Don Diltz’s Weblog www.MidPenRE.com

We’ve all been reading the conflicting headlines.  Some say 2010 will have its challenges.  Others say 2010 will be the start of good things to come.  But what’s the truth?  How can we read through the pessimism and for that matter, the rose colored glasses, to determine where we are likely headed?

In 2009, it seemed the only thing that was “certain” regarding the economy, financial markets and real estate in 2009 – was uncertainty.

We’re hoping much of that is behind us, and here I’ll offer my insight and share what I believe the coming year will bring.  Together, we’ll weed through the headlines and I’ll offer my best opinion.  And a year from now, we’ll look back on this edition of Weekly Market Watch to determine if my hunch was correct or if I should’ve kept my opinions with the rest of the weeds.

• Overall.  I think 2010 will be the year we begin to build a solid housing foundation.  Many experts are predicting that the recession is nearly complete, if it isn’t already, as measured by a decline in negative growth.  But the recovery is going to depend somewhat on stimulus spending (much of which is already approved and unspent) and doing more to facilitate job growth.  As CAR Economist Leslie Appleton Young said, “If we don’t create more direct policies to get people back to work, this could go on much longer.”
• Let’s start with foreclosures.  No, we are definitely not out of the woods yet.  I think we have a lot of work ahead of us and much of that has to do with the state of the overall economy.  Unemployment is still high and while I think we’re better, we’re not yet on enough solid ground to be able to say that 2010 will see the end of broad-based job loss.  Late in 2009 we’ve seen some consecutive weeks of declining new unemployment claims, which could be a good start.   The latest U.S. Bureau of Unemployment Figures show that unemployment rates were higher in November 2009 than for the same period in 2008 in all 372 metropolitan areas.  What happens when people lose their jobs?  They typically aren’t able to pay their mortgages.  There are also many people out there with adjustable rate mortgages which haven’t yet adjusted.  When those mortgages adjust, there will be people who will find themselves in a short sale or foreclosure situation, especially if their employment situation is not as favorable as it was when they originated their home loan.   Fortunately the good news is that the government is putting more pressure on banks to work with homeowners on modifying their existing loans.  There are also some banks who are taking steps to clear the way for a Short Sale approval if a modification request can’t be approved.  These programs can help avoid too many foreclosed properties hitting our markets in too short a period of time.  There is talk of even more creative programs that could ease the level (or velocity) of foreclosures – which simple Econ 101 tells us is coming.  
• Interest rates.  There are many schools of thought with relation to the future of interest rates.  I tend to agree with economists who believe that last year’s record low interest rates, where some were able to secure a 30 year fixed rate mortgage for under 5%, may be a thing of the past.  Do I see them taking a big surge upward in 2010?  No, probably not.  CNBC Reporter Diana Olick wrote, “Unless the government decides to extend its Fannie-Freddie purchase program or do something else to juice the credit markets, mortgage rates will rise steadily, probably leveling off somewhere around six percent” and I tend to agree with that.  Also, from Lawrence Yun, NAR Chief Economist: “The Federal Reserve will slowly start the unwinding of its mortgage-backed security purchases. Also, consumer prices will be watched for any sign of accelerating inflation. Bond investors, therefore, will be cautious about lending at such low rates. The 30-year fixed rate is likely to reach 5.7 percent by the end of 2010 from the current 5.0 percent.”  Still a good place to be.  But having said that, I encourage you to review my February 2009 Reality Check piece in which I shared how increases in purchasing power can affect a buyer’s purchasing power.  I have updated it with the latest numbers and if you are considering buying, you may want to consider doing so before interest rates start making their way up.  Even a small hike in rates can dramatically affect your purchasing power.
• Housing Prices and Sales.  I tend to agree with the California Association of Realtors price and sales outlook for 2010.  They’re calling for a 3.3% increase in median home price.  They’re also calling for a 2.3% decline in home sales.  I think these are accurate predictions.  In the Bay Area we will have pockets that could vary as much as 5% to 8% in either direction – but I will say that we’ll see the Bay Area remain fairly flat with respect to price and units as a whole.
• The hottest market?  The entry level market is by and large the hottest segment of the housing market right now and in all honesty, probably will continue to be in 2010.  But, it was also the first to experience the downturn so it is certainly easy to suspect that it would be the first to recover.  What we know about the entry level market is this:
  • Homes saw a great deal of depreciation in this market
  • This market was most affected by foreclosures and short sales
  • Affordability is especially high in this market
  • The inventory is low in the entry level market in many areas

I don’t see much of this changing in 2010. 

