San Francisco Bay Area Market Update

[Tim H]

Hope everyone had a fun, safe and restful Fourth of July weekend. In spite of all the challenges we have in the world, America is still the land of opportunity and magnificent individual freedoms. We all thank those who have given the ultimate sacrifice so that we may have this wonderful country. We have much to be thankful for.

Amazing, half the year is gone. It has been like “Mr. Toad’s Wild Ride”. We started 2008 in the tank. The sub-prime fiasco was in full swing. We were facing the possibility of substantial investment houses going under. The housing market was coming to a screeching halt. Inventories in the Bay Area were reaching levels that not seen since the early 80’s and 90’s---San Francisco the best of markets ---was just about a 5 months supply of inventory and Napa and Solano counties were in the low 20’s. Price ceilings were coming down to 2004 or 2005 levels. Loans were almost impossible to obtain as new guidelines were looking at the potential income stream of yet unborn generations.

Much has changed since January. You wouldn’t think that reading today’s headlines. However, headlines are just that---ways to get readers attention. The economy is wobbly no doubt. Unfortunately, most of it is in minds of consumers. Yes, oil is taking its toll and the dollar once the strongest currency in the world, is taking a beating. There is the upside---our products are more affordable around the globe. The debate of--is it or isn’t it a recession--drives me crazy. I said in January we were in a recession. The public needs to know. Can’t understand why the government is skirting the issue. Oops---I forget---we have election year.

Somehow the media has not dug deep enough to understand exactly what is happening in the Bay Area real estate market. Remember I said that at the beginning of the year we had inventories in most counties in double digit months. Now looking at the end of the first half of the year. Those once bulging inventories have come down considerably. The highest monthly inventory supply is now at 6.2 months in Napa county. The majority of the counties are now between 4-5 months. That is a far cry from January. Here are the numbers from around the Bay: San Francisco at 3 (4.8) months, San Mateo 3.2 (8.1), Sonoma 4.2 (11.2), Marin 4.3 (8.4), Santa Clara 4.3 (11.2), Solano 4.5 (22.8), Contra Costa 4.7 (17.8), Alameda 5.0 (11.8) and Napa 6.2 (21.3). The numbers in the parentheses are the peak of supply of monthly inventory in each county which occurred sometime between 9/07-1/08 depending on the county. As you can readily see, there is a substantial difference from the current supply compared to the peak month.

This does not mean we are out of the woods. What it does indicate is that homes are still selling and that the inventories that were swelled with REO (bank-owned properties) and short sales are being depleted. Banks, although still moving slowly, are of the mindset to get out of the real estate business. We are now seeing multiple offers on some of these lower-end properties from both first time buyers and investors. Prices have come down appreciable to stimulate this section of the market.

The strongest evidence of this is how steeply prices have dropped in the lowest average sales price markets of Solano, Napa, Sonoma, Contra Costa and Alameda counties. Median and average sales prices have declined year over year in these counties anywhere from 20-42%. The bulk of these significant changes are due to the high volume of sales in properties under $500,000. The numbers of units sold under $500,000 YTD this year compared to last are up significantly. I will give you the decline of median and average prices in these counties and the unit growth of sales for those properties under the $500,000 price point. The first number given is median price %/the second is average price % decline. In parentheses will be the percentage growth of sales units under $500,000. Here we go: Contra Costa - 39%/-34% (+72%), Sonoma -31%/-27% (+36%), Napa -29%/-37% (+62%), Solano -29%/-31% (+42%) and Alameda -23%/-20% (+38%). The lower end sales have dominated those market places. All I am saying is when looking at average and median prices the declines in price levels may not be as steep as is indicated. The price drops may be skewed by the number of sales as you can see above. Dramatic numbers, but very little interpretation by the media.

When you look at the highest average and median sales price counties we see a different picture. Prices have dropped less because they have not been dominated by the sub-prime mortgages. In fact average sale price in San Francisco has actually gone up. Here are the numbers for the rest of the counties San Francisco -3.6%/+3%, San Mateo -7.4%/-8%, Santa Clara -10%/-7% and Marin -11%/-8%. These declines were much less because the $500,000 properties are a smaller portion of overall sales comprising of anywhere between 12-24% of those markets. The difference between these two worlds was the easy money mortgages and the large supply of inventories that were sold due to new home building. It created a bubble in those markets and the air came out.

There are other trends that should be noted that show some light at the end of the tunnel. In the month of June every county was up over last June in homes under contract (pending sales) with one exception and that was San Francisco , but it was down only 1.32%. Solano county was up 212%, Napa +114%, Contra Costa +94%, Sonoma +80%, Santa Clara +24%, San Mateo +24%, and Marin +11.4%. The trend over the last 90 days for pendings has been steadily going up in every county except San Francisco which has been flat.

Solds were up in three counties over last June---Solano +38%, Contra Costa +14% and Sonoma +11%. The lower end is at work. The rest of the counties were down between 17-25% over last year. The trend over the last 90 days in solds has four counties going steadily up and five flat or slightly up and down. That pattern of bumping along the bottom.

What all these numbers show is the market is not dead nor is it brilliantly healthy. We have a wide variety of markets. Some hot, some cool and some just right. Inventories are being held in check because the number of new listings coming on the market staying constant or declining.

We are coming into a period which I call “the summer trough”. I would expect sales to dip as they have over the last 20 plus years. I am also projecting a much better fall market than last year for several reasons: inventories will be smaller, buyer demand has been increasing and continues to build, and, lastly, we will be getting close to the election ( always good for real estate sales ).

Next year will probably not be much different from this year. That is o.k. by me, as I see this market much more active than those of the 80’s and 90’s. I will offer this caveat to sellers---buyers are looking for value, both in price and condition. Those houses that bring both to the market sell quickly. Those that don’t, linger. Beware of seller-assisted pricing. That is where the seller says, “I know my house is worth it—it is special”. Many of these sellers find out that the market is a better predictor of price than any individual, especially the seller, who is personally invested.

For buyers the tone is that there are good values in the market, but remember value is determined by demand, if you find yourself in a multiple offer your chances of getting the home by offering less than the asking price is slim to none. Yes, in many transactions you can negotiate---that is the beauty of this kind of market, but remember, negotiation is a give and take process. If buyers and sellers understand this, then the transaction has a great chance of consummating itself.

This is the kind of a market that if you bought your house 3-4 years ago or longer you are still fine. For those that didn’t, it is best to wait it out. Those that are willing and able to buy this year and next will be geniuses in 5-10 years. They will talk about how smart they were to buy now. We have seen it before and we will see it again. Now it won’t be the huge double digit appreciation of 2003-2005, but it will be very acceptable single digit appreciation that will lead to long term gains. And don’t forget, there are some nice tax benefits with home ownership and most importantly it is a home and our piece of the rock.