By: Robert Kleinhenz, Ph.D. Deputy Chief Economist

The stock market may have been on a roller coaster ride in recent weeks but conditions in the California housing market better resemble “Up” and “Down” escalators. On the “Up” side, seasonally adjusted sales of existing detached homes have increased consistently since late last year. At 502,190 homes sold in September, sales have increased 97 percent from the cyclical trough of 255,340 homes that occurred in September 2007. Sales in September rose 2.3 percent compared to August sales of 490,850 homes, and exceeded 500,000 homes for the first time since early 2006. California sales now stand 9.9 percent ahead of last year’s sales pace on a year-to-date basis.

However, a significant share of homes sold were distressed sales with sizable price reductions, bringing us to the “Down” side of the market story. The median price has decreased by ever larger record margins since the beginning of the Credit Crunch in August 2007. With half or more of all sales statewide considered to be distressed sales, the median price for September was $316,480, falling by a record 40.9 percent from the September 2007 median of $535,760.

As noted in past columns, changes in the mix of sales can strongly influence the direction of the statewide median. This occurred in early- to mid-2007, when the statewide median continued to increase because of an increased share of high-end homes, even though median prices of most individual markets were declining. That trend reversed with the onset of the Credit Crunch and has been partly responsible for recent slide in home prices.

The statewide median faced a three-pronged attack in recent months. First, the share of the market under $500,000 climbed sharply from 43 percent in August 2007 (when the Credit Crunch first hit) to 76 percent in September of this year. The gain in share was driven by a succession of very large year-to-year increases in sales. Second, this market segment -- the fastest growing by far – had also experienced the largest price declines, further pulling down the statewide median price. These price declines were largely due to the presence of distressed sales in this market segment, where as many as three in four homes sold were some type of distressed sale. Finally, sales in the market above $500,000 lost share because of a string of year-to-year decreases in sales, partly because sources of jumbo mortgage lending had dried up since the beginning of the credit crunch.

The September median price was last in the low $300,000 range in early 2002, and there is no sign that home prices will soon flatten out. In fact, the median price fell nearly 10 percent (9.6 percent) from the August median of $350,140. Finishing on an “Up” note, lower prices and favorable interest rates should lead to improved affordability in the coming months.