Reprinted from article by California Assn. of Realtors

MIXED MARKET PERFORMANCE ACROSS PRICE RANGES

Sales activity in the California housing market continued to slump as it entered into what is traditionally the busiest time of year. Seasonally adjusted, annualized sales of existing detached homes fell 22.7 percent year-to-year to 350,980 units in July, compared to 453,980 units the same month a year ago. Sales were last below this level in July 1995 when sales fell to 342,630. Sales have averaged 399,280 units since the start of the year, down 20.1 percent on a year-to-date basis, but sales have dipped below 400,000 in the past four months. Weakness in sales continues to be driven by tighter underwriting standards since the start of the year, low affordability, and the adverse psychological impact of news regarding foreclosures and the sub-prime situation.

The statewide median price dropped by 1.4 percent to $586,030 in July from $594,280 in June. The median price increased 3.2 percent year-to-year from the median of $567,860 a year ago. While the median price at the state level continued to increase on a year-to-year basis, price movements at the regional level were varied across markets. At the regional/county level, year-to-year price changes ranged from a low of 15.2 percent decline to a high of 6.9 percent gain. The month-to-month changes ranged from a decrease of 19.7 percent to an increase of 0.7 percent. Across the state, regional median prices averaged 5.8 percent below their peak prices of the last two years, with regions showing declines against the current record high ranging from 0.7 percent to 12.3 percent.

The recent series of year-to-year increases in the statewide median price have been at odds with the trend at the regional level, where median prices have generally registered one or more year-to-year decreases. This has to do with the change in the mix of homes sold. When sales are grouped by price range, it becomes apparent that the lower and middle segments of the market have been harder hit than the higher end of the market, both in terms of sales and price changes. When sales from January through July of this year are compared with the same period in 2006, sales of homes below $500,000 declined 24.3 percent, and sales of homes between $500,000 and $750,000 fell 26.4 percent, while sales of homes above $750,000 declined by just 5.4 percent.

Because sales above $750,000 have shown a much smaller decrease than sales below $750,000, they accounted for a larger share of total sales, increasing from 23.6 percent of all sales from January through July of 2006 to 28.1 percent of total sales for the same time period in 2007. By contrast, sales of homes below $750,000 decreased from 76.4 percent of total sales in the market last year to 71.9 percent this year. Meanwhile, prices of homes sold below $750,000 fell by 1.9 percent since the beginning of the year, while prices of those above that threshold increased by 2.2 percent. Together with the change in the mix of total sales, the relative stronger performance at the high end of the market has pulled the statewide median price up, despite decreases in the other segments of the market.

By mid-summer 2007, a new development arose in the form of a credit or liquidity crunch (the subject of next month's Research Highlights). With uncertainty about the sub-prime market on the rise, it became increasingly difficult to price risk, so investors cut off funds to mortgage lenders. Despite efforts by the Fed to stabilize the situation, including a rare half-point cut in the discount rate, concerns will likely persist in the coming months. Home sales at all price ranges are expected to decline further for the remainder of the year, with the low end of the market facing more pressure on prices than the high end of the market. As such, the statewide median price could remain close to $600,000 towards the end of the year.