A report of brisk August home sales in California reaffirmed that prospects are improving for several mortgage stocks with California exposure, according to analyst Jonathan Gray of Sanford C. Bernstein & Co.

"California prices bode well for home mortgage credit losses," Mr. Gray wrote in a report this week.

Among the mortgage investors that stand to gain are Fannie Mae, Freddie Mac, Washington Mutual Inc., and H.F. Ahmanson & Co., he said.

California home prices had plunged 20% to 60% from 1989 to 1996, and they have been slow to recover.

The median California home price in August was $194,390, still 8% below 1991's peak of $211,000.

The steep and prolonged drop in prices meant that many California homeowners had negative equity, that is, they owed more on their mortgages than the homes were worth, making it more likely that they would default if they encountered financial difficulty.

Now that prices have recovered to September 1992 levels, credit losses are expected to ease-hence Mr. Gray's sunny outlook.

In his report, he wrote: "While California represents an estimated 16% of the total number of mortgages in the U.S., and perhaps 20% or more by dollars, it has accounted for as much as 60%-70% of the total credit losses."

Indeed, lenders have been losing five times as much on California loans as the national norm, he said.

Default rates and loss severity on California mortgages have been 2.5-3 times the national average.

August's numbers suggested that California's housing recovery, under way since early last year, may be accelerating.

Home prices rose 7.5% in August from a year earlier, according to the California Association of Realtors. That was the most robust increase since the late '80s when double-digit price increases were common.

The pace of sales in August jumped 14.1% from a year earlier; at that pace, 587,000 homes would be sold this year in California. That would be the highest rate since March 1989.

The recovery is also penetrating the all-important Los Angeles market, which has been sluggish.

Mr. Gray noted that prices in Los Angeles rose 5.4% in August from a year earlier-again, one of the strongest increases in years.

Prices rose 8.3% in Orange County, and six of the 16 major regional markets showed double-digit gains, Mr. Gray noted.

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