While the California housing market "three-peated" its record-setting sales and price pace in 2005, the state also reported a weaker jobs market and declining affordability, causing the California Association of Realtors to call its annual 2004/2005 State of the Housing Market report "paradoxical."

The paradox could be explained by continuing 30 to 40-year low interest rates, the "wealth" effect of maturing Baby Boomer buyers and sellers, the increasing use of higher risk adjustable and interest-only loans, investment and tax benefits, and the tight markets for homes, particularly on the California coastline.

California grows by 230,000 to 250,000 households annually, a growth rate of about 1.5 percent. Baby Boomers, those aged 41 to about 67, account for about 40 percent of the market, and will continue to impact sales and affordability, says the C.A.R.

According to the report, home sales in 2004 exceeded 2003's record by three percent, and the median price of homes rose 22 percent to an annual median of $454,720.

At the beginning of the year, unsold averages were at 1.6 months of inventory, while later in the year, supply tripled, but still remained below the critical 6.5 months on hand. The national average held steadily at 4.5 months, with prices advancing nationally 7.5 percent.

But while homesellers were enjoying record profits, homebuyers were in a desperate race to jump in. In another paradox, first-time homebuyers usually drive any housing market, but the California market appears to defy gravity as first-time homebuyers dropped to below 30 percent of the market for the first time since 1979.

First-time homebuyers are typically 30 to 40-years old, half are married and one-third are single. Singles are pooling their resources to co-own properties, raising the two or more individual homebuyer rate to 13.2 percent. Typical first-timers earned $75,000 annually and bought historically high median priced homes of $401,500. The average median sales price of homes sold in California was $460,000, 27.8 percent higher than in 2003.

The most important reason for buying, notes the report, was the desire to stop renting, cited by nearly 49 percent of first-time buyers. Investment/tax reasons for buying were cited by 13 percent and 11 percent purchased because they wanted a "better location."

Higher prices forced first-timers to borrow 33 percent more money in their first mortgages than last year, or to take on a second mortgage actions which increased 36.4 in 2003 and 57.2 percent in 2004. Down payments dropped 27.6 percent to $18,450.

"What jumped out at me," says C.A.R.'s chief economist Leslie Appleton-Young, "was that the percentage of first-time buyers was low, 26 percent - that's the lowest that number has ever been since 1979. It's a testament of the affordability hurdles that first-timers face, and the 22 percent price appreciation - that's the highest price since 1979."

Appleton-Young agrees these figures look like a perfect real estate storm brewing. "As they converge to make a perfect storm," says Appleton-Young, "I think it (affordability) will be the same or lower and looking at the California market for 2005. We will see price appreciation not in coastal high-end but in the central parts of the state as people move inland in pursuit of affordability. We are seeing very strong appreciation in some areas, such as the high desert. In Apple Valley, they are going up in excess of 40 percent. The median home price is $250,000 and the median for homes state-wide is $460,000 so there is a real substitution effect going on where young families are having to look inland. The inland communities like San Bernardo have also had the fastest job growth. You are starting to see a fully expressed metropolis, the overall price appreciation will be below 2004, but higher than that in certain regions."

Published: January 25, 2005

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