With existing-home sales up 9.6 percent at the end of 2003 compared to a year earlier, the National Association of Realtors Chief Economist David Lereah said the housing market continues to offer surprises.

"We've been expecting the pace of home sales to ease, and a decline in November seemed to indicate a more sustainable pace, but the rebound in December—the second highest monthly pace on record—shows there's still a lot of life in this market. The biggest factor is a resumed decline in mortgage interest rates, which have been much lower than most analysts expected."

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.88 percent in December, down from 6.05 percent in December 2002. The average 30-year rate for all of 2003 was 5.83 percent, the lowest annual average since Freddie Mac started tracking interest rates in 1971.

National Association of Realtors President Walt McDonald said favorable housing-affordability conditions will continue. "Mortgage interest rates have eased even further in recent weeks, and we're not expecting any big changes over the next few months," he said. "Given the demand from a growing number of households in an improving economy, we can expect sales to remain close to record activity this year."

On the home front, Realtor Brian Kessler of Intero Real Estate Services in Los Gatos believes the local market has improved dramatically in the last 45 to 60 days, with only 102 single homes on the market in Los Gatos as of month's end January 2004. "With inventory so slow and many qualified buyers out shopping for a new home, this computes to price appreciation for this coming year and beyond. Perhaps we will soon see the same inflationary cycle that took place in the mid-80s and mid-90s," he said.

In addition, interest rates are very low, with some adjustable rate loans beginning at less than 2 percent, indicated Kessler.

"Monthly payments are relatively small, on even jumbo loan amounts. Payments on a $1 million mortgage would be about $3330 per month, with the adjustable rate loan program currently being offered at Washington Mutual. It has a start rate of just 1.25 percent. This program has made it easy for our real estate clients to purchase a home at a higher price point, without the worry of high mortgage payments," Kessler said.

That means multiple offers are back on some properties, a phenomenon that Realtors have not seen in a few years. "In summary, what a great time to be part of the next real estate boom that is beginning to happen right before our eyes. I would encourage buyers to act quickly and make a home purchase as soon as they can, before they miss the boat," Kessler said.

Realtor John Leslie of Alain Pinel Realtors in Los Gatos believes the real estate market has already heated up, with fear of prices rising and low interest rates motivating homebuyers to get into bidding wars again.

"The shortage of homes, particularly under $1 million, has created a hot seller's market. The trade-up buyers are frustrated, too, since there is so little for sale in the over $1 million to $1.5 million. This condition is similar to 2002 and is likely to linger until May, when more sellers traditionally come on the market," Leslie said.

Leslie thinks the challenge for listing agents will be to get their clients to hit the market when it's hot instead of waiting for May or June when there will be greater competition. At the same time, buyers' agents are trying to reassure their clients that there are more homes coming on weekly and they shouldn't get discouraged.

"Multiple offers and overpriced listings are back again, but this condition will eventually change. I can see that from May on there will be a flood of listings and prices will level off in a lot of price ranges," Leslie said. "Interest rates should click up also, sometime this year, and this will slow the market. In the meantime, expect lots of agents running around trying to find listings."

Housing inventory levels fell 7.3 percent at the end of December, with 2.30 million existing homes available for sale nationwide. Locally, Realtors say inventory levels are at an all-time low.

"The market is very hot due to low inventory," said Patti Mauseth of Alain Pinel Realtors in Los Gatos, who had a listing with Ken Roberts in San Jose near the Cupertino border that received 11 offers.

"I believe the market will continue to remain stimulated until the interest rates begin to climb. My advice for potential sellers is to hurry. Don't miss this incredible market. My advice to buyers is to not get involved in the craziness of bidding wars. I feel in another few months the market will be more buyer-friendly, as the inventory will rise," Mauseth said.