Homeowners Expect Prices to Keep Rising

Americans remain largely optimistic that home values will keep rising in the next few years, but some are concerned that they won't be able to keep up with their mortgage payments, according to a Los Angeles Times/Bloomberg poll.
By: Tom Petruno and Kathy M. Kristof: Times Staff Writers
More than one-quarter of those who have adjustable-rate mortgages say they aren't sure they'll be able to make their monthly payments if their interest rate goes up. These loans have been particularly popular in California and other states with high housing costs.

Homeowners' views in the new nationwide poll show widespread faith in the real estate market, despite signs that prices and sales are cooling. The median price of existing U.S. homes sold in January was $211,000, down from a record high of $220,000 in August.

In the Times/Bloomberg poll, nearly half of homeowners expected the price of their primary residence to rise 5% to 15% over the next three years. Twenty-five percent expected appreciation of 16% or more in that period.

Just 5% predicted no price increase.

"I think the 'bubble' talk is hyped," said Diane Harvey of Foster City, Calif., in a follow-up interview after the poll. She and her husband, David, have made a business out of buying and selling houses in the Sacramento and Phoenix areas for the last 2 1/2 years.

Harvey, 66, said she believed that the market had entered a slowdown but that over time, the growth of households and the lure of Sun Belt living would shore up prices in the regions where she and her husband had invested in homes.

The Times/Bloomberg telephone poll surveyed 2,563 adults on their personal finances and their views of financial markets and investment opportunities.

Asked about the short-term trend in house prices, 36% of all respondents — homeowners and renters — expected homes in their neighborhood to increase in the next six months, while 49% expected prices to stay the same.

A minority of 14% predicted a decline in prices in that period.

In the West, 43% of respondents predicted rising prices in their neighborhood in the next six months, the highest percentage among the nation's four major regions. The figure was 29% in the Midwest.

The poll, which was conducted Feb. 25 through Sunday and has a margin of sampling error of plus or minus 3 percentage points, also revealed unease among some homeowners about their ability to hold on to their property.

About 1 in 7 homeowners said the mortgage on their home was an adjustable-rate rather than a fixed-rate loan. Adjustable-rate loans typically offer low initial interest rates, making homes affordable for many people who couldn't qualify for fixed-rate mortgages.

As market interest rates rise, however, homeowners with adjustable loans face the prospect of sharply higher payments.

Of those who have adjustable-rate loans, the poll found that 21% said they were "not too confident" about making their payments if they adjusted higher. Five percent said they were "not at all confident." The rest were "very confident" or "somewhat confident."

Lillie Oliver, 50, of Alvertville, Ala., said she got an adjustable-rate loan a few years ago when she refinanced her house to pay for improvements. But her loan rate recently jumped a full percentage point, and it could adjust again in six months, she said.

"I'm at the point right now where I can barely make the payments," Oliver said. "If everything keeps going higher, like groceries and everything, I don't know how I am going to make it."

Jackie Arnold, 41, and her husband used an adjustable-rate loan to buy a home in suburban Atlanta 18 months ago. Now, as interest rates rise, she's worried that the loan may have been a mistake.

"Our dilemma is, do we sit on the [loan] that we have and wait … or do we refinance now and pay considerably more right away?" Arnold said. "We are caught between a rock and a hard place."

Some consumer advocates say home buyers haven't been fully aware of the risks involved with adjustable-rate mortgages.

Homeowners with "substantial income or assets could well weather the storm of higher payments on these loans," said Stephen Brobeck, head of the Consumer Federation of America. "But we know that a fairly high percentage of people who have taken out these exotic loans aren't in that situation."

In California, an estimated 25% of so-called prime mortgages issued in 2005 were adjustable-rate loans, compared with 13% nationally, according to data firm LoanPerformance. Prime borrowers generally have the best credit ratings, but over the last two years even these customers increasingly have taken out adjustable loans that allow them to pay artificially low interest rates for months or years. When these loans eventually adjust higher, many consumer advocates fear, some borrowers won't be able to make their payments.

Still, with most homeowners enjoying the relative safety of fixed-rate loans, and with home prices up significantly in nearly all regions in recent years, the allure of residential real estate as an investment remains strong, the poll indicated.

Asked how they would invest most of a $1-million windfall, 36% of respondents picked real estate. The next-most-popular investment was mutual funds, named by 13% of respondents.

T. Darren Gillespie, 34, figures his best retirement plan is the Orange County, N.C., house that he lives in.

He said he had been saving and investing in mutual funds for 14 years but felt that he had accumulated relatively little — $35,000 in all — in those accounts. "As hard as I've worked at it, that's all I've got," said the self-employed contractor. "That's not going to provide me with a whole lot for retirement."

