By Sara Sutachan, Senior Research Analyst & Robert Kleinhenz, Ph.D. Deputy Chief Economist

Amid an unstable financial market environment, the ongoing Credit/Liquidity Crunch, and a softening economy, the California housing market registered sales above 400,000 for the fourth month in a row in August, while the California median price continued to decline. At 490,850 homes, August sales rose to their highest level in over two years, improving 1.8 percent over revised July 2008 sales of 482,290 homes, and rising 56.7 percent over the August 2007 sales figure of 313,310 homes. For the first time this year, sales were ahead of 2007 in year-to-date terms. Sales gains were driven in part by large shares of deeply-discounted distressed sales in many parts of the state.

However, as sales improved from 2007 levels in recent months the statewide median price continued to decline by a record margin in August. The statewide median price declined to $350,140 from $350,890 a month earlier and $588,670 a year ago, corresponding 0.2 percent month-to-month and 40.5 percent year-to-year decreases. Once again, the year-to-year decrease was an all-time record, surpassing the previous record that was set a month earlier with a 40.3 percent decrease.

The string of record declines in the statewide median can be largely attributed to the numbers of distressed sales as well as the mix of homes for sale. First, since the onset of the Credit/Liquidity Crunch, there has been a dramatic shift in the mix of sales. While homes that sold under $500,000 accounted for 40 percent of sales at this time last year, the share of the market rose to 72 percent in August.  Meanwhile, the market share of homes between $500,000 and $1 million declined from 45 percent last year to 21 percent in August, and homes selling over $1 million saw their market share fall from 15 percent to seven percent in the same time frame. The change in the mix of sales, dominated by the large share of home sales under $500,000, has put tremendous downward pressure on the statewide median price as liquidity in the jumbo loan market continued to drag.

Second, because so many sales in the segment under $500,000 are distressed sales, that market segment has seen tremendous downward pressure on prices. In some regions of the state, the majority of homes were some type of distressed sale in August. While this was not the case for all markets in California -- coastal markets and higher priced markets tended to have smaller shares of distressed sales -- the statewide median has taken a double-hit because the under-$500,000 market share has increased at the same time it has seen significant price declines.

Along with the increase in sales, another positive sign in the housing market was the relatively low level of homes for sale in recent months. Since the beginning of the year, inventory has been dropping from a recent peak of nearly 17 months to just under the long-term average at 6.7 months in August and July. However, with growing uncertainty facing the financial markets at this time and the significant numbers of distressed properties in the marketplace, prices are not expected to stabilize prior to the middle of 2009.

 
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