Fisher Center for Real Estate and Urban Economics

This article describes the effects of the subprime and credit crisis on the California housing market and the fall 2009 outlook for recovery. The article begins with a description of alternative measures for tracking home price changes and discusses how median price, the Federal Housing Finance Agency (FHFA) index, and the Standard & Poors/Case-Shiller index differ as indicators. Statewide, the median price, dependent on the mix of sales, rose faster and then dropped more than the FHFA index, based on same-home sales with “conforming” loans. Trends among California’s regional markets also vary by index. The FHFA indices for San Francisco Bay Area west bay and east bay areas dropped significantly less than the Case-Shiller index for the combined area. Both FHFA indices among regions and price-per-square foot data within the San Francisco Bay Area show that lower priced markets, with high shares of subprime loans experienced higher foreclosure rates, as well as the most severe price drops early in the crisis. Higher priced markets have shown more vulnerability within the last year, as the impacts of recession are added to the softening caused by the subprime and credit crisis. Uncertainties in employment recovery, interest rates, and building activity make it difficult to predict how and when the market will recover. Present trends suggest that the California housing market may be stabilizing, but it is unlikely that prices will fully recover to the pre-crisis peak in the next five years.

With Silicon Valley employment still well below the 2000 peak, and rising foreclosures nationwide, this article examines whether the area's housing market is vulnerable to a correction. Recent statistics suggest that several factors have helped support home prices, but that there are uncertainties going forward. Although the San Jose MSA has regained less than one-fifth of jobs lost since 2000, there are now strong signs that employment is in recovery, with job growth occurring in diverse sectors. The San Jose MSA's wage and salary jobs now outstrip the area's resident labor force, suggesting that there may be a pent-up demand for housing from commuters in surrounding communities. This demand may be one of several factors that kept the region's housing prices stable immediately following the dot-com bust, and allowed price increases to follow in the absence of full employment recovery. Other factors include low interest rates; a mobile younger workforce, whose departure affected rent more than home prices; and a shift in investment from stocks to homeownership following the dot-com bust. In the 2007 housing market slowdown, the greatest impact nationwide has been at the low end of the market, while Silicon Valley's expensive housing market has a foreclosure rate well below the statewide average. Nevertheless, there is some evidence of softening. The number of home sales has decreased. The same-home sales price index was down slightly first quarter, as was the median price for new homes. The median price of existing homes is rising, but in part because of the drop off in sales at the low end and in part due to sellers taking homes off the market rather than lowering prices. The paper concludes with several possible scenarios for Silicon Valley home prices going forward--a two-tiered market with price increases in some segments and declines in others; price stabilization across home-types; or a significant recession-induced price decline.