December 2006

Stabilizing Market Conditions?
Robert Kleinhenz, Ph.D.,Deputy Chief Economist

The California housing market continued to experience steep declines in sales for the month of October, while the median price registered a further decrease consistent with the typical pattern for off-peak months. Yet, a number of market signals suggest that the market may be stabilizing as the year draws to a close.

Seasonally adjusted and annualized sales of existing single family homes fell from 621,530 units in October 2005 to 443,320 units in October of this year, 28.7 percent year-to-year decline. While sales registered a slight 0.3 percent month-to-month drop, sales over the past three months have held steady at just under 450,000 homes, a welcome sign after many months of decline beginning in October last year. The statewide year-to-year decrease was the smallest of the past four months, a pattern that has prevailed in most regions of the state as well.

The statewide median price continued to show year-to-year gains, but has dipped for two months running compared to the August peak of $576,360. The October median was $548,680, down 1.5 percent from the September median of $556,920 but 2.0 percent ahead of last October's median price of $537,930. The month-to-month decreasesin the median at this time of year may be attributed to seasonality, but the yearly price changes have shrunk substantially from nearly a 14 percent gain in January of this year, to small single digit increases in the last 3 months.

At the regional level, the picture is mixed. In areas that saw relatively less new home building in recent years -- notably Los Angeles County and much of the Bay Area -- home prices continued to increase by small single-digit year-to-year margins. However, in partsof the state where new home activity flourished in the recent past, new home and existing home inventories have competed with each other throughout much of the year, triggering a succession of year-over-year decreases in the median price. These areas include parts of the Central Valley, and to some extent, Orange and San Diego Counties. Softness in home prices also continued in the Wine Country, which had seen elevated levels of second home activity over the past few years, and in the Palm Springs/LowerDesert region, which saw both elevated new home levels and second-home activity levels during the housing boom.

It does appear as though the market will finish 2006 and enter 2007 on a more stable set of market conditions than those that markedthe beginning of 2006. First, because the slide in sales actually commenced in late 2005, smaller year-to-year percentage declines in sales are expected in November and December compared to the first 10 months of the year, so sales should finish the yearvery close to the predicted 23 percent decline for all of 2006. Additionally, the unsold inventory index and, in particular, the number of listings have stabilized. While the supply of homes for sale is about twice that of a year ago, large increases insupply are not expected over the foreseeable future. As such, large decreases in median prices are unlikely. Finally, interest rates have held steady or edged down in recent months, a good sign as the California housing market embarks on a new year.

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