The latest forecast for the California housing market's reversal of fortunes jibes with a previous outlook predicting flat, rather than falling home prices in California for the next few years.

In 2007, California home prices will slip only 2 percent, while sales will be off 7 percent, according to the California Association of Realtors' "2007 California Housing Market Forecast".

"The housing market clearly downshifted in 2006 from the record-setting sales and robust price gains of the last few years," said CAR president Vince Malta.

"The residential real estate market in 2006 was characterized by a gap between buyer and seller expectations. Sellers sensed that the peak of the market was approaching, yet still hoped to obtain the highest possible prices. Buyers' sense of urgency waned as the number of homes on the market grew and they took longer to identify and subsequently purchase a home," Malta added.

There was much agreement with the CAR forecast and "2005: The Year the Tortoise Won the Race, Whither California Home Prices," by University of California Los Angeles (UCLA) Anderson Forecast director Edward Leamer.

Leamer also says the real estate sector will be plagued by falling sales more so than falling prices and that home prices five years from now will be about the same as they are today. However, in real terms, values could be 20 percent lower due to the impact of inflation.

"We do not predict a recession, nor do we predict a substantial decline in average nominal home prices. This forecast is based on two arguments. There is not enough vulnerability in the usual sources of employment loss to create a recession, and the historical record suggests that average home prices do not usually fall without this kind of job loss," said economist Ryan Ratacliff, author of the Anderson Forecast "Soft Landing with Turbulence Ahead."

CAR pointed to unsustainable home price increases, related affordability concerns, rising energy costs and higher interest rates as the culprits responsible for undoing California's boom.

"Fixed-rate mortgages also hit and passed the psychological threshold of 6 percent, while adjustable rate mortgages passed 5 percent, ultimately causing a decline in affordability. Affordability concerns also will continue to constrain sales for many households in California throughout 2007, especially for first-time home buyers," said CAR vice president and chief economist Leslie Appleton-Young.

CAR also expects the greatest sales declines to come from the Central Valley, San Diego and Riverside/San Bernardino regions that were among the Golden State's biggest boom markets.

"That also holds true for several second-home markets, including the desert areas of Southern California and the Wine Country," she added.

Anderson forecasters said California's housing market could fare worse should higher interest rates break household budgets, many of which remain intact with high-leverage, risky mortgages.

Interest rates thus far have remained well off the 7 percent level forecasters predicted this year.

Published: October 23, 2006

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.