June 2008

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

Following 13 months of sales below 400,000 homes, sales of existing detached homes in California in the month of May rose to 423,700 units on a seasonally adjusted and annualized basis. This corresponded to a 15.5 percent increase from the April figure of 366,720 homes, and an 18.1 percent year-to-year gain from the May 2007 figure of 358,640 homes. This was the second consecutive year-to-year gain, following a 30-month string of year-to-year percentage decreases that began in October 2005. Home sales now stand 14.6 percent below 2007 sales on a year-to-date basis.

Although sales have improved since reaching a low point last October, the median price of a home in California fell by yet another record-setting margin last month. The median price for May was $384,840, declining 4.7 percent from the April median of $403,870 and decreasing by a record 35.3 percent from the May 2007 median of $594,530. This was just the latest in a succession of record year-to-year decreases in recent months, beginning with a 9.9 percent decrease in October of last year that surpassed the previous record-setting 7.2 percent decrease of May 1993. The market has endured a string of unprecedented, ever-larger double-digit percentage declines in the months since October.

This pattern of declines may be explained in part by a set of recent developments in the market. First, all segments of the market have been adversely affected by tighter underwriting standards - reducing the pool of potential buyers - and by falling home values that have reduced the purchasing power of repeat buyers. Second, the mix of sales in the market has shifted dramatically since August of last year, with the share of sales under $500,000 climbing from 40 percent last year to 65% in May 2008. Third, homes within that price range have seen large decreases, both because of large numbers of distressed sales (short sales and REOs) and because of tighter underwriting standards as mentioned. Finally, market segments above $500,000 declined in their market share in part because of the liquidity or credit crunch that has cut off funds to the jumbo market to the point where even a qualified home buying household may see funding for its home loan fall through.

C.A.R. released its mid-year forecast update earlier this month. Annual sales for all of 2008 are expected to be 342,300 homes, declining three percent compared to the 2007 annual sales figure of 352,800 homes. Annual sales should bottom out in 2008, with 45 percent peak-to-trough decrease from peak sales of 625,000 sales at its peak in 2005.

As a rule, the median price bottoms out at some point after sales reach their low point. The median price for 2008 is expected to decline 28 percent to $402,000 from the 2007 median of $558,100. However, the market must still move large numbers of distressed sales through the pipeline in the coming months, possibly through the first quarter of 2009. This may result in a larger than forecasted year-to-year decline in price by yearend.

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