State of the California Housing Market 2008-2009 – Research Highlights

Outlook and Forecast

Sales of existing detached homes hit bottom in the last quarter of 2007, and have since gradually climbed back. Following two years of steep declines exceeding 20 percent, annual sales in the California housing market are expected to increase 12 percent to 395,600 in sales in 2008, with a further 12.5 percent increase projected in 2009. The increase in sales is largely attributed to the growth in the absorption of distressed properties with huge mark-downs in prices.

Home prices have shown significant and unprecedented downward movement over the past year. The pile-up in foreclosures, real-estate owned properties (REOs), and short sales will continue to put downward pressure on home prices until mortgage problems begin to subside in the second half of 2009. The market will continue to experience large year-to-year decreases in the coming months, and the statewide median price is expected to decline 31.7 percent to $381,000 for 2008, the first decline since 1996.  The price will further decline by 6.0 percent in 2009 to $358,000.

This year’s State of the California Housing Market report examines the developments in the housing market and real estate finance over the past year, places recent events into a historical context, and looks ahead to 2009. The annual report also provides detailed statistics on consumer demographics, data on home buying and selling behaviors, analyses on current housing market conditions, and insights on the direction of the market. 

Key Findings

• • The steep decline in price largely resulted from the increase in the share of distressed sales across the state.
     According to the annual survey results, one-third of all home sales were distressed sales, with a 2 to 1 ratio
     between REOs and short sales.
  
  • Many home sellers sold their properties at a loss, as the increase in repair costs/price adjustments cut into
     their equity gains. The number of sellers who sold their home with a loss almost doubled from 11.9 percent
     in 2007 to a record-setting 22.2 percent in 2008. This was well above 1.9 percent in 2006, and was almost
     triple the long-term average of 7.7 percent.
  
  • Home buyers took advantage of falling home prices and buying bigger houses at a lower price per square foot
     compared to previous year. The size of a typical home bought in 2008 was 1,700 square feet, compared to
     1,600 square feet in 2007. Buyers paid $267 per square foot for a typical home in 2008, as compared to
     $336 in 2007. The median price per square foot declined for the second year in a row since peaking in 2006,
     and was the lowest since 2003.
  
  • FHA and VA loans have become widely used as a result of the changing environment in the financial market.
    FHA loans as a first mortgage accounted for just one percent of total mortgages for most of this decade.
    With higher loan limits in 2008, FHA loans jumped from 1.2 percent of all loans in 2007 to 18.8 percent.
    VA loans, meanwhile, increased from 0.3 percent in 2007 to 2.7 percent in 2008.
  
  • The share of home buyers who had a zero down payment declined abruptly from 17.7 percent in 2007 to
     3.4 percent in 2008, the lowest level in at least the last ten years. The decline was more obvious for
     first-time buyers than for repeat buyers.
  
  • Consistent with the increasing trend of distressed sales, almost one of five (19.8 percent) sellers sold their
     property because the property was in foreclosure, short sales, or default, an increase of 6 percent from 2007.
    “Change in family status” was one of the most important reason to sell, increasing from 9.8 percent in 2007
     to 19.1 percent in 2008. “Retirement or moving to a retirement community” followed with 11.5 percent, 
     a decline from 15.3 percent in 2008. The desire for a better location, which was the number one reason to
     sell, dropped by more than half from 17.5 percent in 2007 to 8.1 percent.
  
  • Three of five (56.6 percent) first-time buyers bought their property primarily because they were tired of renting.
     Other important reasons for buying properties include:
      o Desire for a larger house (9.2 percent)
      o Desire for a better location (9.2 percent)
      o Change in family status (7.9 percent)
      o Investment and tax considerations (7.0 percent)
  
  • The single most important reason to buy for repeat buyers was their “desire for a better/other location” (21.2
     percent) and their “desire (for) a larger home” (19.5 percent).  Other important reasons for buying properties
     include: 
      o Investment and tax considerations (18.0 percent)
      o Changed jobs (8.0 percent)
      o Change in family status (7.3 percent)
      o Tired of renting (7.1 percent)