California Association of Realtors Chief Economist Leslie Appleton-Young told members of the Silicon Valley Association of Realtors in Menlo Park last week that the housing market has been "absolutely dynamite" and has been one of the strongest sectors of the economy during the past three years.

This is a different ballgame than the early '90s, Appleton-Young said. Consumer confidence is a key factor, and although the economy has been shaky due to the declines in the stock market and the resulting loss of wealth, she believes consumers have been trying to "get positive."

"The optimism of the consumer in America is there. Long-term optimism is something that is important to future recovery and why housing is doing so well," Appleton-Young said. "Low mortgage interest rates, strong demand, baby boomers in peak home-buying years, lots of immigrants coming and price appreciation ... people are wanting to get into the market before it's too late, and no one wants to put their money in the stock market right now."

Appleton-Young admitted that everyone seems puzzled by the economy. The market has been unable to ignite a recovery in capital investment that is so desperately needed, she said. "In January I felt that by August or definitely by October the economy would have had plenty of time to work though its kinks and get going. That hasn't happened."

In spite of the sluggish economic recovery, Appleton-Young thinks a relatively favorable mortgage environment will continue through the end of the year. Next year may be a different story, however, since the market may depend on how quickly the economy is able to kick into gear. For instance, a big increase in interest rates could be harmful to the housing market and could have an effect on the demand level in the moderate and entry levels of the California housing market.

Calling real estate a cyclical industry, Appleton-Young pointed out that the housing market in California has encountered many changes over the years. She believes today's market hinges on two important factors: affordability and jobs.

Appleton-Young advised Realtors to watch the consumer confidence index, which comes out every month, to see how quickly consumers are going to bounce back. The job market also provides important indicators about where the market may be heading. What drives the housing market is jobs, and when people have jobs, they pay their mortgages, she said.

While the worst is hopefully over in terms of jobs and the number of companies going under, the employment rate has dropped, with more than 10,000 jobs lost just in Silicon Valley. In spite of the unemployment rate, there is still a housing shortage in the Bay Area and that is one of the reasons why the Bay Area housing market is doing better than expected. Just to meet the demand for housing in the Bay Area, 250,000 houses would need to be built per year.

Then there's the affordability factor. The gap has widened to 27 percentage points between those who can purchase a median-priced home in California compared to the rest of the United States. In Santa Clara County only 22 percent can afford to buy a median-priced home, compared to the national average of 55 percent.

"One of the challenges we face in California is, at some point, people have to vote with their feet if they can't afford housing," Appleton-Young said. "We need to care about affordability at some point since it impacts jobs and that's the bottom line."

When the housing market in a particular area reaches an affordability wall, people will move to other areas. Eventually the jobs will follow the affordable housing. Appleton-Young cited Sacramento as an example and told Realtors to watch out for the Central Valley, which may be the last great frontier of California.

As far as the numbers and a preliminary forecast for next year, Appleton-Young suggested there may be slightly lower sales during the coming year due to lack of affordability, as well as the potential rise of mortgage rates. She reiterated that a forecast is just a forecast and that nobody really knows for certain what will happen. For instance, an unanticipated additional job loss could change the real estate market dramatically.

"There isn't much we can do about the economy. All we can do is to try to understand it," said Appleton-Young. She urged Realtors to become a resource for their Silicon Valley clients, who tend to be savvy and ask educated questions.

Realtor Leannah Hunt of Coldwell Banker in Palo Alto said that the information presented by Appleton-Young gives her a better understanding of the current housing market.

"I feel that her generally conservative forecasts have enabled us to speak with our clients regarding conditions throughout our state, our particular areas and reflect on the nation as a whole. This is a fragile recovery, and the low interest rates have continued to fuel the consumer confidence figures," Hunt said.

Silicon Valley Association of Realtors President Alicia Tuvell said, "I thought her forecast was right on the money. She is absolutely correct that there is not a bubble that is going to burst. As Realtors we can convey this information to our clients so they can have the advantage of the most up-to-date thinking on the economy and the real estate market."