The California housing market is poised to finish 2003 by setting new records across the board for the second consecutive year, according to a report, “State of the Housing Market 2003,” from the California Association of REALTORS (C.A.R.).
“The housing market in 2003 is on course to break several records that were set in 2002,” said C.A.R. President Ann Pettijohn. “Sales of detached existing single-family homes are expected to exceed 2002’s record-setting pace of 572,500 units, increasing 4.2 percent to 596,500 units this year. The median price will easily achieve a new high in 2003, reaching $369,500, a 17 percent increase over 2002.”
The market has benefited over the past two years from the lowest mortgage rates in more than a generation, according to C.A.R. economists. Moreover, strong demand relative to supply has contributed to significant increases in the median price as the state’s population has grown by 600,000 people per year, while new home production has fallen short of statewide household growth by at least 40,000 units for the past several years.
Repeat Buyers Dominate Market
Repeat homebuyers, who accounted for 70 percent of home sales in 2003, have increasingly dominated the residential real estate market, according to the report. Their market share has climbed steadily since the mid-1990s, when repeat buyers represented 50 percent of all homebuyers.
“Because repeat buyers have reaped equity gains on the sale of previous homes in recent years, and have rolled much of those gains into the purchase of their next home, their home financing decisions have applied tremendous upward pressure on home prices,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.
Repeat homebuyers are primarily Baby Boomers in their peak income- producing years, who have a median age of 45 years and a median annual income of $100,000, according to the report.
Low Interest Rates Benefit First-Time Homebuyers
Comprising 30 percent of the market and with somewhat fewer financial resources, first-time homebuyers have nevertheless been a force in the California housing market over the past year. Relying primarily on savings for their downpayment, and more likely to take out a second mortgage than repeat buyers, first-timers have taken advantage of the low interest rate environment.
“Instead of being discouraged by increasing home prices, many first-timers take a more positive alternative by purchasing more affordable units such as condos or townhomes that requires smaller downpayments and lower monthly mortgage payment than detached homes,” Appleton-Young said.
First-time homebuyers have a median age of 33 years, earn a median household income of $75,000, and typically are married, although just over one-third of first-timers are single. First-timers also purchase a less expensive home than the statewide median ($307,500 compared to $375,000), and are more likely to view condominiums as a more affordable option — 44 percent of all condominium purchases are made by first-time buyers. The survey also revealed that one out of three first-timers take out a second mortgage to avoid paying private mortgage insurance (PMI).
“Yet despite the fact that there is a wider array of first-time homebuyer financing programs than ever before, first-time homebuyers as a share of all homebuyers have never been lower in the history of C.A.R. housing market research,” Appleton-Young said. “With tight market conditions and repeat homebuyers driving the market, rapid price appreciation has left homeownership out of reach for many prospective first-time buyers.”
Inventory, time on market at record lows
Across the state, inventory levels have been at record or near-record lows for most of the past two years, ranging between two and three and one-half months since early 2002. Time on market has ratcheted downward for eight consecutive years, and now stands at just two weeks, while the median price discount — the difference between list and sale price — was at 0.9 percent – – the sixth consecutive year when the discount has been below 2 percent.
Housing Affordability Deteriorating
Favorable mortgage rates kept housing affordability from deteriorating throughout 2002 and the first half of 2003 despite strong price appreciation over that period. Over that time interval, the C.A.R. Housing Affordability Index hovered in the range of 30 percent, meaning that 30 percent of California households could afford to buy the median-priced home. Once mortgage rates bottomed out in mid-2003, affordability dropped below 25 percent for the first time in over a dozen years, raising concerns about access to homeownership on the part of first-time homebuying households.
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