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

I had an interesting chat with one of our Agents recently.  She mentioned that many of our sellers in the upper-tier price point are seeing the current strength of the Dow as a sign that their home will probably fetch more in the early part of next year.  Academically speaking, there is a belief that there is a direct correlation between the housing market and the stock market.  But from an analytical standpoint, although the stock market and the housing market correlate well, there is a variable time lag.  The time lag between housing underperformance and stock market performance can vary widely.  The average is 18 months.

Some high-end Sellers may be saying no to potential contracts on their home as they think by waiting another four to six months (thanks to the stock market’s recent gains) they may get more for their home.  Of course every home is unique and each market is very local, but by and large, the higher end of housing probably won’t follow this reasoning.  First, what we know is that in a “normal” market (of which this market is anything but), the average lag time between the two is 18 months (not four to six months).  It’s also important to point out that we probably aren’t out of the woods as it relates to the volatility in the stock market and overall health of our economy.  Many analysts are suggesting that our recovery may be “W” shaped rather than “V” so we could be looking at more challenges ahead.

 Focusing less on the stock market and more on the level of supply and demand in the particular market and neighborhood will most likely be more helpful.  In most markets, the upper-tier price point remains relatively soft; in some cases offers can be few and far between, and may be worth a second look.  A few examples:  In San Mateo and Santa Clara counties, there’s currently less than a month and a half’s supply of inventory for homes under $750,000.  For homes over $3M, there is a 13 month’s supply.  In San Francisco, for homes under $1M – there is a 2 months supply of inventory.  For homes over $3M, a 14 months supply.  That’s not to say buyers should be throwing out unrealistic offers and expecting them to be accepted.  The real story here is that across the board we’re seeing very favorable increases in interest and in buyer activity.  Sellers may want to consider taking advantage of that interest…before the typical seasonal slowdown.  Our agents are making great use of Coldwell Banker’s “Market Trends” tools in MyRECafe –drilling down to particular neighborhoods and particular price-points, and having factual discussions regarding inventory and activity levels with Buyers and Sellers.

For those who focus on the stock market daily, it is probably a better indicator for the economy as a whole rather than a predictor of where real estate is headed.  With the DOW closing Thursday at just over 9,300, it doesn’t suggest home values will rise in a direct correlation, but it may mean that the recession is subsiding which would be good news for us all.  Now let’s take a look at this week in real estate:

·         Peninsula—Burlingame reported the hot price range is under $500,000. These properties are typically short sales and REOs and they are garnering major multiple offers, many times 20 or more. This has resulted in some of our buyers seeking opportunities in the East Bay or further south. Meanwhile, the $800K-1.2M range is lacking in inventory and there is strong demand. Typically we see the inventory drying up at this time of year and then more coming on the market in mid September.  Menlo Park Santa Cruz Avenue reported an Atherton sale with a list price of $11,900,000 and sold by our Menlo Park El Camino office.  Maybe the high end is loosening up! Open house activity was very busy for mid-August.  San Mateo reported the overall mix is balanced with the exception of $2.5mil and up which still lags the market.  Woodside reported four sales at $1.8mil plus--that is very good.

·         San Francisco—Noriega reported the low end is on fire and it's not just from first time buyers. Case in point, one REO, fixer property in the Ocean View district listed at $350k received 40 offers.  One offer was reportedly $150,000 over asking all cash and the individual did NOT get it.  There were 10 all cash offers. It's very obvious that these all cash offers are not from first time buyers, they are from investors. Maybe the investors are seeing that the market has bottom out and even from them, it's a good time to buy.  Lombard reported a slower week on traffic, opens, new listings and sales. Quite a number of listings are off the market until after Labor Day.  Lakeside reported it is like August in Europe: the population as well as the economy has taken the month off. Optimistically looking forward to a return. To rituals in September.  Van Ness reported slow but steady.  Large sales are still running at a good pace.

·         Silicon Valley—Cupertino reports the activity is fantastic! Open houses are very well attended and deals are being made.  San Jose Almaden reports there are multiple offers on everything under $400,000 and depending on area up to $600,000.  The high end remains extremely slow.  Agents are getting creative to help them get their offers excepted.  Like paying for moving costs for the sellers.  Open houses can, depending on location, be busy.  Willow Glen reports median price homes are selling nicely. Multiple offers are plaguing some of our clients’ offers though eventually the buyers are successful in purchasing a home.  Saratoga reports short sales and REOs still dominate the market. It seems that lenders are getting a little more serious about approving short sales.

