Coldwell Banker President Rick Turley's Market Watch
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
