As 2004 draws close to the New Year and a new four-year term for the Bush administration, it’s appropriate that we examine the U.S. housing market—looking back from last January and forward to 2006.

We've finally come to the end of the political season. With all the negativity and focus on what’s ailing the country, attack ads and sniping, it's little wonder that measures of consumer attitudes have been beaten down in recent weeks: the yardsticks that cover those concepts all pointed to a somewhat more disappointed electorate. For example, the Conference Board's Index of Consumer Confidence dipped to a reading of 92.8 in October from September's 96.7; and the University of Michigan survey of Consumer Sentiment slid to 91.7 from 94.2. Based on the November 2 election results, I expect that sentiment will begin to improve as the partisan politicking falls behind us.

It is fair to say that those sentiment levels haven't affected home-buying and refinancing decisions. According to financial publisher HSH New Home sales in September jumped back up to a 1.206 million (annualized) level of sale, rising 3.5% from August. In addition, sales of previously-owned stock powered higher by 3%, landing among the best levels of this stellar year.

To be certain, lenders, mortgage brokers, realtors and homeowners have enjoyed a prosperous 2004. Driven by a strengthening economy, low mortgage interest rates, and a demand for home ownership that far outweighed the supply in most regions, home values have skyrocketed amidst a selling, buying and refinancing frenzy held over from 2003. And all signs point to the continuation of a strong single-family home mortgage market over the next 24 months.

Let’s examine the nation vs. California vs. the Los Angeles Westside. The national median existing-home price was $186,600 in September, up 8.6 percent from September 2003, when the median price was $171,800. During the same period in California, median home prices were up 21%, from $384,690 to $465,540. By comparison, many Westside L.A. areas showcased September 2004 median home values exceeding $1 million. Acknowledging the widespread proliferation of million-dollar homes throughout the Westside, Coldwell Banker recently upped to $2 million, from $1 million, the listing requirement for homes represented by its Preview Homes division.

For 2005, the Mortgage Bankers Association is forecasting continued, though moderating, economic growth, with purchase mortgage originations remaining near the record levels of 2004. The MBA says low rates are keeping mortgage payments very competitive with apartment rents, so apartment vacancy rates are increasing as home-ownership rates increase. Additionally, low mortgage payments are opening home-ownership opportunities to many immigrant families. The mortgage industry has shown itself adept at using the capital markets to bring greater liquidity to a number of innovative products like hybrid ARMs, low documentation loans and loans to borrowers who want to buy a house while they are still rebuilding their credit.

According to Douglas Duncan, the MBA’s senior vice president and chief economist, the MBA is forecasting only a modest increase in rates, despite the continued expansion of the economy. “As long as rates remain at these levels, home buying will remain an attractive alternative to renting and the purchase market will continue strong,” said Duncan.

Duncan believes—and I agree—that 30-year fixed mortgage rates will increase gradually to 6.5 percent by the end of 2005, and to nearly 7 percent by the end of 2006. This will largely be a result of long-term Treasury rates staying well below 5 percent during 2005 and climbing to 5.1 percent by the end of 2006. Short-term (1-year) Treasury rates are expected to climb even more quickly, increasing from 2.2 percent to 3.2 percent by the end of 2005 and to 4.0 percent by the end of 2006.

Many factors will continue to positively influence LA County’s home values. Population density together with the dearth of available land on which to develop and build new single-family housing is a winning combination for sustaining property values. Much of this market’s economy is comprised of small entrepreneurial businesses, professionals, and of course a booming entertainment industry—people to whom lifestyle is a priority and can afford to buy up and want to live in LA’s most desirable neighborhoods.

Further buoyed by our diverse Southern California economy and an influx of foreign money, especially from Asia, I foresee home sales remaining extremely fluid and home values continuing to appreciate accordingly.

About the Author
Mark Cohen is president of Beverly Hills-based, Cohen Financial Group—rated the “#1 Mortgage Broker in California” for eight years in a row by Mortgage Originator Magazine and "Best of LA" by Los Angeles Magazine. You can learn more at www.cohenfinancialgroup.com. You may reach Mark at (310) 777-5401.