June 2007

Mid-Year Forecast Update
Robert Kleinhenz, Ph.D., Deputy Chief Economist

Home sales in California registered a further decline in April, as low affordability and the impact of tighter credit standards contributed to the continuing weakness in the California housing market. Sales of existing detached homes in April fell 27.8 percent year-to-year to 373,280 homes (seasonally adjusted and annualized) compared to 516,960 homes a year earlier. The last time sales fell below 400,000 was July 1996 when 396,290 homes sold. Through April, California home sales have fallen 17.2 percent in year-to-date terms.

The statewide median price achieved a record high in April of $597,640, corresponding to a 2.1 percent month-to-month increase and a 6.2 percent gain over the April 2006 median of $562,820. However, median prices for individual counties and regions of the state portrayed a mixed picture, with weaker sales and softer prices in the lower-priced areas of the state. At the regional/county level, year-to-year price changes ranged from a low of -5.2 percent to a high of +12.1 percent.

The supply of homes for sale reached its highest levels in years. The unsold inventory index was 10.0 months in April, compared to 8.7 months a month earlier, and 5.7 months a year ago.  The 3-month average for unsold inventory was 9.5 months, up from 8.9 months in March, suggesting further softness in prices in the coming months. The Bay Area continues to see leaner inventory levels compared to the state as a whole and Southern California.

Earlier this month, C.A.R released its Mid-Year Forecast Update, in which it reported revisions to its Annual Forecast from October of last year. In light of recent and anticipated conditions, the outlook for sales was revised downward from an expected 7 percent decline to a 14 percent annual decline, with annual sales expected to finish at 410,500 annually in 2007 compared to 477,460 sales in 2006. Year-to-year percentage changes in sales should become smaller in the remaining months of the year. The outlook for the median price wasrevised upward from an original 2 percent decline to a revised 1.8 percent annual gain in the statewide California median price from $556,640 in 2006 to $566,500 in 2007.  As stated earlier, the aggregated price for the state may be edging up, most individual markets in the state are either holding steady or showing declines.

The economy was to blame for the extended duration of weakness in the California housing market during the 1990s, but it is not the culprit now. In fact, the statewide economy is faring about the same as the national economy, with job growth in the low one percent range, historically low unemployment rates, and very little chance of recession. Rather, low affordability and tight credit standards are constraining activity, particularly in lower priced, entry-level markets. The non-prime situation (reported on in a previous column) will continue to capture the attention of the press, but any turnaround in sales will require significant improvements in affordability. With mortgage rates expected to hold steady and no significant declines anticipated in home prices, affordability relief is not yet in sight.

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