April 2007

Inventory Levels on the Rise in California
By Robert Kleinhenz and Sara Sutachan

Housing market sales activity continued to slow in February, while the median price moved upward. Statewide sales of existing detached homes fell 9.6 percent year-to-year from an annualized figure of 513,740 homes last year to 464,560 homes in February 2007. However, the level of sales was the highest level in eight months on a seasonally adjusted basis, and was up 6.2 percent from January of this year. The February median price stood at $564,700, increasing 5.7 percent year-to-year from the February 2006 median of $534,400, and up 1 percent compared to the January median of $559,300. The median has been in the range of $550,000 to $575,000 since late 2005.

The unsold inventory index for February was 8.8 months, up a half-month from 8.3 months in January, and more than 2 months higher than the reading of 6.2 months in February 2006. The February figure was the highest since February 1997 when supply stood at 10.2 months. The index has averaged 7.9 months over the past three months.

Higher inventory levels have been symptomatic of the slowing housing market over the past year, and have corresponded to moderation in price changes in recent years. Inventory levels averaged 2.2 months in 2004 when the median price rose 21 percent. The index reached an all time low of 1.3 months in the Spring of 2004. The median price rose 16 percent in 2005, when inventories averaged 3 months, while price appreciation slowed to just over 6 percent in 2006 when inventories had doubled to 6.3 months.

Despite the continued percentage gains in the statewide median price, price changes in regions across the state have been mixed, with most areas of the state below their peak prices. This reflects differing inventory conditions across the state, and notably, by price range. While inventories across all price ranges are considerably larger now than during the peak sales years (2004 and 2005), year-to-year comparisons in February 2007 reveal that inventory levels actually fell compared to a year ago for homes priced above $750,000.  Inventories for homes above $1 million were 12 percent lower than the year ago levels, while those for homes between $750,000 and $999,000 were 4.5 percent lower than the year ago levels. Of homes priced below $750,000 the supply of homes for sale in February of this year exceeded year-ago levels by at least 28 percent, with the biggest year-to-year increase of 84 percent in the lowest price tier of under $300,000.

Consistent with the supply numbers, higher-priced markets have shown more strength in both price and sales than lower-priced markets. Consequently, continued year-to-year increases in the statewide median have to do with the mix of homes that have sold, with price gains at the high end of the market pulling the median up and masking declines in lower-priced tiers. Thus, while the California median price reflects the overall direction of the statewide market, one must examine the county and regional medians to get a sense of how the individual markets are behaving.

To learn more about our Trends Newsletter, please contact the Research & Economics Department at  research@car.org or (213) 739-8352.