I do see a trickle-up affect coming from the entry level market into the move-up market.  We are beginning to see contingent offers, more and more each week.  Some homeowners are able to take advantage of the $6,500 home buyer tax credit as well as the opportunity to cash in on a buyer’s market in the entry level and a seller’s market in the move-up region.  It really is a perfect storm for this group and I hope more move-up buyers will consider that.  Fortunately, we have our Move-Up Marketer program which helps to educate move-up buyers about the opportunities in today’s market. 

The luxury market is a very different market indeed.  It was the last to be affected by the market changes and in all likelihood it will be the last to recover.  Having said that, there are some very interesting pockets of success.  It really depends on the house, the neighborhood and the overall demand for that particular market.  We’ve seen instances where a million dollar home comes on the market only to be snatched up within a few days, while others nearby are sitting for over 120 days.  It really comes down to location, condition and pricing—no real surprise there!  Luxury homes over $2.5M are least affected by interest rates and availability of loans – but can be more largely impacted by movement of the Dow and international economic markets.  I would say watch where the Consumer Confidence Index and the DJI is going, and your Luxury market is probably not far behind.

In the end, regardless of what the market may or may not be in the coming year, the bottom line is, it may be a really great time to buy.  Attractive interest rates.  Increased affordability.  Tax credits.  In many instances, there hasn’t been a better opportunity to buy in decades.  Please don’t lose sight of that.  If you are in a position to buy and are considering do so, please do explore your options.  I believe 2010 will be a year of creating a solid foundation on which to build.  Don’t wait until it has passed by.

  Now, let’s take a look at the past two Holiday weeks in local Bay Area  real estate:

• East Bay—Berkeley reports we are very low on inventory.  We are hoping for a big tour tomorrow with lots of new listings. At our sales meeting yesterday, the agents announced several “coming soons”, sellers who had been waiting for 2010. We had a good number of accepted deals at the end of December.  The buyers are still out there and a perfect storm of disappearing government credits, hints that the Fed will increase interest rates, and new listings will hopefully get the more reticent buyers off that fence.  Castro Valley reports the market is still full of cash buyers, who are leading the market.  It seems like everyone has cash, and lots of it.  Livermore reports there seems to be a lull in the market, as some of the listings that were garnering multiple offers just 30 days ago are sitting on the market in Livermore.  This lull may be an opportunity for buyer to purchase a home without competing offers.  Oakland reports one of the busiest Decembers I have ever seen.  The agents were frantically working on escrows and our budget was for 27 sales and we had over 40.  Average sales price went up for the month.  Feeling lot’s of buzz.  Listings came in right around expectations.  Walnut Creek reports very low inventory, most sales are over asking price.  We are seeing a few more REO listings coming on market.
• Monterey County—Unlike most years, activity really did not slow down much over the holidays, especially in the lower price ranges.  There are still many showings of homes and writing of offers, and we put 30 properties into escrow in the three weeks right around Christmas.  Also, in December only 25% of our closed properties were above $1 million, with highest-priced sale at $1.8 million.
• North Bay—Northern Marin reports a closed  escrow on a short sale at $199,000 in Novato after 570 Days on Market that was original listed for 235,000.  Cash is still winning out on multiple offers in the market place.   Inventory is picking up.   Southern Marin reports seasonal low sales and listing activity, but agents report new listings coming on the market in the next few weeks.  Santa Rosa reports the final two weeks of the decade saw a flurry of closings with strong sales the week before Christmas and a very quiet final week for new escrows.  There is an optimistic feeling in the air and a feeling of moving forward.
• Peninsula—Burlingame reported the inventory is down and we are all waiting to see what comes to the market in the next few weeks. Everyone has buyers ready to buy and waiting for the perfect listing to come up. We ratified on 1 home listed at 1,499,000 after one day on the market. The early bird prevailed!  Half Moon Bay reported a slow market through the holidays – although buzz is in the air as agents are much more optimistic about 2010 and ready to get to work.  Menlo Park Santa Cruz reported inventory is very low.  Many listings were sold towards the tail end of the year. Sales in all price ranges seemed to be on the buyer’s radar.  We had 3 Atherton sales; $6m, $3.99M, & $3M.  Palo Alto Downtown reported the holidays were fairly good to the mid-peninsula.  We had a variety of first time homebuyers, as well as some sales in the two to three million dollar range.  That was interesting, and hopefully an indication of the new year.
• San Francisco—The Market Street office reported Agents have been diligently working to find properties for our buyers but over the last couple of weeks new inventory has been slow coming to the market.  Conference rooms have been busy with agents writing offers on what’s available. Several great listings will be coming to market within the next few weeks to take advantage of the serious buyers in search of a home.  The San Francisco Van Ness office reported a fairly strong closing month, despite the holiday season.
• Santa Cruz County— 2009 ended up being the first year since 2004 in SC County that the unit count went up. 14% on closed sales.  This is most attributable to the high incidence of REO sales the first half of the year.  Inventory level were down from 2008 overall by about 21% which started driving prices up from hitting a low point in March of $460,000.  We ended the year with the median price at $550,000 – $35,000 down from December of 2008 in the County.  
• Silicon Valley—Cupertino reports it is very slow, as one would expect between Christmas and New Year’s.  San Jose Almaden reports the local market is a pressure cooker under 1 million. Current  REO market is 168 last year at this time was 986.  Property north of 1 million will sell if considered being a steal of a deal.  Otherwise they sit.  San Jose Main reports sales activity has been slow thru the holiday period but we anticipate an increase in listing and sales activity in the upcoming weeks. Interest rates and soft pricing is attracting first time buyers. Most homes up to $550k still seeing multiple offers.  San Jose Willow Glen reports we have a lot of new listings. This will certainly give potential buyers a better chance to buy now.  Saratoga reports the market seemed to mirror what would be expected for the holiday season.
• South County—Gilroy reports the activity is very slow, as one would expect between Christmas and New Year’s.  Morgan Hill reported the new year brings renewed optimism for buyers and sellers (and agents).  We are seeing an increase in new listings–especially upper-end properties.  More importantly, buyer demand remains high as potential buyers are still seeking bargains for entry level homes.  The South County remains one of the best areas for first time home buyers and investors.   The average sales price for a home sold in the Morgan Hill Office was about $427,000–well below our neighbors to the North.  Good interest rates and the tax credit see to be prime motivators for buyers to secure and close a home before June.

