California Housing Market Update

Increasing home sales, declining home prices, stricter loan guidelines, and the financial market meltdown all contributed to a turbulent year in our California housing market, according to the recent California Association of Realtors (C.A.R.)Housing Report I read this week. The report noted that approximately one in five home sales in California were the result of foreclosure, short sale, or borrower default.

Sales generally improved over last year in all parts of the state, with significant price declines leading to sharp increases in the Central Valley and Southern California, C.A.R. said. Realtors attributed the increase to the growth in the absorption of distressed properties with mark-downs in prices.

Reports show the market continuing to experience large decreases in the coming months before leveling out in late 2009. The California median price is expected to further decline by 6% from $381,000 for 2008 to $358,000 for 2009. Realtors noted that affordability was high for first-time home buyers increased dramatically (approx 53%) during the third quarter of 2008 resulting from this decline in median home prices.

Increasingly restrictive lending standards and the credit crunch resulted in the inability for many other first-time home buyers to qualify for a mortgage loan. Because of the ongoing turmoil in the financial market, many lending institutions declined loans that were considered risky, especially jumbo loans with amounts that exceeded Fannie Mae and Freddie Mac guidelines.

As conventional loans became more difficult to obtain and the credit crunch contracted further, the percentage of FHA loans increased significantly in California. FHA loans typically require lower down payments and have less rigid credit-qualifying guidelines than conventional loans.

C.A.R. attributes this significant gain partially to the Economic Stimulus Act of 2008, which temporarily raised the conforming loan limit in high-cost areas from $417,000 to $729,750 until December 31, 2008.

Other highlights from the C.A.R. Housing Report included:

• Distressed properties sold during 2008 had a median sales price of $330,000, a median price per square foot of $197, and a median size of 1,600 square feet.
• More than half of the distressed properties sold were REO (54.8%)
• Almost one-third were short sales (31.2%)
• The discount between sales price and list price increased from 4.3% in 2007 to a record setting 7.5% in 2008
• One in five properties fell out of escrow in 2008. Primary reasons included: buyers could not secure financing (33.3%); buyer changed mind due to fear of economy or loss of job (33.3%); and buyer could not come up with the down payment (10.8%)