George’s July 2009 State of the Bay Area Real Estate Market

Interest rates have recently dropped back down ~1/4 Pt after moving up ~3/4 Pt in June. We are now at 5.25% for 30-Yr Fixed Conforming loans with 0 Pts and 5% for 30-Yr Fixed Agency Jumbo loans with 1.5 Pts
30-Yr Fixed Jumbo loans (loans higher than $729,750) are averaging 6.9% IY and they typically now require at least a 700 Credit Score, 6 months reserves, & 20-25% downpayment (30% downpayment for loans of 1M+). This tightening of jumbo loan money is a big reason for the recent downturn in values of high end (1M+) homes, by the far THE housing sector taking a value hit right now (while the 750K and under market surges). According to Princeton Economist Bernard Baumohl, the high end is unquestionably the worst performing sector of the residential real estate market right now. Sales of existing homes priced above $750,000 made up 2.3% of all sales in the first quarter of 2009. That’s down from 4.4% of homes sold in 2007, before high priced mortgages dried up. The recession and collateral damage in the stock markets have knocked many luxury buyers out of the market.
As to why the 750K and under market sector is doing so well these days, C.A.R.’s 2009 Survey of California Home Buyers shows that favorable home prices, record-low interest rates, and the belief that rates will rise in the near future has been the primary motivators leading home buyers to purchase this year. 68% of buyers said price decreases motivated them to buy a home, 39% reported low interest rates helped them move to a better location, & 23% claimed the likelihood that rates will go up as the motivating factor. Housing affordability has improved dramatically in response to the decline in home prices along with historically low mortgage rates, creating a tremendous opportunity for California home buyers. According to the survey, 49% of all buyers purchased a home though a traditional market sale, while 38% purchased an REO/bank-owned property, and only 13% of buyers purchased a short-sale property.
Meanwhile, recent news indicates that another wave of foreclosures is poised to strike, possibly as soon as this summer. Amid rising unemployment and falling home prices, mortgage defaults have surged to record levels this year. Until recently, many banks have put off launching foreclosure action on troubled properties, instead modifying loans to make it easier for troubled borrowers to make payments. It’s unclear how big this next foreclosure wave will be or how much of it will be concentrated on the Bay Area, but loan defaults are up sharply and many government and banks’ self-imposed foreclosure moratoriums are expiring with the biggest lenders indicating that they are likely to move more aggressively to clear up a back log of troubled mortgages. Mark Zandi of Moody’s Economy.com estimates that 15.4 million homeowners (or about 1 in 5 of those with first mortgages) owe more on their homes than they are worth. Many Real Estate experts (including myself) think that this next wave of foreclosures could be as big as the one we saw through 2008, but that the effect on prices won’t be as severe because values already have plunged and there’s a lot of demand for REO properties. Still, it could keep prices low and slow down the general recovery.
The LA Times recently reported that 467,000 jobs were lost in June, which is 117,000 more than analysts had expected, and this raised our unemployment rate to a 26-yr high of 9.5%. Not only was the size of the payroll loss unexpected, but it reversed a trend in which the monthly losses had been steadily shrinking from the January peak of 741,000 jobs eliminated. Those declines (since January) had raised hopes that an actual turnaround might be approaching. This is the only recession since the great depression to wipe out all the job growth from the previous business cycle.
Looking at the most recent Bay Area statistics, the low end of the market (750K and under) continues to surge despite the negative unemployment figures and the next wave of foreclosures looming.
San Mateo County Home prices rose for the 5th straight month in June, hitting an average Sale Price of $945,717, a 28% total rise from its low of $683,900 in January. (Class 1&2) Residential property inventory also dropped for the 2nd straight month (to 2,065 total active listings), but is still 9% above January’s inventory level of 1,884.
Santa Clara County Home prices rose for the 4th straight month in June, reaching a $688,484 Avg Sales Price, up a total of 18.5% from its low of $561,329 in February. SC County residential inventory also dropped for the 4th straight month, sinking to 5,584 total active listings compared to 6,806 in February.
The East Bay (Alameda/Contra Costa county) region has seen Sales outpace Listings over the past month (2,919 Sold to 2,435 New Listings), although so far in July New Listings are slightly outpacing Sales.
San Francisco residential inventory also dropped for the 3rd straight month in June. Monthly listings are still outpacing sales, but at a decreasing rate. San Francisco Residential inventory now sits at 2,076 Active listings, 964 Class 1 (Single Family Homes) and 1,112 Class 2 (Condos/TH’s), down 8% from a total of 2,261 in March.
I expect the next few months to be more of the same (as recent trends) with high end homes continuing to struggle and the low end homes and condo market (in many parts of the Bay Area) continuing to move quickly with plenty of demand in place. More foreclosures and short sales will hit the market, but there seems to be more than enough qualified buyers (including investors) to snatch them up and it shouldn’t cause values/prices to go back down, just probably slow the progress that we have seen over the past 5 months.

George Sudol is the Broker for Bay Area Realty Services (with offices in San Mateo and Palo Alto).
He writes these monthly state of the market newsletters to keep his clients constantly informed of the Bay Area Real Estate market conditions. Please call George at 650-242-4079 or Email him at george@ba-realtyservices.com if you have any Bay Area Real Estate questions or needs.
You can also visit him and his Brokerage on the web at www.ba-realtyservices.com