Fire Sale: California home prices now 40% below year-ago levels

The median sales price of California homes sold in July was 40.3% below year-ago levels as bargain-hunters snapped up distressed housing in large numbers, skewing the state's housing market toward cheaper houses, the California Association of Realtors reports.

Median sales prices in the state -- which peaked at just under $600,000 late last summer -- fell from $587,560 in July 2007 to $350,760 in July 2008, a staggering decline that translates into prices falling by $4,500 per week.

"Deeply-discounted, distressed sales continue to drive volume in     many regions of the state," said William E. brown, president of the  California Association of Realtors.

Median prices paid for single-family homes have now rolled back to levels not seen since early 2003, and the lower prices are luring buyers in large numbers:  The C.A.R. reports the pace of home sales in July surged by 43% from year-earlier levels. Inventory of for-sale homes also dropped sharply, a sign the California housing market may be stabilizing. From C.A.R.'s press release: "C.A.R.’s Unsold Inventory Index for existing, single-family detached     homes in July 2008 was 6.7 months, compared     with 10 months (revised) for the same period a year ago."

Note: It's important to remember that the 40.3% decline does not indicate that individual houses have, on average, lost 40% of their value. The decline comes from a combination of two factors: yes, houses are losing value; but also, the "mix" of homes being sold has changed -- that is, houses in cheaper neighborhoods are selling faster, and in larger numbers, than more expensive homes, which skews the statistics toward lower median prices.

--Peter Viles
Your thoughts? Comments?
Photo Credit: Getty Images

Comments

[Rational Renter]

Your qualification at the bottom of the article shouldn't reassure any current homeowners. Yes, it's only the foreclosed-upon and deeply discounted houses that have realized this 40% drop. But why are those the only houses selling? Because as credit and lending standards have returned to normal, those are the only homes that are affordable. So that means that all the homes sitting unsold on the market have a long way to fall before they are affordable/sellable.

[David Raether]

I found an amazing foreclosure site -- has all the information for free that Realty Trak and those other guys hold back: address, owners, default amount, etc.

www.preforeclosurenetwork.net

If you're in the foreclosure business, go to this site.

[Wes Boudville]

Maybe the "mix" of homes selling is actually a good reflection of an underlying reality. Suppose that it is mostly the homes in cheaper neighbourhoods that are selling in higher numbers than homes in more expensive places.

But generally there are more people at lower incomes than people at higher incomes. And there are more houses at lower price levels than higher. So any "skewing" might actually be the opposite.

[Farkney]

$350k may be a lot lower price than a year ago, but let's keep in mind that it is a statewide number, and still quite unaffordable for most Californians, as they will now have to qualify for a conventional mortgage, including a 10% to 20% downpayment and a total debt burden of no more than 3.5x annual income. I wouldn't be surprised at all if the statewide median drops another 50% from this point, which would bring it to $175k, or about what it was prior to the housing bubble. It could go lower than that if we end up in a deep recession.

[SoCalRealEstateNews]

Peter: Thank you, thank you, thank you for explaining one of the two weaknesses of median stats, even if some of your readers are in denial.

The other problem is that we're dealing with closings for July, which mostly went into escrow in May and early June, so this is a picture of the market about 3 months ago, not of offers being made today.

That's not nearly as bad as the delay for Case-Schiller, which is more like six months due to their lagging 3 month average.

[Mary C.]

A year ago, it was more of the higher-priced homes that were selling. It was just before jumbo mortgage financing was almost cut off in August of '07 (loans less available, interest rates much higher). That financing has slowly come back with the help of the government, but it's still difficult. So, it makes sense that lower priced houses are the movers now. Last year, they still had not dropped much in price, even the foreclosure prices, so the affluent buyers skewed the stats in the other direction.

[E]

When the higher end homes come down to reasonable levels with the coming Alt-A resets, the median will rise as more people will come off the fence in that segment.

Does this mean that prices are on their way up?

Probably not.

Beware of "medians"

[Rational Renter]

SoCalRealEstateNews - you would be wise not to accuse others of being in denial. If you think the fact that it's only the dregs of the market that are selling right now is anything but a HORRIBLE sign for the rest of the market, you are missing the point. Yes, the median price is being pulled down by foreclosures and the low-end. But that doesn't mean the high-end is immune. Far from it. It means the high-end is fundamentally unsellable because the prices are unaffordable. Please read Farkney's post above for a clear explanation. Jumbo loans are all but a thing of the past. There are no longer sufficient buyers who can secure loans to uphold the high end. Those homes will only start selling en masse when they come in line with people's incomes. Which means STEEP and SEVERE price declines to come.

[Laker]

David Raether,
You site does not work...it says it will be in the future....

