. While Mr. Berry and others insist that spec buying has remained below the levels of a decade ago, there are some signs that it may be on the rise on the South Coast. In 2001, one out of four people buying homes in the area paid for the purchase with cold hard cash. Real estate agents attributed the phenomenon to people cashing out their stock portfolios and buying homes as a substitute investment. Data on all cash purchases in 2002 has not yet become available, but the persistence of the stock market slump points to the continued trend for paying in greenbacks for homes. The condominium market also shows signs of more spec buying than in recent years, especially since most still carry a below-the-median price tag. Several real estate agents in recent months said they have noticed more buyers interested in purchasing condos to rent out rather than to live in. But some landlords have noticed that the rental market has been softening, which sends up another flag that the home-buying market could be headed for a breather. Rentals easily commanded top dollar a few years ago, but that has changed, and it's harder to find tenants these days, said Ms. Pirkowitsch, who also owns a three-bedroom, two-bath rental home in the Hope Ranch annex area. "At one point I had the house vacant for four months," she explained. "I had to drop the rent about 10 percent. And even then I had a hard time getting it rented." "I'm concerned that we may be pricing our work force out of the housing market," Ms. Pirkowitsch added. "I've always thought the Santa Barbara area was good for investment property. But if the work force can't afford to live here, then those people are going to look elsewhere for places to live. That's not good for people with rental property, and it's not a good sign for our community."
