Home Prices in O.C. Take a July Breather

Orange County’s blazing housing market cooled a bit last month, as the median home price slipped to $238,000 from the all-time high of $241,000 in May and June, according to a real estate research firm.

The results indicate that rising interest rates nudged more entry-level and moderate home buyers into the market than those with deeper pockets, said John Karevoll, an analyst at La Jolla-based Acxiom/Dataquick Real Estate Systems Inc., which compiled the housing figures.

Although it was a busy month, housing sales also dipped below the same month last year. Buyers snapped up 4,828 homes, down 8.2% from 5,259 in July 1998, the busiest month of the decade.

Agents said there are more properties available on the market than in previous months, partly because sales have slowed, and partly because of new master-planned communities that opened in late July.

Higher interest rates were one of the factors contributing to lower sales, said Bernadette Ryerson, an agent at Prudential California Realty. “It’s still a very good market,” she said. “But there’s a lot of properties, and a lot of inventory right now on the market. We haven’t seen that in a long time.”

In another sign that steadily rising interest rates are starting to have an impact, the Acxiom/Dataquick report found that a growing number of buyers opted for adjustable rate mortgages with lower interest rates on the front end, Karevoll said.

Despite the double whammy of higher interest rates and rising prices, the market is holding up, Karevoll said. “There’s no frenzy out there, but the market is still pretty strong.”

Karevoll is sticking with previous predictions that the median price will move up considerably by the year’s end--perhaps as high as $260,000--because job and population growth is creating more demand for housing.

Indeed, the median price in July, while lower than the record high in May and June, was up 3.9% from a year ago, according to the report. That marks the 26th consecutive month that housing prices have surpassed prices in the same month a year earlier.

But there has been a noticeable shift in the kinds of loans consumers are using.

In July, 30% of Orange County home buyers opted for adjustable-rate mortgages rather than fixed-rate loans--the highest rate in nearly two years. Over the last couple of years, when the market showed signs of rebounding and interest rates were at historic lows, only 15% of home buyers were using adjustable-rate mortgages.

But the trend toward these flexible-rate loans, which allow buyers to buy larger homes at a lower rate initially, indicates that people are stretching to qualify for loans, analysts said.

Since dropping to the lowest level in nearly 30 years, interest rates have edged higher over the summer, approaching 8%. Even though rates remain historically low and far behind levels of a decade ago, buyers may find it more difficult to find houses they can afford if prices keep climbing.

Last year, nearly one-third of the homes that sold in Orange County were priced at $425,000 or higher, according to the Construction Industry Research Board, a Burbank-based research group. Only 3.2% of the homes had price tags of $150,000 or less.

And at the current median price of $238,000, a 30-year fixed mortgage at 7.5% interest would run $1,664 per month. But a variable loan, at 6.5% interest (a rate that fluctuates depending on interest rates) costs $1,504 per month, said Daniel Phelan, president of the California Mortgage Bankers Assn., a Sacramento-based trade group. “If interest rates trend up, we’ll see an increase in the volume of adjustable-rate mortgages,” Phelan said.

Many of those applying for adjustable loans are first-time home buyers, who with each upward tick in interest rates, may find themselves increasingly squeezed out of the market.

Julie Day, a manager at Norwest Mortgage, said loans that provide lower interest rates during the first couple of years in exchange for a higher rate over the rest of the term also are popular among younger buyers.

“We’ve seen a lot more first-time buyers in the last 60 days, and it’s almost like they’re trying to get in before it’s too late,” Day said. “With rates moving higher, it tightens the margins of what they can afford.”

Prices of new homes showed the sharpest gains, rising 9% in July to $322,750. Previously owned homes also moved up 5% to $260,000, while condominiums rose 3% to $158,750.

The median price per square foot, which measures the cost of space regardless of structure and is considered a truer reflection of the market, hit $158.78 last month, matching the record set in June. The price was up 8.1% over July 1998.

Analyst David Chapman also expects prices to keep moving up.

“I don’t see these rising mortgage rates having a major impact on the market because we’re still well below the levels we saw in the 1980s,” said Chapman, a housing industry accountant with Haskell & White in Newport Beach. “As long as we have such a shortfall of housing in Orange County, prices will continue to go up.”