A quick synopsis of the above shows that about ½ of the offices reported Holiday slowdown, while offices such as Oakland, Santa Rosa, SF Van Ness, the Menlo Park offices, and Palo Alto felt that late December was very busy considering the Holidays.  I can say that spending time in several offices this past week – it certainly seems to be one of the busiest first weeks of the New Year that I’ve seen in some time.

Until next week- Very Best,

Rick 

Rick Turley
President, San Francisco Bay Area
Coldwell Banker Residential Brokerage

S&P Reports On The State of the Housing Market

One of the founders of what has really become one of our industry’s (and the media’s) most published reports  for real estate statistics and forecasts, S&P Case Shiller, recently participated in a Q&A about the state of the US housing market.  Robert Shiller, a Yale University economist, discussed the housing market and the implications of lower interest rates.  I found it fairly conservative, and in my opinion, pretty much on target with what we are seeing in today’s market.

Here is an excerpt from his interview:

Is the slump in U.S. home prices bottoming out?

Shiller: The situation has definitely changed. With our numbers — the S&P/Case Shiller home price index — going up sharply. It looks like a major turnaround. We’ve been watching that for three months now, and we have some concern that it could be an aberration and temporary. But, at this point, it seems to be evident in just about every city in the U.S. That suggests it’s real. But it probably isn’t the beginning of a major boom, just because the economy is in such bad shape. There’s also a chance that it will reverse. It’s still only three months old, so it’s very hard to be sure at this point. The most likely scenario is that it won’t continue at this high rate of increase, but that it will neither go down a lot, nor up a lot.

So the index will move sideways for a while?

Shiller: Yes, for a while, meaning five years.

What are the main factors driving U.S. house prices? What could push them up, or cause another slump?

Shiller: The main factor is the world economic crisis and the efforts of governments around the world to stimulate the economy. Parts of those efforts have been directed at the housing market. In the U.S., there is an 8,000 dollar first-time home buyer’s tax credit which expires at the end of November. That’s a reason for concern, as it comes to an end. Also, the Federal Reserve has a plan to buy $1.25 trillion worth of mortgage-backed securities to support the housing market. They are most of the way through the program and anticipate phasing it out at some time in 2010 – that’s another thing that will go away. We’ve yet to see how the housing market will continue. Part of the problem is that people are buying now rather than later. When later comes, there could be a downturn in the market.