Peter ,
Listen to Rational Renter - he is 100% correct.
The fact that cheap houses are now selling and dragging down the median is a fact but the actual meaning of it is very important and you miss it.
It means simply that high end homes are not sell-able. Nobody buys them (I mean much less than they use to sell).
This thing cannot continue forever. At some point, those owners will need to reduce the prices, and when it happens, the high end will start moving. It will only happen for the one of this options:
1) Bring back stated income Option ARMS.
2) Prices go down by 40-50% from peak to about 2000-2001 prices.

Many of these high end homes that use to sell for $500,000 in 2001, were selling for $1.3 Million in 2006. Now, ask yourself why?
The answer is very easy:
Back when you had to show your income, $120,000-150,000 would qualify you to buy that $500,000 house in 2001. Jumping to 2006, to buy same house, you'll need an income of $350,000-450,000 to get same mortgage....
Now, are you saying incomes of the person that made $120K is now $350K ??
Or simply that person's income in 2006 was $130K, He stated his income as $250-300K AND chose Option ARM and got qualified based on the minimum payment (not based on fully amortized payment).
You see this high end market received double whammy.
1) They can't state their income to get $1M loan.
2) The can't get the minimum payment loan and qualify based on it for the payment.
You combine those two and it is bad news.......

[steve from virginia]

What is happening now is an example of wishful thinking. The sales out of foreclosure is a return of speculators to the real estate market. These people are buying on the premise that 'someday, prices will get back to normal'

This is not going to happen. The real value of real estate relates directly to incomes. Incomes are not rising except for the lucky. Incomes are not going to increase any time soon, measured to incomes, house prices are still wildy overpriced.

The real estate market will 'improve' once ALL the speculators are purged from the system, including these 'second generation' investors. When real estate becomes untouchable to any investors .. that will be the bottom.

Look for that in ten years.

[jeff]

Also, please see it from the lender's perspective. For example, someone living off of income recently retired. My mortgage is just now paid off, which means I am no longer making the general pool of loans "safer" by being a good debtor. I no longer believe in buying mortgage bonds, since the risk has increased, and I don't believe the government will back them up like US bonds (remember the run on US gold by foreign countries in the 70s, the US just passed new laws to stop the flow out of the country) Sorry homeowners, my saving is not available for loaning to buy houses.

[ryanonthebeach]

Your headline is seriously questionable…. It should read; housing prices returning to normal levels? Fire sale it is not.
I don’t know why you idiots can’t simply value a house as you would any other asset. It is simple, very, very simple. Price vs. Rent is the yield, after expenses the yield should be more than inflation. It is still negative!!! So they are still overvalued !!! What the hell is so complicated about that. Are you really that stupid/incompetent? Or are you just telling people what they want to hear, which is corrupt. So you’re either incompetent or corrupt, which is it?

[Michael]

No surprise here. Goldman Sachs put out a report nearly 18 months ago predicting this decline. What we've seen up to this point has been largely driven by credit conditions (the same easy credit conditions that led to the run up). The next leg of the decline will be led by economic fundamentals. Rising unemployment (7.3%) and energy costs will continue to take a toll on the local economy and house prices.

This is not a crash... simply reversion to the mean. Back to 00' / 01' prices. No harm, no foul

[bill gates]

dont worry be happy

[qo]

The majority of the posters in this thread have it exactly right, from a number of angles. It's great to be in good company!

At the end of the day, the average house keeps the elements at bay, gets your kids into decent schools and affords a reasonable commute for those bringing in the bacon. The price people are willing to pay for that house fluctuates around this inherent value; buffeted by credit conditions (which have been absurdly lax the last 10 or so years), demand (high due to lax credit conditions), and a variety of drivers specific to locality. In other words, while a house's PRICE may change, its VALUE doesn't change unless local conditions figure large in the equation.

An example of local drivers figuring large would be Cisco's (abandoned) plans to expand its campus into Coyote Creek in South San Jose. Value for property in the area skyrocketed when the plans were announced, and price (logically) followed value. I haven't looked recently, but my guess is that price also followed value downward when the plans were scuttled.

The above isn't what happened in CA the last decade though. Price skyrocketed based not on value, but on easy credit conditions. Any resulting "demand" in such an environment will be ephemeral since underlying value hasn't changed at all.

While I don't agree with ryanonthebeach's bedside manner, I completely agree with him that 1) there is nothing complex about determining the PRICE of a house and 2) his formula is all you need.

[Jane B]

thanks for your thoughts, Peter Viles. however, it's critical to note that C.A.R. is the most blatantly biased source you could have referenced. they have been gilding the lily now for over two years, hoping buyers will believe them. such a grim report as this just indicates that things are much worse than they say.