2006 Housing Market Outlook

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

Low interest rates and new loan products have unleashed the state’s demographic forces in recent years and enabled the California housing market to reach new heights 4 years in a row. The state is poised to establish new records for sales and the median price in 2005, stretching the longest housing market uptrend to ten years. The market and economic fundamentals of recent years will remain mostly intact in 2006, giving rise to a cautiously optimistic outlook for the year to come.

Sales of detached existing single-family homes in 2005 are likely to eclipse the record-setting sales pace of 2004 of 624,740 units, with an anticipated 1.8 percent increase to 635,000 units. Sales have risen in 8 of the past 10 years, making this the longest in the 35-year history of C.A.R.’s housing statistics.  California home prices likewise reached new heights in 2005, surpassing the 2004 record of $451,000 with an estimated annual median of $523,100. The pace of appreciation in 2005 slowed as expected from the 18 to 21 percent increases of recent years to 16 percent in 2005.

So what lies in store for 2006? The market and economic conditions that gave rise to an outstanding 2005 performance will generally prevail again in the year to come and contribute to another very good year:

• Steady but moderate economic growth accompanied by improvements in the labor    
  market  and low inflation
• Rising but still very favorable interest rates along with continued use of innovative real 
  estate financing options.
• Current and long-run demand forces continuing to encounter supply constraints

GDP in 2006 is expected to increase at a 3.5 percent rate, sustaining nonfarm job growth of 1.5 percent and a tame 3.5 percent inflation rate. Core inflation (excluding fuel and energy costs) is expected to remain low in 2006, with forecasts ranging from 1.5 to 2.5 percent.

With inflation in check, fixed rates in 2006 should increase only slightly and fall in the low- to mid-6 percent range. Adjustable rates, which rose moderately in 2005 in response to increases in the federal funds rate, should also increase slightly in 2006. Overall, the interest rate environment will remain favorable for the year. However, with high home prices, more and more households will need to stretch their purchasing power with innovative forms of financing in order to buy a home in 2006.

While the unsold inventory index is expected to increase somewhat in 2006, current inventory levels will remain lean enough to drive continued price appreciation in the year ahead.  Meanwhile, new home building will again fall short of household growth in 2006, resulting in a long-run housing shortfall that will contribute further to higher home prices.

All in all, sales in 2006 are expected to decline by 2 percent to 622,300 units, still very strong by historic standards. The median price will rise 10 percent to a new record of $573,500. Coastal regions of the state are expected to see weaker price appreciation and sales than for the state as a whole, while faster growing inland regions will see a somewhat stronger performance than that of the state.

Orange County Real Estate