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California Sunsets

It’s one of the things that has intrigued me the most about this real estate slump, how home sales volumes can crash but prices stay up. Doesn’t this fly in the face of economics 101, less demand, lower prices?

The latest numbers for Southern California—that’s a Laguna Beach sunset at the right—sheds light on the phenomenon. A total of 17,800 homes sold in Southern California in July, according to real estate researcher DataQuick Information Systems. That number was down 27% from July of last year and remarkably is the slowest July since 1995, the bottom of California’s last housing slump.

“The last time we had sales this slow, Southern California had been in recession for a few years,” explains Marshall Prentice, DataQuick’s president. “Jobs were being lost in droves, people were leaving the area and home prices fell significantly.” But the median price last month actually climbed 3.7% to $505,000!

DataQuick has an explanation. What’s happening is that fewer lower-priced homes are selling. Prices are flat or increasing in the top half of the market. So when you adjust for this shift in type of home sold, you find that the typical dwelling has actually declined in price, roughly 3% below where it was a year ago.

One potentially heartening scenario is that buyers of entry-level homes are holding off, concerned about falling prices. When they do feel more secure this pent-up demand will lift home prices even higher. A worse scenario is that buyers at the high-end begin to feel the same skittishness. They hold off buying and prices as a whole spiral downward. There’s two ways to look at that California sunset—a prelude to a sunny new day or a long dark night.