As prices continue to rise unabashed by sales slips, Californians are backing off adjustable rate mortgages and lenders are making it tougher to qualify for home loans.

In February, 51.9 percent of all California home buyers financed their purchases with an adjustable rate mortgage (ARM), down from 63.7 percent in January, 68.7 percent in December and 70.9 percent in November, according to DataQuick Information Systems in La Jolla, CA

The use of ARMs, considered easier to get because of initially lower monthly mortgage payments, are also considered an indication buyers are stretching finances.

ARM use in California peaked in May last year at 73.7 percent.

"Some of the financing issues at play here are fairly complex and would include this year's higher conforming loan limit, the spread between the cost of an ARM and a fixed-rate mortgage, use of equity lines, and federal regulators who have recently told lenders to lower risk levels," said Marshall Prentice, DataQuick president.

Indeed, fewer home loan applications are being approved with a minimum of underwriting as lenders tighten scrutiny in a housing market with narrowing margins of error, according to HomeSmartReports.com a San Juan Capistrano, CA, service that provides consumers with online access to sales trends, property value estimates and risk analyses.

Mortgage applications in HomeSmartReports' so-called "slam dunk" category of limited underwriting accounted for 79.6 percent of the last six month's home loan application volume, down from 83.8 percent in the prior six months.

As a result of increased lender scrutiny, mortgage risk of default has declined by 22.7 percent in the past year, according to Mike Ela, HomeSmartReports' president.

"As appreciation rates come down, fewer mistakes will be submerged by the rapid rise in home values. Some added caution may also be because federal regulators have told the lending industry to be more careful, especially when it comes to loans in the so-called subprime category. Consumers need to do their homework," said Ela.

Coinciding with both DataQuick's and HomeSmartReports' news, the California Association of Realtors reported home sales in the Golden State fell by 15.5 percent in February, compared to a year ago.

Meanwhile homes continued their upward march, rising 13.7 percent from a year ago to a median $535,470 in February.

However, the February price was a decrease from a month ago when in January this year the median hit $551,300 in California.

"Unsold inventory rose again in February to a 6.7 month supply, one of the highest inventory levels in several years," said CAR vice president and chief economist Leslie Appleton-Young.

"We expect the pace of price appreciation to slow from the 13 to 17 percent range of 2005 to 10 percent this year as rising inventory levels mitigate some of the upward pressure on home prices. The higher-priced coastal areas will see price gains in the mid-single digits while the inland areas will see increases in excess of 10 percent," she added.

Sales of California homes also slowed to a median 52 days in February this year compared to only 40 days a year ago.