By: Oscar Wei, Senior Research Analyst and Robert Kleinhenz, Deputy Chief Economist
California sales of existing detached homes increased 1.2 percent on a month-to-month basis from 471,840 homes in May 2011 to 477,710 in June, but dropped by 3.6 percent on a year-to-year basis from 495,780 homes in June 2010. The statewide median home price was $295,300 in June, an increase of 1 percent from the previous month, but a decrease of 5.9 percent from June 2010. Despite a weaker performance in terms of closed sales compared to last June, pending home sales rose for the second consecutive month in June, suggesting an improvement in sales activity in the next couple months. In fact, sales during the second half of the year should match or exceed last year’s sales on a year-to-year basis.
Indicators such as the unsold inventory index and pending home sales offer a preview of future market conditions based on the actual number of homes for sale or having sold. As for the direction of future home prices, one indicator to consider is the sales-to-list price ratio (SL ratio), measured as the ratio between the final sale price of a property relative to its original list or asking price. It is also an indicator of how much negotiation power buyers and sellers have in the home buying process.
In the mid-2000, when inventories were lean, multiple offers were common, and properties were flying off the shelf in a matter of days, buyers and sellers alike knew they needed to move quickly to consummate a transaction. Buyers had zero negotiation power, and the average statewide SL ratios in 2004 and 2005 were near 100 percent, an implication that many properties were purchased at or above sellers’ asking price.
As the market shifted to a lower gear in late 2005, sellers were still hoping to sell their home at a premium while buyers realized they had more bargaining power to ask for better deals. Throughout 2006 and 2007 the SL ratio declined as the psychologies of buyers and sellers drifted apart. The ratio continued its free fall in 2008 - dropping below 90 percent at one point, when the statewide median price declined
more than a third from the previous year. The median price finally hit bottom in early 2009, at which point home sellers became more realistic about market conditions and set their list price closer to the prevailing market value. The SL ratio started climbing back up in 2009 and edged up again in 2010 as home buyers took advantage of the tax incentives.
The SL ratio was relatively weak in the first half of 2011 when compared to that of the same time of 2010. It started declining since the beginning of 2010 and had continued its downward trend through Feb 2011 when it bottomed out at 93.5 percent. The ratio has bounced back since then, hitting at 94.6% in June, an increase from 94.3% in May, but a decline from 97.4% in June a year ago.
SL ratios vary between price ranges. Among the different price segments, high-end homes (homes priced at $1 million or more) had the lowest ratio in June, while sales in the middle tier ($500k to $999k) had the highest. This implies that the sellers at the high end were more flexible with their asking prices, and were more willing to concede in order to complete the sale transaction. The high proportion of distressed sales with prices already set below market value in the lower price segments could also explain why sellers in these price segments were less willing to lower their asking price.
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