This week I’ll leave you with a few good articles of note:

·         Mortgage Applications Increase In Latest MBA Weekly Survey; Mortgage Bankers Association

·         Optimism Grips Homeowners: 81% Think Home’s Value Will Increase Or Stay Same In Next 6 Months; RISMedia

·         Are New Home Prices, Starts And Sales Rates Nearing Bottom?; RISMedia

Very best, until next week-

Rick

Rick Turley

President, San Francisco Bay Area

Coldwell Banker Residential Brokerage

Last week we had great housing news with the announcement that May home prices posted their first monthly increase since the summer of 2006 (based on the Standard & Poor’s/Case-Schiller 20-city index).

We also learned that sales of newly built and existing homes rose in June for the third consecutive month.  New home construction, though still weak, is the best it has been since the fall.

This week the good news continued.  As announced by the Mortgage Bankers Association, Mortgage loan application volume increased 4.4 percent compared to the previous week.  On an adjusted basis, the Index increased 4.1 percent compared with the previous week and 18 percent compared with the same week one year earlier.  In addition, the Refinance Index increased 7.2 percent from the previous week. The Index has climbed about 35 percent above its recent low at the end of June. The seasonally adjusted Purchase Index increased 0.9 percent from one week earlier.

Also interesting to note is this week’s release of the National Association of Realtors’ Pending Home Sales Index revealed an increase of 3.6% during the month.  That was 6.7% higher than June 2008.  It was the fifth straight month of increases, the first time that has happened since July 2003.  The jump was much higher than expected with a consensus of industry experts put together by Briefing.com forecasting an increase of just 0.7%.

NAR’s Chief Economist Lawrence Yun had this to say, “Historically low mortgage interest rates, affordable home prices and large selection are encouraging buyers who’ve been on the sidelines.”  It seems all of these incentives, much like the Cash for Clunkers program in the auto industry, is finally pushing people off of the fence. 

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

• Peninsula—The Half Moon Bay office reported a busier than usual week. Seeing more sellers taking all contingencies to move upper end properties. Pending sales this month more than doubled from April.  Menlo Park El Camino reports that we’re struggling still at the $1,500,000 range and up. Scarcity of comps is making it hard to define prices and buyers are still holding back.  Palo Alto Downtown reports we’re still building inventory in the Palo Alto, Menlo Park and Los Altos areas. If well priced, we will have multiple offers.  Redwood City reports an active market in the $600-$900,000 range.  Short sales and REOs are garnering multiple offers; we had 19 offers on an REO in Hayward, eight were all cash. Good open house activity both Saturday and Sunday - buyers are out there many without Agents.  Woodside and Portola Valley have been seriously impacted by the financial downturn. Portola Valley has faired better due to some prices being in the low range for county property. Woodside is pretty much frozen. The San Mateo office says the lack of saleable listings is slowing down sales activity.
• Silicon Valley— The Cupertino office reported the office is buzzing with activity and the vibes are positive.  The Los Gatos office reported good movement if priced right. The over $2.5 is still very weak.  The San Jose Almaden office reports REOs continue to be hot and receive multiple offers.  Short sales in some cases are moving a little faster and in other cases, not.  It depends on the bank and Agent.  Outlook among Agents is positive as there are numerous signs that the market is improving and properties are selling.  The San Jose Willow Glen office reports the lower to middle end is extremely active.  We’re still seeing multiple offers in many cases.

Overall the market this week is much like it has been over the last several.  Low-end sales have been the strongest segment of the market, an indication that the first-time homebuyers tax credit is contributing to the rise.  The clock, however, is ticking on this credit and it may have buyers stepping up their shopping to get their purchases in under the wire.  Because it may take as long as two months to close on a home after signing a contract, first time home buyers must act fairly soon to take advantage of the credit.  To qualify, they must close on the sale by November 30.

I’m also pleased to report more Previews high-end sales this week from our Luxury Leader Coldwell Banker offices.  Among last week’s closings are:   San Francisco -$11.5M    Ross -$11M    Pebble Beach- $9.2M    Hillsborough- $8M     Atherton- a $5.3M and a $3.9M closing   Monte Sereno (Los Gatos/Saratoga) -$4.2M    Orinda $3.5M    Los Altos  $3.6M   and 5 more in the City between $2M and $3M.  I’m very proud of the fact that we are not only the Bay Area Market Leader – but also, thanks to our Previews program, and our incredible Previews agents –we dominate the Luxury market as well. As confidence begins to return to several economic sectors (some of us are finally starting to open up the mail when the 401K statements come), we will see continued activity in our Previews markets around the Bay Area.  Price/Value/Condition will remain to be key and critical for these sales to continue.

