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California Housing Market: A Slow Leak

Living in California promises lots of benefits: great weather, the beauty of nature, and the cosmopolitan perks of cities big and small.

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But living in California has its price. And it’s a higher price than anywhere in the nation.

California's housing affordability is the lowest in the country, according to the California Building Industry Association (CBIA). This fact has led to a massive housing slowdown in the state, leading the way for the national housing market to cool and slow.

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The Facts

Recent figures released by the California Association of Realtors (CAR) indicate that home sales are decreasing rapidly. In January of 2007, home sales decreased 12.6 percent compared with the same period a year ago.

Why? One reason is the continually increasing home prices. The median price of an existing, single-family detached home in January of 2007 was $559,640. This was a 1.9 percent increase over the median for January 2006.

In fact, home prices soared over the last few years, and did not keep pace with Californians’ income. From October of 2000 to October of 2006, median home prices soared nearly 117 percent. DataQuick Information Systems reported 52.4 percent, or 195 out of 372 cities and communities, showed an increase in their median home prices from a year ago.

What does this mean? California home prices are out of reach for a historically high number of first-time buyers. Figures from CAR in 2006 reported fewer than one in four (24 percent) first-time homebuyers could afford the median-priced home. In 20 California metro areas, families earning the median income can afford fewer than 10 percent of the homes available, according to the CBIA.

When houses are not affordable, sales drop. And the market quakes.

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The Future

With home prices in California far above average incomes and affordability, realtors find it extremely difficult to sell homes. Properties stay on the market for a long time, and more come on the market everyday.

This glut of homes is actually helping to moderate prices, but it will take awhile. Some economists predict it will take the California housing market three years or more to recover from the downturn. Prices will fall due to the inundated market, and incomes will rise due to inflation. But it will be a slow process.

Many sellers are still resistant to the idea that the market is not what is used to be and stick to their high prices. This foot dragging means that the market will not rebound as quickly as it could.

In the meantime, there are bright spots. Apartment rentals are increasing in number and price, as is the market for office space.