California real estate creates home-buying paradox
January 24, 2005
Proportion of first-time buyers falls to record low in 2004
Last year marked a continuation of the record-breaking performance of the California housing market that began in the late 1990s, according to the California Association of Realtors "2004 – 2005 State of the Housing Market" report, released today. Home sales and the median home price reached record high levels in 2004, while supply conditions and the share of first-time buyers in the California housing market fell to historic lows. The record-setting performance in 2004 eclipsed that of the previous year for the third year in a row; with the exception of a slight pause in 2001, the state's housing market has made significant advances every year since 1995.
"The market performed in a somewhat paradoxical manner in 2004," said C.A.R. President Jim Hamilton. "Home sales and prices continued to advance despite declining affordability and weakness in the labor market, primarily due to low mortgage interest rates, the wealth effect among repeat home buyers, increasing use of adjustable-rate loans, and both near-term and long-term supply constraints."
"Across the state, regional housing markets seemed to be moving in slightly different directions," he said. "Whereas sales were up moderately in all regions of the state in 2003, the picture was mixed in 2004, even as home prices continued to climb at a pace that was double, and in some cases triple, the national rate of increase."
The outlook for 2005 is largely dependent on the trajectory of interest rates, which in turn will dictate the extent to which the wealth-effect-driven market conditions of the past few years will persist, according to the report. Mortgage rates will remain low, but are expected to increase by 50 to 75 basis points as the economy grows in 2005, with the fixed-mortgage interest rate expected to be just under 7 percent by year's end.
"If job growth, which is expected to accelerate throughout the year, is seen as a precursor to inflation, mortgage rates may increase more quickly and cross the 7 percent threshold," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. "This is the biggest risk facing the housing market in 2005."
The share of first-time buyers dropped below 30 percent for only the second time in the 24-year history of the C.A.R. survey, reaching a record low of 26 percent in 2004. Repeat home buyers will again have the ability to outbid first-timers on homes, which will likely lead to an even lower share of first-time home buyers in 2005.
"First-timers are locked out of home ownership for two reasons," Appleton-Young said. "First, with rapidly rising home prices, it has become increasingly difficult to come up with a down payment of any size if one relies on conventional forms of savings. Second, higher prices also translate into higher monthly payments, which puts additional stress on household budgets."
With price appreciation expected to be strong again in 2005, the trend of buying for investment and tax considerations will grow. The share of all buyers who indicated that they bought primarily for investment and tax considerations increased to a historic high of 16.2 percent in 2004, surpassing the previous record of 15.3 percent set in 1991. This trend will be driven largely by older Boomer generation repeat buyers who are diversifying their portfolios, acquiring vacation homes, and planning for retirement.
Housing affordability is a growing concern that could negatively impact the long-term health of the housing market and the California economy. At 20 percent in 2004, affordability in California was less than half that of the nation. With prices and mortgage rates on the rise, affordability will likely plunge to record low levels in 2005, with several coastal regions in the state dipping into single-digit territory for the first time.
"The fate of the housing market will be tied mainly to the direction of the economy," Appleton-Young said. "The greatest concern surrounds the current increase in the use of low-down-payment and interest-only ARMs. If the economy should weaken and trigger job losses, there is potential for today's marginally qualified home buyers to be tomorrow's foreclosure."
Other highlights of the report include:
- C.A.R.'s Unsold Inventory Index fell to a record low of 1.6 months in March and April 2004. Although statewide inventory levels nearly tripled later in the year, supply remained well below the long-term average of 6.5 months.
- Existing-home sales advanced most briskly in the Central Valley in 2004, with nearly a 20 percent year-to-date increase through November, while the median price rose by nearly 25 percent.
- The San Francisco Bay Area registered an 8 percent year-to-date sales increase through November with year-to-year price increases in the range of 15 percent throughout the year.
- The Southern California market slowed slightly from its robust pace in 2003, with sales down nearly 2 percent year-to-date through November 2004, despite a 25 percent increase in the median price.
- There also were regional differences on the supply side of the market. The unsold inventory index for Southern California followed the statewide market and reached historic lows early in the year, but then more than doubled in the summer months before stabilizing. By contrast, the housing supply in the San Francisco Bay Area bottomed out at 1.1 months in July and finished the year with inventory levels that were still well below 2 months.
- The median purchase price for repeat buyers increased significantly from $411,250 in 2003 to $506,250 in 2004.
- While most repeat buyers were white households (69.4 percent), the share of Hispanic repeat buyers increased from 9.9 percent in 2003 to 12.8 percent in 2004, and Asian buyers increased from 7.1 percent to 10.3 percent of the total. The typical first-time buyer fell in the age range of 30 to 40 years, with a median age of 32.
- While more than four out of five home buyers (84.3 percent) bought their home to be used as a primary residence, 15.7 percent of all home buyers bought a home in 2004 either for investment purposes or as a second home. This includes 10.7 percent who acquired a home as an investment or rental property and 5 percent who bought a vacation or second home.
- The overall share of investment, vacation, and second-home purchases has risen since 2001, when they accounted for just 9.8 percent of all purchases.
Los Angeles-based C.A.R. is a state trade organization with more than 160,000 members.
Source: Los Angeles-based C.A.R.