California experienced another year of weak home sales in 2007. Sales of existing detached single-family homes, which declined 23.6 percent for the year 2006, were projected to decrease another 26.0 percent to 353,200 homes for the year 2007. Sales fell steeply in the last quarter of the year as the liquidity crunch severely constrained availability of funds for mortgage loans. Monthly sales fell below 300,000 units on a seasonally adjusted and annualized basis, levels that had not been seen in over 20 years.
Despite the decline in sales, the statewide median home price set a new record of $597,640 in April and remained near record levels for much of the year. This was partly due to the downward stickiness in prices in a slowing market, but also had to do with the mix of sales in 2007 compared with prior years. While low- to moderately-priced markets suffered throughout the year, the high end of the market was somewhat more resilient and propped up the statewide median price. However, with the onset of the liquidity crunch later in the year, that market segment saw weakness both in sales and prices and forced the statewide median price below $500,000 in October and November for the first time since early 2005.
In general, lower-priced markets experienced large sales declines and weaker home prices as compared to higher-priced markets in 2007. Sales through August for homes valued below $500,000 declined 24.6 percent year-to-date, and sales of homes between $500,000 and $999,999 fell 24.2 percent when compared to 2006. By comparison, sales of homes priced $1 million and above declined only 0.5 percent from the same period of last year. However, the liquidity crunch choked off sales beginning in September, with the $500,000 to $999,999 market experiencing year-to-year sales declines in the range of 50 percent through the end of the year, and the market over $1 million market showing year-to-year declines of roughly 25 percent.
The housing market is unlikely to see significant recovery in 2008. A further six percent decline in sales is expected for the year 2008. Peak to trough, annual sales are expected to decline 47 percent from peak levels of approximately 625,000 homes in 2004 and 2005 to 332,000 homes in 2008. Meanwhile, the statewide median price will show its first decline since 1996, with a projected 5.5 percent annual decline in 2008 to $536,500.
As the economy remains in the late stages of expansion with many mixed signals, economic growth for 2008 is expected to be positive, but will be below the potential GDP growth rate of 3 to 4 percent. The California economy should grow on a par with the national economy, with non-farm job growth increasing 0.9 percent, and unemployment rate approaching 6 percent in 2008.
Current market problems, however, have their roots in financing, not in weakening economic conditions. As such, this is not like the situation in the 1990s. Market weakness will continue to be driven in part by the ongoing problems in the subprime arena. Subprime mortgage payment resets are expected to peak in late 2007 and early 2008, so defaults and foreclosures should crest later in the year before easing as the year draws to a close. This will continue to put downward pressure on home prices, particularly in parts of the state that had a lot of new home building. Improvement in market conditions is more likely in the latter part of the year, as mortgage problems begin to subside and as buyers and sellers sense that home prices may have stabilized.