Is there an oversupply of houses in the U.S.?

Shiller: That’s been a problem. The inventory of unsold houses has been high, but has come down a bit. On top of that, there will be more foreclosures, more homes are going to be dumped on the market as people default. Now, that may slow down as home prices will start going up again. But I suspect that this isn’t going to happen. Also, banks have more REO, or real estate owned, that they’re holding on to for the time being. But eventually those REOs are going to be dumped on the market. So that’s why it doesn’t look particularly encouraging from a supply consideration.

Turning to interest rates, which are at exceptionally low levels: Is there a risk that this eventually will cause irrational exuberance?

Shiller: There is always a risk of that. Those things are hard to predict. However it seems like the present time is least conducive to bubbles of any time. We’re in what some people call “pretend-and-extend” economy, which means that banks that have commercial loans are often extending those loans and pretending that the property is worth something. That’s because they don’t face reality. This kind of economy isn’t really suited to a beginning of a real bubble. Now, everything could change… It’s surprising how strong the residential, single-family home market looks right now. It makes me think that it’s hard to predict animal spirits.

How long can central banks afford to keep expansive policies in place?

Shiller: In principle we can keep this in place for a long time. That’s what Japan did… But confidence is definitely coming back. The depression scare is over at the moment. So it would be plausible that central banks could be raising interest rates — both in the U.S. and Europe — [as early as next year]. But I just have a worry that this isn’t going to happen and that it’s not going to be so easy to extricate [themselves from the low-rate environment].

Will the sharp increase in global debt levels drive up inflation over the medium to long-term?

Shiller: My best guess is that we won’t have inflation, that central banks will pull it back as inflation starts to begin. But I think that there’s a chance of it; people have to be defensive in their investments. It always amazes me that people are so trusting and that they want nominal debt as much as they do… So a good long-term strategy is to invest a good part of one’s portfolio in inflation-indexed bonds, even though it doesn’t particularly look like the time to worry about inflation right now

I tend to agree with Shiller on many of his statements, specifically that we are probably in the midst of a turnaround.  Having said that, it is important to point out that this isn’t going to be a sharp “V” recovery with a sudden jump in prices or units.  In all probability what we will see is a long “L” shaped broad base recovery, where there will be most likely very small gains in overall price for quite some time.  In our San Francisco Bay Area markets this is evidenced by what we have been seeing for several months: entry level prices going up, and high end prices coming down. 

Now, let’s take a look at this week in real estate:

·        East Bay—Castro Valley reports cash is king in this multiple offer market.  We are seeing a more deals with short transaction times as the cash buyer streamlines the process.  We are seeing more pendings fall out and houses going back on the market due to numerous issues.  Some Agents are selling houses two and three times over, luckily, there are always plenty of back ups to lean on.  With the appraisal climate being what it is, many purchase prices are being dropped mid escrow as appraisals continue to come in low.  Fremont reports the low inventory is attracting buyers who are very interested in buying properties that are $400,000 and below.  Livermore reports active inventory is decreasing in Livermore, Pleasanton, and Dublin while the total pending sales in these three cities remains stable.  Multiple offers are the rage below $500,000, and we are starting to see more sales activity in the $500,000 – $1,000,000 price range.  It is very difficult to get an FHA buyer’s offer accepted.  Oakland reports homes in the upper-end are continuing to sell, move up buyers are looking at ways to make the move, like contingent sales. Buyers are showing up at open houses and our Princeton Capital Loan Officer has many clients in the pipeline, waiting for the right property.  Orinda reports sales appear to be holding steady and open house attendance is increasing.  Walnut Creek reports sales activity has really slowed down due to low inventory.  A new listing in Lafayette had over 100 visitors this past Sunday.  Multiple offers on almost every sale.

·        Monterey County—Our Previews market is still slow but not dead.  We’ve had 42 properties on Monterey Peninsula sell for $2 million to $9.2 million since beginning of year, with only eight of those selling above $4 million.

·        North Bay—Petaluma reports Rohnert Park properties go into escrow almost as fast as they come on the market.  We had 26 offers on a $250,000 property; not bank owned not a short sale. Petaluma inventory is at a two year low with less than two months supply. Median price for the month is 440,000 highest since June of 2008.  Santa Rosa reported the inventory squeeze defines our current market. Cash with no contingencies is king, but does not guarantee success. New open escrows have slowed.  Sebastopol reported we continue to see good numbers at open houses. Well priced inventory continues to sell briskly. Many appraisal challenges remain including properties encumbered with over 20% agriculture; think apple trees, olive trees and hobby vineyards.  San Rafael reported inventory has decreased in San Rafael and the bidding war on entry level properties in $300K is still steady.  Southern Marin reports we have had the best month ever, by far, for closings and sales volume.  The market seems to be holding steady, with every deal being negotiated and challenged, but ultimately closing.  We are getting very light on listings.

