2005 Housing Market Outlook

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

For the third straight year, the California housing market is poised to eclipse the record-setting performance of the previous year. Annual statewide sales should exceed the record levels of 2003 by an anticipated 3.8 percent, while the median price is expected to show a 22.0 percent increase in the annual median to $454,720.

Low interest rates, demographic trends, and changes in the mix of loan products were the main reasons for the housing market’s standout performance in 2004. Mortgage rates remained virtually unchanged from the record-low levels that were experienced in 2003. Rates had been expected to increase in 2004 as economic conditions improved. Those improvements never completely materialized, in part because of the drag on the economy imposed by oil prices that exceeded $50 per barrel throughout much of the year. While lower than expected rates were symptomatic of an underperforming economy, they enabled the housing market to reach unprecedented levels.

Households would not have been able to take advantage of low rates and propel the market to new heights if it weren’t for the wealth they accumulated in home equity and turned into purchases of real estate.  Three out of four homebuying households were repeat buyers, most of whom either traded up or tapped into their equity to buy a second home. Households also augmented their purchasing power with more flexible loan products as the share of adjustable-rate mortgages jumped from 10.3 percent in 2003 to 28.2 percent in 2004.

Tight supply conditions kept pressure on the market as well. Despite a near tripling of the unsold inventory index from a record low of 1.6 months in early 2004 to 4.3 months in August, the unsold inventory index remained well below the long-term average of 6.5 months.

The 2005 housing market outlook will be tied mainly to the direction of the economy and its influence on interest rates. With inflation tame and the economy growing at a moderate pace, mortgage rates are expected to increase slightly but remain low by historic standards. The share of households using adjustable rate loans will continue to increase, while repeat homebuyers will again be able to outbid first-timers on homes.

Taken together, 2005 should be yet another strong year. Home sales are expected to fall by a modest 2.5 percent in 2005 compared to 2004, while the median price will continue to increase, with a projected 15.0 percent increase to a new record median of $522,930. With rates and prices both expected to increase, affordability will continue to decline and may drop to record low levels in 2005.

Orange County Real Estate