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C.A.R. sees no downward spiral in 2007 housing market

Monday, November 27, 2006

The California Association of Realtors® (C.A.R.) predicts the 2007 housing market will see a continued gulf between seller aspirations and buyer expectations, along with inventory and affordability constraints, but contrary to media reports, real estate analysts do not expect a downward spiral in the state's housing market.

C.A.R. Deputy Chief Economist Robert A. Kleinhenz states in a report that the year 2006 marked a turning point in the California housing market. After four successive years of new records for both statewide sales and the statewide median price, the existing home market declined sharply in 2006, while the price of price appreciation slowed with each passing month.

"The 24 percent decline in sales from January 2005 to January 2006 was a harbinger of things to follow through the year," the report indicated, noting that the highest seasonally adjusted monthly sales figure on record occurred in January 2005, so a decline was expected.

However, with five of the top six monthly sales figures records between January and September last year, sales had no place to go but down in 2006. As of September, sales were down 31.7 percent year-to-year and year-to-date sales were off of last year's January-through-September pace by 24.0 percent.

With a 13.8 percent year-to-year increase in January 2006, the median price showed lingering strength in early 2006. However, that strength dissipated over the intervening months and statewide price appreciation that fell to 1.8 percent year-to-year by September. Meanwhile, scattered counties and communities around the state experienced year-to-year declines in their median prices as inventories increased and time on market lengthened.

C.A.R. expects annual sales to decline 23 percent for all of 2006, from the 2005 record of 624,960 homes to 481,200 homes. The unsold inventory index will average about 6.5 months in 2006, more than double the 2004 average of 3.0 months. With higher inventories, price appreciation will fall into the single digits, as the statewide annual median is expected to increase 7 percent from $524,020 to $560,700.

Here is what C.A.R. expects for 2007:

* The market should see less of a decline in sales in 2007, with an anticipated 7 percent decline in statewide sales for 447,500 homes. Inventories will remain in the range of the long-run average of seven months through much of 2007. Inventories, affordability constraints, and a continued gulf between seller aspirations and buyer expectations will result in a 2 percent decline in the median to $550,000 in 2007.

* There are concerns about a possible recession, possible increases in interest rates, and possible increases in foreclosures. However, the general economy appears more likely to expand slightly in 2007 rather than tip into recession. The Fed has held steady with the federal funds rate, attempting to strike a balance between curbing inflation and moving the economy forward. It is unlikely that the Fed will cut rates over the next few months, but may be in a position to do so in mid-2007 if the threat of inflation subsides.

* Last, with the dramatic increase in loans over the last few years, an increase in foreclosures in 2007 and subsequent years is practically a certainty.

The big question is, how large of an increase will occur and how will the market react? If the economy holds up as expected, more households will be in a position to hang on to their homes than in the early 1990s when the California economy suffered massive job losses. As such, the increase in foreclosures may remain at manageable levels, and is unlikely to trigger a downward spiral in the housing market, according to the C.A.R. report.


The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.

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