By contrast, Gillespie estimated that the value of his home, recently appraised at $350,000, had risen $50,000 in just three years.

"Eighty percent of my net worth is tied up in this home," he said.

In the poll, 56% of property owners estimated that real estate accounted for 50% or more of their family's total net worth, or assets minus liabilities.

A report last month from the Federal Reserve pointed to the increasing importance of home equity in bolstering Americans' net worth in this decade. That, in turn, has helped support consumer spending.

Of homeowners in the poll, 16% said they had taken cash out of their home in the last two years through credit lines, second mortgages or other loans. The money primarily went to finance home improvements, pay off other debts and buy cars, poll responses showed.

Seven percent of homeowners said they were considering tapping their equity.

One is Edward Ogden, a 52-year-old public relations executive in Canton, Ohio. With children ages 17 and 15, he said, he might have to turn to a home-equity loan to finance their college expenses.

Many Americans' reliance on real estate as a savings account, however, raises the risk that a decline in housing prices could drag down the economy because consumers would have less home equity to tap for spending.

A decline in housing prices also could hit Americans who lack substantial savings and were counting on their home equity to help fund their retirement.

For Carol Carlisle, 60, drawing down the equity in her Albany, Calif., home in retirement may be unavoidable, she said.

Carlisle and her husband have saved, but she's not certain they have enough to last. The value of their investment portfolio tanked after the 2001 terrorist attacks and left her with a nagging uncertainty.

"There is great anxiety," she said. "My parents got to age 62 and they were retiring and they had enough. My friends and I talk about it a lot. We don't know if we have enough."

The majority of homeowners in the Times/Bloomberg poll — 75% — said they weren't expecting to need their home equity to help pay for retirement. But some economists believe people routinely underestimate what retirement will cost.

"This is something that no one thinks about until they get there," said Susan Sterne, head of Economic Analysis Associates in Greenwich, Conn.

More to come?

Asked of homeowners in a nationwide Los Angeles Times/Bloomberg poll:

Q: How much do you believe your primary residence will appreciate in value over the next three years?

Expected appreciation: 5% to 15%

Percentage of respondents: 49%

*

Expected appreciation: 16% to 30%

Percentage of respondents: 19%

*

Expected appreciation: 31% or more

Percentage of respondents: 6%

*

Expected appreciation: Less than 5%

Percentage of respondents: 12%

*

Expected appreciation: Won't appreciate

Percentage of respondents: 5%

*
Expected appreciation: Don't know

Percentage of respondents: 9%

Source: L.A. Times/Bloomberg poll

Los Angeles Times

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Optimism, and concern, about housing

Q: If you were given $1 million to invest today, where would you invest most of it?

Real estate: 36%

Mutual funds: 13%

Stocks: 12%

Bank accounts: 7%

Would diversify: 6%

Bonds: 6%

Gold: 4%

Other investments: 8%

Wouldn't invest it: 2%

Don't know: 6%

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Asked of homeowners with adjustable-rate mortgages:

Q: How confident are you that you will be able to make your payment if it adjusts upward in the future?

Very confident: 55%

Somewhat confident: 19%

Not too confident: 21%

Not at all confident: 5%

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Asked of property owners:

Q: How much of your family's overall net worth is in real estate?

50% or more: 56%

26% to 49%: 24%

Less than 25%: 13%

Don't know: 7%

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Asked of those who have tapped the equity in their home over the last two years or are considering tapping their equity:

Q: What did you use the cash for, or what are you considering using the cash for?

Home improvement/repairs: 40%

Pay off other debts: 30%

Car or other vehicle: 23%

General spending: 6%

Education expenses: 4%

Investments: 4%

Medical expenses: 4%

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Notes: Results are among adults polled nationwide. Some answer categories are not shown.

Poll results and full question wording are available at http://www.latimes.com/timespoll .

How the poll was conducted: The Los Angeles Times/Bloomberg poll contacted 2,563 adults nationwide by telephone Feb. 25 through Sunday. Included were 752 households with incomes of more than $100,000. Among them, 712 were investors. Telephone numbers were chosen from a list of all exchanges in the nation, and random-digit dialing techniques allowed listed and unlisted numbers to be contacted. Multiple attempts were made to contact each number. Areas that have a majority of households with incomes of more than $100,000 a year were contacted in separate random samples to allow more accurate analysis of that subgroup. Adults in the entire sample were weighted slightly to conform with their respective census proportions by sex, ethnicity, age, education, national region and probability of selection. The margin of sampling error is plus or minus 3 percentage points for the entire sample; for investors in households with incomes of more than $100,000, it is 4 points. For certain subgroups, the error margin may be somewhat higher. Poll results may also be affected by factors such as question wording and the order in which questions are presented.

Source: L.A. Times/Bloomberg poll