After four years of dizzying housing gains, the California Association of Realtors (C.A.R.) announces that price appreciation and home sales slowed in 2006, due partly to the smallest share of first-time homebuyers buying homes in recent memory.
California impacts national figures because one out of every nine people in America lives there.
First-time homebuyers declined from 30.5 percent in 2005 to 27.1 percent in 2006, according to new C.A.R. survey, contributing to statewide declines in sales of existing single-family homes of 23 percent. Price appreciation also slowed dramatically as the year progressed.
Further evidence that affordability is the likely culprit is the fact that the share of buyers who used a second mortgage climbed from 38 percent in 2005 to 43 percent in 2006, says C.A.R.. That's more than triple the percentage since 2001 and the highest percentage since 1982.
The use of alternative loan products also registered a sharp increase, particularly zero-down payment loans. "Home buyers with zero-down payments increased significantly from 4.5 percent in 2000 to 21.1 percent in 2006," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. "Two out of five first-time buyers made a zero-down payment on their home purchase, while just one in 10 repeat buyers purchased their home with no down payment."
"The interest rate environment also played a significant role in the housing market of the past few years," she said. "From 2002 through the first half of 2005, interest rates were either expected to fall or remain at attractive levels. When the fixed-rate temporarily exceeded 6 percent in 2003 and 2004, sales slowed. But in each case, market activity accelerated when the rate fell below that threshold. By contrast, when the fixed-rate moved past 6 percent in late 2005, it remained there. Expectations adjusted and anticipated further rate increases, contributing to the slowdown in sales in late 2005 and into 2006."
That means that home sales in California fell in 2006 after four years of record expansion. "The statewide median price saw shrinking gains throughout the year, slowing from a 14 percent year-to-year increase in January 2006 to just under 2 percent as the year drew to a close," said C.A.R. President Colleen Badagliacco. "That's a far cry from the string of double-digit annual percentage gains that prevailed during the first half of this decade."
"Over the period 2003 through 2005, inventories were lean, multiple offers were common, and buyers and sellers alike knew they needed to move quickly to consummate a transaction," she said. "But as the market began to slow in late 2005, buyers sensed that they would get a better deal if they waited, while sellers still hoped to sell their home at a premium. This drove a wedge between buyer psychology and seller psychology, creating more market friction and leading to a slowdown in activity."
Other key findings from "The State of the California Housing Market" include:
- Twenty-nine percent of first-time buyers purchased a condo or a town home in 2006 compared with 33 percent in 2005.
- The proportion of first-time buyers who purchased a single-family home increased slightly from 61 percent in 2005 to 65 percent in 2006, but still remained significantly below the 72 percent recorded in 2004.
- The share of adjustable-rate and hybrid loans among all loans decreased from 43 percent in 2005 to 35 percent in 2006, but remained high by historical standards. Meanwhile, the share of fixed-rate loans rebounded from a historical low of 57 percent in 2005 to 65 percent in 2006.
- Repeat buyers relied less on the sale proceeds from their previous residence as their primary source of down payment. Only 34.7 percent of repeat buyers considered the sale proceeds as their primary source, compared with 41.4 percent in 2005 and 45.1 percent in 2004.
- Meanwhile, savings as the primary source increased from 31.9 percent in 2005 to 34.7 percent in 2006. The share of savings has been increasing steadily from 29.2 percent since 2002.
- The median down payment declined 8.8 percent from $80,000 in 2005 to $73,000 in 2006, despite an increase in the median home price. This was the first time since 1995 that the median down payment dropped.
- The median down payment for first-time buyers decreased from $25,000 in 2005 to $10,000 in 2006, while the median down payment for repeat buyers decreased from $119,000 to $100,000.
- The median loan amount for first mortgages continued to increase in 2006 along with rising home prices, climbing 8.2 percent from $384,000 to $415,500 among all buyers.
- The median first mortgage amount for first-time buyers increased 6.8 percent from $347,800 to $371,600, while the median first mortgage amount for repeat buyers increased 8.1 percent from $400,000 to $432,500.
- More home buyers used 100-percent financing to purchase their home. About a fifth of all homes purchased (21.1 percent) were financed with a zero-down payment mortgage compared with 19.7 percent last year. Recent use of zero-down mortgages has increased significantly since 2000, when they were used by just 4.5 percent of buyers. Two of five first-time buyers (40.9 percent) made a zero-down payment on their home purchase, while just one in 10 repeat buyers (11.3 percent) purchased their home with no down payment.
- The typical first-time buyer had a median age of 35, earned an annual household income of $80,000, and purchased a home with a historically high median price of $450,000.
- Fifty percent of all first-time buyers were married and 35 percent of them were singles. The share of married first-time buyers has been declining slowly but steadily since 2000. Meanwhile, first-time buyer households with two or more individuals declined from 16.2 percent in 2005 to 13.5 percent in 2006.
- The typical repeat buyer had a median age of 45, earned an annual household income of $120,000, and purchased a home with a historically high median price of $618,000.
- Six of 10 repeat buyers were married, a quarter of them were singles, and one of eight were buyer households with two or more individuals. Repeat buyer households with two or more individuals have increased from 6.6 percent in 2002 to 12.7 percent in 2006.
- Almost half of these home buyers were married (47 percent), 37.6 percent were singles, and 13.4 percent were households with "two or more individuals."
- The typical home seller was 50 years old, had a two-member household, earned an annual household income of $100,000, and lived in the home for five years before selling it.
- Fifty-five percent of all sellers were married and 27 percent were singles. Households with two or more individuals accounted for 12 percent of all sellers in 2006, virtually unchanged from that in 2005.
- After peaking in 2005 at $220,643, the median net cash gain by sellers from all home sales declined 8.4 percent to $202,000. It was the first time since 1997 that the median net cash gain fell. The median net cash gain for single-family detached homes increased 1.6 percent to $250,000, while the median net cash gain for condo/town homes declined 2.7 percent to $180,000.
Observes California-based market timer and analyst Robert Campbell, author of a real estate
