The association's chief economist, David Lereah, said the fundamentals responsible for this year's housing record will be in play next year as well. "Home sales will be off mildly for the second-best showing ever in 2004," he said. "With the economy improving, consumer confidence rising and jobs being created, a growing number of households will sustain strong housing demand. Only a modest rise in mortgage interest rates will slightly dampen the pace of home sales next year."

Lereah said growth in the U.S. gross domestic product will be 3.1 percent for 2003 before growing another 4.8 percent in 2004. "With improvements in manufacturing and other sectors, the job market is beginning to pick up steam and the economy is running on all cylinders," he said. "We expect 2 million jobs to be created over the next year, helping to push the unemployment rate down to 5.6 percent by the fourth quarter of 2004."

The national median existing-home price for 2003 will rise 9.1 percent to $172,600, which is the strongest increase since 1980, and the median new-home price should grow by 3.6 percent to $194,400. Median-price increases in 2004 are forecast at 4.7 percent for existing homes and 5.1 percent for new homes.

"Although the rate of price increase is expected to slow next year, it will remain above the historic norm of one-to-two percentage points higher than the general rate of inflation," Lereah said. He projects the consumer price index to increase only 1.5 percent in 2004, following a 2.3 percent rise this year.

On the local front, the California housing market is poised to finish 2003 by setting new records across the board for the second consecutive year, according to the California Association of Realtors "State of the Housing Market 2003" report released during the last week of 2003.

"The housing market in 2003 is on course to break several records that were set in 2002," said the association's president, Ann Pettijohn. "Sales of detached existing single-family homes are expected to exceed 2002's record-setting pace of 572,500 units, increasing 4.2 percent to 596,500 units this year. The median price will easily achieve a new high in 2003, reaching $369,500, a 17 percent increase over 2002.

The market has benefited over the past two years from the lowest mortgage rates in more than a generation, according to the association's economists. Moreover, strong demand relative to supply has contributed to significant increases in the median price as the state's population has grown by 600,000 people per year, while new home production has fallen short of statewide household growth by at least 40,000 units for the past several years.

Repeat home buyers, who accounted for 70 percent of home sales in 2003, have increasingly dominated the residential real estate market, according to the report. Their market share has climbed steadily since the mid-1990s, when repeat buyers represented 50 percent of all home buyers.

"Because repeat buyers have reaped equity gains on the sale of previous homes in recent years and have rolled much of those gains into the purchase of their next home, their home-financing decisions have applied tremendous upward pressure on home prices," said the association's vice president and chief economist, Leslie Appleton-Young.

Repeat home buyers are primarily baby boomers in their peak income-producing years, who have a median age of 45 years and a median annual income of $100,000, according to the report.

Comprising 30 percent of the market and with somewhat fewer financial resources, first-time home buyers have nevertheless been a force in the California housing market over the past year. Relying primarily on savings for their down payment, and more likely to take out a second mortgage than repeat buyers, first-timers have taken advantage of the low interest rate environment.

"Instead of being discouraged by increasing home prices, many first-timers take a more positive alternative by purchasing more affordable units such as condos or townhomes that require smaller down payments and lower monthly mortgage payment than detached homes," Appleton-Young said.

First-time home buyers have a median age of 33 years, earn a median household income of $75,000, and typically are married, although just over one-third of first-timers are single. First-timers also purchase a less-expensive home than the statewide median ($307,500 compared to $375,000) and are more likely to view condominiums as a more affordable option—44 percent of all condominium purchases are made by first-time buyers. The survey also revealed that one out of three first-timers takes out a second mortgage to avoid paying private mortgage insurance.

"Yet despite the fact that there is a wider array of first-time home-buyer financing programs than ever before, first-time home buyers as a share of all home buyers have never been lower in the history of [the association's] housing market research," Appleton-Young said. "With tight market conditions and repeat home buyers driving the market, rapid price appreciation has left homeownership out of reach for many prospective first-time buyers."

Across the state, inventory levels have been at record or near-record lows for most of the past two years. Time on market has ratcheted downward for eight consecutive years and now stands at just two weeks, while the median price discount—the difference between list and sale price—was at 0.9 percent, the sixth consecutive year when the discount has been below 2 percent.

Favorable mortgage rates kept housing affordability from deteriorating throughout 2002 and the first half of 2003 despite strong price appreciation over that period. Over that time interval, the California Association of Realtors Housing Affordability Index hovered in the range of 30 percent, meaning that 30 percent of California households could afford to buy the median-priced home. Once mortgage rates bottomed out in mid-2003, affordability dropped below 25 percent for the first time in more than a dozen years, raising concerns about access to homeownership on the part of first-time home-buying households.