2006 First Quarter Housing Market Report

Market Trends - May 2006
- Robert A. Kleinhenz, Ph.D., Deputy Chief Economist, CAR California Association of Realtors

With interest rates above 6 percent since late last year, the California housing market registered declining sales and a slowdown in the pace of price appreciation, despite achieving the highest quarterly price on record.

At 517,800 units, sales of existing detached single-family homes fell nearly 60,000 units compared to the fourth quarter 2005 figure of 577,670, and over 100,000 units compared to the first quarter when sales reached a near record of 634,090. Sales declined 10.4 percent compared to the fourth quarter of 2005, and fell 18.3 percent on a year-to-year basis, the largest since the second quarter of 1995.

Despite the weakening sales trend, the state median home price rose 13.5 percent year-to-year from the median of $483,910 in the first quarter of 2005, and set a new record high of $549,150.  The change in price, however, was the smallest increase the market had observed since the fourth quarter of 2001 when the percent increase was 8.5 percent.  In fact, home price appreciation has been decelerating over the past year, as quarter-to-quarter percent change gradually declined from 8.8 percent in the second quarter of 2005 to 0.2 percent in the current quarter.

Market supply conditions for the current quarter were above the norm of recent years, but remained below the long-term trends.  The unsold inventory index was 5.5 months in the first quarter of 2006, compared to 3.5 months in the fourth quarter of 2005, and 2.7 months in the same quarter of last year.  As was discussed in a previous article (see Trend’s article in March 2006), housing inventory is typically higher at the beginning of the year and tightens up after the first quarter, the unsold inventory index will likely trend downward for the remaining of the year.  Meanwhile, time on market increased to 47.3 days in the current quarter from 38 days in the fourth quarter of 2005 and 37.4 days from the first quarter of last year.  

During the housing boom years, buyer and seller perceptions of the market were closely aligned. Buyers wanted to take advantage of the low mortgage rates, while sellers wanted to cash in on their housing equity, resulting in brisk market activity.  With mixed economic signals over the past few months, there is greater uncertainty about the future direction of mortgage rates and home prices, and a disconnect has emerged between buyer expectations and seller expectations. This has created more friction in the market, and has slowed the pace of home sales, despite a general outlook that includes continued economic and job growth, relatively low inflation, and interest rates that remain near their historic lows of the last two years.

Orange County Real Estate