Paul Sakuma  /  AP file
A home for sale in Los Altos, Calif. The pace of existing-home sales rose 3 percent last month from the year-earlier level.
By Martin Wolk Chief economics correspondent
updated 5/28/2005 12:51:55 AM ET 2005-05-28T04:51:55

Pity the poor first-time home buyer in California. With the median price of a home in the Golden State crossing $500,000 for the first time, getting into that “starter” home requires  perseverance, luck and a willingness to think small.

Maya Vestal, 25, who works for a biotech company, took the plunge this month with her boyfriend, plunking down $585,000 for a 1,200-square-foot home near San Jose in a neighborhood she describes as “not great.”

Frankly, the three-bedroom, one-bath house doesn’t sound all that great either. Built in 1940, it needs about $50,000 worth of work including new plumbing, new wiring and a new kitchen, she figures. “The only thing we’re keeping are the floors, which are beautiful, original hardwood.”

Together, Vestal and her boyfriend, a 25-year-old city worker, earn more than $100,000 a year, but the new $3,800 monthly mortgage payments will eat up nearly 70 percent of the couple’s take-home pay.

“It’s a lot of money, and it’s really scary,” she said. “We really like to travel, and we probably won’t be able to do that so much.”

But with prices going up so rapidly and long-term interest rates lingering at their lowest levels in four decades, Vestal and her boyfriend didn’t want to risk waiting.

“We felt if prices or interest rates go up, we’ll be priced out of the market,” she said. “Even if rates went up half a percent we wouldn’t be able to afford a house.”

Vestal can consider herself one of the lucky ones.

All over California young working people in their 20s and 30s are coming up empty as they reach for the American dream of homeownership. Only about 26 percent of sales in California go to first-time home buyers, compared with 40 percent nationally, said Leslie Appleton-Young, chief economist for the California Association of Realtors.

“The trade-up, repeat buyers are in great shape,” she said. “They have experienced remarkable, unprecedented equity growth. If you’re on the outside looking in, it’s very tough.”

At $509,230, the median price of a house sold in California last month was up 12.5 percent from the level a year earlier, according to the Realtors. That actually represents a slowdown from the average 20 percent annual gain of the past three years, supporting the view of analysts that California is headed for a “soft landing” after the phenomenal sales growth of the past several years.

“The rate of price appreciation is slowing,” said Delores Conway, director of the Casden forecast at the USC Lusk Center for Real Estate. “The whole question is, will we hit a soft landing? I think the general expectation is yes, we probably will.”

Keitaro Matsuda, senior economist at the Union Bank of California, agreed, saying the market appears to be stabilizing after a surge last year driven by a drop in mortgage interest rates. “Activity that was frantic last year has gotten a bit more manageable,” he said.

But if price appreciation is slowing, it probably doesn’t feel that way to a lot of house hunters.  Price gains have slowed to the single digits or low double-digits in areas including Los Angeles, Orange County and San Diego, where prices have surged in the past three years, according to the Realtors’ figures, which exclude new homes.

Major Market Indices

Elsewhere in California prices are still surging at a rate of 25 percent or more, including the rapidly growing Central Valley and Riverside regions, where prices are far lower than in areas closer to the coast.

“I do think the rate of appreciation is not sustainable in the long term,” said Appleton-Young, of the Realtors. “What is happening gradually over time is that people are getting priced out of the California market.”

Robert Bowen, a 32-year-old technical editor in Los Angeles, counts himself among that group. He and his wife, a film editor, have been looking for a house since even before they were married in November and feel like the ground has been shifting under their feet.

“I’ve lost count of how many places we've gone to look at — probably 40 to 50,” he said. Bowen and his wife are trying to find something in the $320,000 price range, an amount that must have seemed reasonable when they began thinking about a house but now seems laughably small.

“We started out looking at small, stand-alone houses, and we realized we really couldn’t afford any,” he said. “At this point even condos are out of our price range. The areas we started looking at were on the fringes of acceptable. They were up and coming, and now they have up and come.”

He is becoming resigned to the notion that he and his wife probably will remain renters for some time to come.

While debate rages over whether the national housing market is in a dangerous bubble, California is one place where the memory of a housing bust is still a fresh one. In the 1990s housing prices fell 20 percent in southern California as the defense industry shrank after the Cold War ended. In other parts of the state housing values flattened, and sales dried up as homeowners grew more reluctant to sell.

Still, economists say the state’s economy has diversified since then, and they can point to the rapid rebound in the northern California housing market after the collapse of the dot-com boom.

And the current inventory of unsold homes, about three months’ worth, is a bit higher than a year ago, but still less than half the average level of the late 1990s. “I haven’t met an agent in three years who has complained about extra inventory,” said Appleton-Young.

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Data: Latest rates in the US

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Home equity type Today +/- Chart
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