2005 Mid-Year Housing Report

Market Trends - August 2005
- Robert A. Kleinhenz, Ph.D., Deputy Chief Economist, CAR California Association of Realtors


With the first half of the year over, the California housing market is on track to set records for both statewide home sales activity and the median price in 2005. Market activity this year has been aided by lower-than-expected mortgage rates, improved economic conditions, and higher inventories compared to a year earlier.

Sales of existing detached homes in California hit the second highest level on record at 644,430 units in the second quarter of 2005, just shy of the record level of 645,920 units that was set in the last quarter of 2004. Sales rose 1.6 percent compared to the first quarter of the year, and were up 1.4 percent over the sales pace of a year ago. In year-to-date terms, sales from January through June sales were 3.6 percent higher than a year earlier. Meanwhile, the quarterly median price pushed past $500,000 for the first ever, reaching $530,430 in the second quarter. The median price rose 8.4 percent compared to the first quarter median of $489,300, and 15.0 percent compared to the second quarter 2004 median of $461,280.

Mortgage rates have defied expectations so far this year. While market conditions determine interest rates, it is generally thought that changes in key rates by the Federal Reserve Bank will trickle through the entire term-structure of rates over time. However, yields on Treasuries have shown little response to Fed tightening over the past year, and mortgage rates, which are largely tied to Treasury yields, have reacted only slightly. Beginning in June 2004, the Fed raised the Federal Funds Rate from a rock bottom rate of 1.0 percent to 3.5 percent, yet the Freddie Mac fixed rate fell from 6.29 percent in June 2004 to 5.58 percent in June of this year, while the 1-year adjustable rate registered a minor increase from 4.10 percent to 4.24 percent over the same period. This apparent contradiction has been explained by a global excess of demand over supply for bonds and similar investments (including mortgage-backed securities), which has pushed bond prices up and has driven yields and interest rates down.

The housing market has also benefited from improved economic conditions that have created jobs and income. The unemployment rate in California dropped below 6 percent in January and continues to decline, while nonfarm jobs have grown an average of 1.7 percent year-over-year compared to an average of 0.4 percent last year.
 
Increased inventory levels have also contributed to market activity. C.A.R.’s statewide unsold inventory index has averaged 3.1 months thus far in 2005, compared to 1.8 months over the same period in 2004. Present inventory levels remain low relative to a long-term average of 7.5 months. However, higher inventory levels compared to 2004 make higher sales volumes possible, while also tempering the pace of price increases in the market. The statewide median has averaged a 16 percent year-to-year price increase through the first six months of 2005, well below the 23 percent average annual price increase in the first half of 2004.

Looking ahead to the balance of the year, sales activity is expected to slow somewhat compared to last year’s pace, ending the year with a 1.4 percent increase in sales. If achieved, the projected sales figure of 633,500 units would be a new record. Likewise, the California median appears to be headed toward a new record, with a projected annual median of $523,150, equivalent to a 16.0 percent annual increase. With a continued increase in home prices, the C.A.R. Housing Affordability Index may very well match or fall below the record low of 14 percent that was established in the summer of 1989.

Orange County Real Estate