January 2008  

Record Decline in California Median Price, Effects of Crunch Continue
By Robert A. Kleinhenz, Ph.D. Deputy Chief Economist

Home sales improved slightly in December 2007 on a seasonally adjusted basis, and edged above 300,000 homes on an annualized basis for the first time since August. Still, the credit or liquidity crunch continued to suppress sales and triggered a record rate of decline in the statewide median price.

With the onset of the liquidity crunch in late July/early August, the crunch initially affected closed escrow activity in August as sales fell 9.1 percent from the previous month. This was followed by a 14.9 percent month-to-month decrease in September as sales plunged to the lowest levels in over 20 years. Seasonally adjusted sales fell further in October (down by 2.4 percent to 265,030 homes), but then showed an 8.5 percent month-to-month rebound in November to 287,600 homes but still fell short of the 300,000 threshold. Sales finished the year 301,040 in December, up 4.7 percent from November, but down 33.4 percent against the same month a year earlier. While it appears that sales may have turned the corner, in the past two months, there is little evidence to suggest that sales will surge any time soon. Rather, these extremely weak sales levels may linger for at least the next couple of months as the financial markets work the liquidity crunch out of their system.

Price adjustments normally follow sales adjustments in the housing market, and the reaction to the liquidity crunch was no exception. As recently as August, the median price came within $10,000 of the record high of $597,640 from April 2007. By September, the median price declined by a record-setting 9.9 percent month-to-month. Up to that point, the largest monthly decline was a 5.3 percent decrease in September 2003. The sudden change in price can almost certainly be tied to the liquidity crunch, as funding for loans above the conforming limit of $417,000 dried up and choked off sales of homes over $500,000, a price segment that accounts for roughly half of the statewide housing market. Through the last quarter of the year, the median price was hit by a succession of year-to-year decreases, each one setting a new record: a 9.9 percent decrease in October, followed by declines of 11.7 percent and 16.5 percent in November and December. The previous record was a 7.2 percent slip in May 1993. With this series of decreases, the median price stood at $475,460 at year end, over $120,000 below the record high from April.

Price erosion has occurred in weak markets in the past but rarely have price declines been so large and so swift. That pattern alone suggests some type of anomaly in current market behavior. As mentioned here in previous articles, the liquidity crunch has made it difficult to get loans funded, even for well-qualified individuals. Therein lies the key to understanding the past several months.

It makes sense to think of a background or 'baseline' amount of activity that occurs regardless of whether the market is in a slow or active mode, but this assumes those households can get loans when they find a home they want to buy. Based on C.A.R. research, this level may be in the range of 350,000 to 400,000 sales, given the state's demographics and stock of homes. With current activity levels below that range, perhaps something has disrupted 'baseline' activity: the inability to acquire funding for loans among buyers who otherwise could and would buy a home at this time.

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