·        Peninsula—Burlingame reports our conference rooms are busy and Agents are writing offers. Sales are being negotiated with many counters and buyers are nervous but moving ahead with their purchases. Open house attendance is spotty and hard to define. One week well attended and the next week very little activity. Condo prices are declining. Several of our short sale offers are finally getting approval after 4-5 months of waiting.  Menlo Park El Camino reports sales from  $189K to $3 million.  The market has definitely gotten some legs from the $2 to $3 million mark.  Buyers are certainly less nervous and understand that rates only have one way to go.  Palo Alto Downtown reports moderate activity.  Sometimes very active at open houses, sometimes relatively little.  There are some high-end properties that are moving in Atherton and Palo Alto from 3 to 9M.  Those are buyers that are going to stay in the area for some time, either local buyers or a few that have transferred in.  We have a few spec buyers looking in the high-end and feeling it is a good time to buy.  Entry level all the way up to about 2M is generally active – very, very active if it’s priced well.  Otherwise you could have six to seven offers and actually be below list price.  Redwood City/San Carlos reports more "good" properties coming on the market.  A lot of activity at open houses.  Properties that are in good condition and are priced correctly are selling quickly.

·        San Francisco—The Market Street office reports great traffic at open houses throughout the City the last two weekends.  Several offers were ratified on new constructions units that are currently very well priced.  Deals are getting much tougher to keep together each week. The Agents are working very hard to assist their clients in reaching the goal of being home owners.  The Noriega office reported we are seeing a steady stream of REO listings coming into the market. Short sale listings are decreasing.  Still a very active entry level market.  The Van Ness office reported 19 deals closed during this period. Not bad for a holiday.

·        Santa Cruz County—Closed sales in Santa Cruz County are 1073 through August for single family homes.  This represents a 19% increase over the same time last year.  Inventory levels are down about 33% from the same time last year, which the combination is driving a low end multiple offer market. The median price hit a low in March of $404,000; rose the next 4 months, and dipped down again in August to $497,750.  So, like most places we have less inventory, more unit sales ytd and lower prices overall. 

·        Silicon Valley—Cupertino reports the low end is extremely competitive.  There are lots of unescorted potential clients visiting the open houses.  Morale is good.  Los Altos reports the market is picking up with the normal Fall home buying season.  The lower end still has the most activity.  San Jose Almaden reports brisk open houses this weekend in West San Jose/Cupertino market.  25-30 groups of people through in the mid $700s price range.  Almaden under $1.2 is very healthy.  Very little on the market to choose from with 40% of our inventory pending.  Blossom Valley has nearly 70% pending.  Willow Glen reports several Agents are experiencing multiple offer situations and losing out.  Open houses are busy and floor calls are picking up.

·        South County—Morgan Hill reports the local South County market seems to mirror the rest of Santa Clara County.  June and July were great months for sales–August proved to be somewhat slower.  Lower priced homes are garnering multiple offers–but higher priced properties (above $800,000) are languishing on the market.  Most Agents agree that the key to sustained recovery is the extension of the $8000 tax credit for first time buyers.  Gilroy reports a lack of inventory is still our biggest issue.  Properties under $400K are receiving multiple offers with cash or conventional buyers beating out FHA buyers.  Hollister reports Short Sale listings are still dominating our inventory.  REOs are requesting appraisal contingencies removed upon acceptance in some listings due to multiple offer situations.  Buyer activity is still increasing and inventory decreasing.

Without a doubt, locally what continues to push our market in the right direction is the $8,000 first time home buyer tax credit.  Currently in Washington D.C., Realogy executives and government officials are lobbying for either a $15,000 all home buyer tax credit or at minimum, an extension of the $8,000 first time home buyer tax credit but the result of that debate is still in the air.  If the tax credit does disappear we are likely going to see more investors in the entry level home buyer arena which may cause problems with housing prices and a continued erosion of the first time home buyer market.  Please contact your local representative to call upon his/her support of this important initiative.

Have a great week!

Rick

Rick Turley

President, San Francisco Bay Area

Coldwell Banker Residential Brokerage

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