February 2007

2006 HOUSING MARKET WRAP-UP
Robert Kleinhenz, Ph.D., Deputy Chief Economist

Conditions in the statewide housing market further stabilized in December 2006, as sales edged down and the California median price showed a slight gain. Despite this hopeful news, it would be premature to say that the market had bottomed out and that a rebound is in sight.
 
For the sixth month in a row, seasonally adjusted, annualized sales for the state remained in the range of 450,000 homes. Sales dropped slightly from 450,930 homes in Novemberto 450,550, and fell 15.3 percent year-to-year compared to the December 2005 figure of 531,910 homes. The statewide market registered a 23.6 percent decline in sales for all of 2006 to 477,460 homes. However, the drop in sales activity commenced in the final quarter of 2005 and was well underway by the start of 2006. In fact, December 2006 sales were a full 30 percent below of the September 2005 figure of 650,780 homes, the month immediately preceding the start of the market slowdown.

The statewide medianshowed a slight bounce, with an increase in the median price from $555,280 a month earlier to $567,690, and a 3.7 rise from the prior year median of $547,400. For all of 2006, the statewide annual median price advanced by 6.5 percent from $522,670 in 2005 to $556,640. This was the smallest margin of increase in the California median since 1997 when the median climbed by 5.2 percent. Price changes varied by size of home, with a 4.2 percent gain among homes having four or more bedrooms, two-bedroom homes increasing by 6.7 percent, and three-bedroom homes performing slightly better with a 6.8 percent gain.
 
The slowdown in price appreciation was symptomatic of increased inventory levels. The Unsold Inventory Index averaged 6.4 months in 2006, more than double the 2.9 month inventory average of 2005. The monthly Unsold Inventory Index adjusted quickly in the early stages of the slowdown, more than doubling from 3.2 months in September 2005 to 7.5 months by July 2006. During the second half of2006, the Index stabilized in the range of 7 months. Measured as the ratio of listings to sales, the Index increased in part because of the decline in sales. But listings climbed by 61 percent from 2005 to 2006, making and even greater contribution to the increase in the Index. Still, the Index remained just under the long run annual average of 7.7 months since 1982, and fell far short of the 12 to 13 month range that prevailed in the troubled early 1990s.

As the market slowed, the gap between buyer and seller expectations expanded and more buyers faced difficulty qualifying for financing. These developments gave rise to longer Time on Market readings in 2006. For all of 2006, the median Time on Market rose to 51 days from 32 days in 2005. The share of homes on the market less than 30 days fell significantly from 49 percent in 2005 to 32 percent in 2006, while the share on the market over 90 days rose from 11.5 percent in 2005 to 23.9 percent in 2006.

In retrospect, it appears that the market bore the brunt of the slowdown in late-2005 and the first half of 2006, but saw improved stability in terms of sales and supply conditions during the second half of the year. All in all, the market remains on target with a projected 7 percent decline in sales in 2007and a 2 percent dip in the statewide median price.


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