Potential first-time home buyers fled the Golden State's housing market in 2006 and those who could manage to buy had to heavily leverage the deal.

As median home price gains withered, sales collapsed, dropping by 23 percent last year. Even move-up buyers more often found they needed more than equity gains to afford another home.

That's the way it was in California in 2006, according to a new report "The State of the California Housing Market", recently release by the California Association of Realtors.

What a difference a few years make.

"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," said CAR president Colleen Badagliacco, broker owner of Valley Properties in San Jose.

"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," she added.

Affordability, or the lack of it, also drove the California market last year with the market's share of first time home buyers dropping to 27.1 percent, the second lowest level ever.

The median home price in California ended the year at $567,690 in December, up only 3.7 percent from December 2006.

"That's a far cry from the string of double-digit annual percentage gains that prevailed during the first half of this decade," said Badagliacco.

However, with a high median price by any standard, California's home prices took a toll on sales.

Home sales in California fell 23 percent in 2006 after four years of expansion. The San Francisco Bay Area, remained the state's strongest market in both sales and prices. Still sales fell 19 percent.

Sales in southern California fell 23 percent and inventories tripled. The Central Valley's decline was the largest in the state.

Buyers were hit hard too.

More buyers, 43 percent, had to rely upon a second mortgage to close the deal in 2006. In 2005 only 38 percent used a second mortgage. Last year's 43 percent was more than triple the percentage since 2001 and the highest since 1982.

Repeat buyers couldn't squeeze as much equity from their home last year as they could in previous years. 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.

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.

Loan amounts for all buyers swelled. The median loan amount for first mortgages among all buyers increased 8.2 percent last year, from $384,000 in 2005 to $415,500 in 2006.

Likewise, 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.

Other key findings include:

• Even with the greater costs buyers were making some smart moves. They appeared to hedge their bets by going after properties that hold value better in slower markets. The percentage of first-time buyers who purchased a single-family home increased slightly from 61 percent in 2005 to 65 percent in 2006. Twenty-nine percent of first-time buyers purchased a condo or a town home in 2006 down from 33 percent in 2005.

• Borrowers were getting riskier mortgage monkeys off their back. The share of adjustable-rate and hybrid loans among all loans decreased from 43 percent in 2005 to 35 percent in 2006 -- still high by historical standards. Fixed-rate loans rebounded from a historical low of 57 percent in 2005 to 65 percent in 2006.

• Home buyers were also more often putting their own stake in the purchase. Savings, as the primary source of down payment, increased from 31.9 percent in 2005 to 34.7 percent in 2006.

• But that meant buyers had a smaller starting stake in their homes. The median down payment for all buyers 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.