All the Best until Next Week-

Rick

Rick Turley

President, San Francisco Bay Area

Coldwell Banker Residential Brokerage

It seemed everywhere you looked this week, the media was reporting on some sort of positive indicator relating to the real estate market.  For starters, Good Morning America ran a story on Tuesday about the state of the housing market. You can see the interview here: http://abcnews.go.com/video/playerIndex?id=8190034   Liz Ann Sanders, the Chief Investment Strategist for Charles Schwab, and Mike Santoli, Assoc Editor of Barron’s were interviewed.  Essentially they both indicated there are enough cumulative signs from indicators to say that things are not only “less bad”, but we are starting to see some pockets of improvement in the housing market.  Among the vital signs they said to watch for in calling a recovery are; Index of Leading Economic Indicators, currently up three months in a row; drop in new unemployment claims (the four week average is down 93,000 from the peak, and never before has there been this large of a drop while still being in a recession); and the spread between short term (set by Fed) and long term (driven by the market) interest rates, which is widening. Additionally an opinion was shared that if the Dow stays above 8,000 – this would be a good indicator that we’re on the road to recovery.  This week we danced over the 9,000 mark, closing today at 9,171; making it the best July for the Dow in over 20 years.

Our industry was the first to be hit by the economic downturn and if all continues on this path, we will be the first out.  We probably won’t see housing numbers start to appreciate across the board anytime soon.  What we are seeing right now are signs we typically see at the bottoming-out of a down market.  Speculators and investors are competing with first time home buyers.  Those individuals are going to continue to gobble up the inventory—both REOs and non-bank sellers at the entry price level.  In many metros across the country, there are very low levels of inventory at the low end.  I was on the phone this afternoon with the Coldwell Banker president for Arizona. They were hit hard, and early, with foreclosures.  He told me that today the Phoenix Metro area has under 2 months supply at their entry level, <$250k  – yet a 7 years supply of inventory at their estate home level of $2M+.

Also this week the Standard & Poor’s/Case-Schiller 20-city index was released and in it, home prices in May posted their first monthly increase since the summer of 2006.  Prices rose from April in 13 of the metro areas tracked, notably Cleveland, Dallas, Boston and the Bay Area. The news followed reports showing sales of newly built and existing homes rising in June for the third consecutive month.  New home construction, though still weak, is the best it’s been since the fall.

Now here’s a local look at our past week in real estate:

• Peninsula—Half Moon Bay reports they need more inventory in the $500k to the $800k range as that is what seems to move.  High end over the $1m mark is still very slow.  Menlo Park El Camino reports four offers on a million dollar house.  Buyers continue to migrate to VALUE. Otherwise they stay in the background. Open houses continue to be pretty strong even for mid July and buyers openly talk of waiting for further reductions.  Menlo Park Santa Cruz Avenue reports we had a $5M & $4M sale this week.  All other price ranges are busy for open houses.  Redwood City reports good open house activity, especially on new listings.  Well priced homes in most areas move within one to two weeks (well priced is the key word).  We’re seeing multiple offers on REO/short sales.  Woodside reports very slow here in the country.  The high end is very slow and sellers are slow to realize that reduced prices are the only way to move their properties. This high end will be the last to actually see the lower prices and accept them as they are able to hang on longer.
• Silicon Valley—The Cupertino office reports the market is active and Agents are working hard, especially for August.  San Jose Willow Glen office reports things have slowed up a bit. Agents are writing a lot of offers that are getting rejected. Also, some of our existing sales are sold at one price and are not getting appraised. Therefore, prices are lower than what they originally sold for.  The San Jose Main office reports a very busy week with sales, mostly $250-500K.  Open houses were extremely busy in all price ranges.  Inventory seems to have flattened out.

 I’ll leave you with two interesting articles from the week. In the first, our Orinda Manager Val Cook-Watkins is quoted on the local market:

• http://www.insidebayarea.com/business/ci_12932118
• http://www.usatoday.com/money/economy/housing/2009-07-28-home-prices_N.htm

Have a great week!

Rick

Rick Turley

President, San Francisco Bay Area

Coldwell Banker Residential Brokerage