August 2007

SECOND QUARTER REPORT: SALES SLIDES, MORE TO COME 
By-Robert Kleinhenz, Ph.D., DeputyChief Economist

Constrained by tighter credit standards that went into effect since the start of the year, statewide sales of existing single family homes slipped further in the second quarter, while the statewide median price continued to rise on the strength of the market for higher-priced homes. Sales in the second quarter fell to 366,530 homes, an 18.2 percent decline compared to the first quarter figure of 448,140 and a 26.1 percent decline against sales of 496,300 a year earlier.

For three successive quarters, sales had held steady in the neighborhood of 448,000. Increasing numbers of lenders and underwriters requiring better credit numbers from borrowers since early in the year, but with escrows roughly in the range of 2 months, the effects of tighter standards have only now appeared in the second quarter closed sales figures.

Prices generally exhibit downward stickiness in a slowing market, and this cycle is no different. In fact, the statewide median price continued to increase in the second quarter to a record-high of $593,040, coming within striking distance of $600,000 for the first time ever. The median rose 4.6 percent against both the first quarter median of $566,920 and the year-ago median of $566,800. However, increases in the statewide median mask declines that have registered around the state over the past year or more, both geographically and by price range.

As of June, all but two areas of C.A.R.'s reporting regions saw a decline against their peak median prices, which occurred at various times beginning in August 2005. In general, areas that saw a lot of new home building or a lot of second-home buying in the first half of the decade have seen the largest declines against peak prices. From a different perspective, when the distribution of statewide sales is divided at $500,000, the median price fell 2.6 percent year-to-year among homes below $500,000, while the median for homes at $500,000 and higher rose 3.7 percent.

Moreover, sales fell more sharply in the under-$500,000 segment (28 percent year-to-year compared to 23 percent year-to-year in the $500,000-and-over segment).By mid-summer 2007, a new development arose in the form of a credit or liquidity crunch (the subject of next month's article). With uncertainty about the sub-prime market on the rise, it became increasingly difficult to price risk, so investors cut off funds to mortgage lenders. Despite efforts by the Fed to stabilize the situation, including a rare half-point cut in the discount rate, concerns will likely persist in the coming months. As such, sales are expected to erode further in the third and possibly the fourth quarters of this year.

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