California Housing in the Subprime/Credit Crisis— Overview and a Forward Look at Recovery

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.