Outlook and Forecast

With buyers returning to the market to take advantage of the discount home prices, government tax credits, and interest rates, the existing home market in California experienced strong sales throughout 2009. As expected, distressed properties generated more interest from buyers because of their deeply discounted prices, but many home sellers of non-distressed properties responded promptly and cut their price accordingly to stay competitive in the market.  Sales of all homes increased, inventory fell to below-normal levels, and home prices adjusted upward in response to tight inventory levels.

The State of the California Housing Market report takes a comprehensive look at these recent developments in the California real estate market and provides an outlook for 2010. In particular, the report examines the impact of the federal first-time buyer tax credit on home buyers, analyzes the sales trends of distressed and non-distressed properties, and takes a closer look at the surge in the share of FHA-insured loans.

Key Findings

• The share of first-time buyers surged from 35.9 percent in 2008 to 47.0 percent in 2009, and
   increased for the third consecutive year. The proportion of first-time buyers exceeded the long-run
   average of 38.6 percent, and the share was the highest since 1995 when more than half of all
   buyers were first-timers.

• The federal tax credit was a big factor in many first-time buyers’ decision to purchase a home, as
   69 percent of those surveyed said that the federal tax credit was either “very important” or “most
   important” in their home buying decision.

•  Many first-time buyers were interested in distressed properties with deeply discounted price tags.
   In fact, over half of all first-time buyers (51.3 percent) either bought an REO/foreclosed property
   or a short sale in 2009.

•  Low home prices not only encouraged first-time buyers to purchase their entry-level home, but
   also lured investors who wanted to add a piece of real estate to their portfolio. Home buyers who
   purchased their properties primarily for investment purposes and tax considerations increased
   from 14.0 percent in 2008 to 16.8 percent in 2009.

•  Prices of distressed properties fell more sharply in 2009 than did prices of non-distressed
   properties. The median price of distressed properties declined 24.2 percent from $330,000 in
   2008 to $250,000 in 2009, while the median price of non-distressed properties dropped 10.4
   percent from $541,000 in 2008 to $485,000 in 2009.

•  Sellers who planned on purchasing another home, or had already bought another home, declined
    from 43.1 percent in 2008 to 39.4 percent in 2009. The share of home sellers who expressed an
    intention to repurchase peaked at 74 percent in 2004 and has declined in each of the subsequent
    five years.

•  The rapid growth in FHA-insured loans continued in 2009, with its share of total first mortgages
    soaring from 18.9 percent in 2008 to 32 percent in 2009. VA loans, meanwhile, adjusted slightly
    upward from 2.7 percent in 2008 to 4.7 percent in 2009.

•  One-third (32.9 percent) of all sellers sold their home with a loss in 2009, a jump from the 22.2
    percent recorded in 2008. It was the highest on record since C.A.R started tracking net cash
    losses, and was more than triple the long-run average of 9.3 percent.