Glimmers of Hope

Several indicators may be pointing to significant shifts in the local real estate market. While these glimmers may be the first light at the end of the tunnel, some pessimists think they might be an oncoming train! Let’s see what’s happening and I’ll give you my opinion.
The first positive indicator has been the continuing uptick in sales at the entry level. Since mortgage rates fell to 5% or lower in late October, sales of homes priced below $430,000 have gone through the roof. Not only are investors returning to the market but many first-time home buyers are as well. (Keep in mind that the IRS defines a first-time home buyer as one who has not lived in a home they own in the past three years. Thus many “first-timers” may have significant equity in a rental property or may have liquidated their previous real estate holdings keeping some cash available for a down payment). Homes that are in nice condition are flying off the market. I have buyers who saw two homes that sold within 1 day of being submitted to the MLS! Whatever happens at the middle and upper price tiers, eventually these new homeowners will gain equity and begin to think about trading up. This segment was the first to fail locally beginning in 2005 and led the rest of the market down by shutting off trade-up buying. I believe it will also lead the market back, perhaps with the same one to two year time lag.
The next indicator is the fall in mortgage rates since the Fed announced they were buying Fannie and Freddie mortgages and guaranteeing several hundred billion dollars of home loans. This announcement drove rates below 5% two weeks ago where they remain at historic lows (4.85% last week). Not since the 1950s have mortgage rates been at these low levels. While unfortunately these low rates only apply to conforming (non-jumbo) loans, in the near future most analysts predict no major rise in rates. Nevertheless, requirements have tightened recently especially with regard to condo and town-home mortgages. Lastly, there is still very little lending outside of the loans being guaranteed by Fannie Mae, Freddie Mac or the FHA, some of which carry strict requirements and / or premiums for certain types of purchases or levels of credit scores.
Another glimmer is the data for February which shows nationwide existing home selling prices rose for the first time since 2007. Also nationally, the affordability index for homes is showing housing is the most affordable (as a percentage of monthky incomes) that it has been since 1991. In California the median time on market declined in January to 6.3 months from 16 months a year earlier. While the median selling price in Ca. is down more than 40% since the peak in 2006, prices seem to be stabilizing, particularly at the lower tiers. This is true for local rural properties as well where smaller homes (less than 1700 sf) on an acre or so are selling in the $600,000 to $800,000 range-prices unheard of a few years ago. Given the scarcity of raw land, which has always supported prices for rural properties, there likely isn’t too much further that these prices will fall. In town, foreclosures have driven prices to 2002 levels and the resulting demand has generated multiple-offer situations with selling prices going over list and support for prices seems to have solidified. Last summer, prices in the lower tier declined to the point where it was less expensive to own than to rent. That situation continues today. The biggest obstacle to buying a home today for some people is the 3% minimum down-payment required by the FHA (5% for Freddie and Fannie loans) while the biggest cash-flow issue compared to renting is the strict requirement for mortgage insurance for all buyers with less than 20% down.
One bright spot locally was the recent rise in condominium sales, especially in Silicon Valley. When mortgage rates fell in late 2008, HOA dues were the primary cash-flow issue that drove people to choose single-family homes over condos. The rise in condo sales may be an indication that there are more buyers than desirable, entry-level, single-family homes at present.
It is only in the middle and upper price tiers that prices show continued weakness. The scarcity of buyers with sufficient cash to buy-in while keeping their mortgage below the conforming loan limit (now $725,000) has depressed prices at the high end of the market. The current premium for a jumbo loan remains approximately 1.5%, pushing rates up toward 7%. In addition, most lenders are demanding a 35% down payment for a $1M loan increasing to 45% for a $1.5M or larger loan. Since few entry level sellers are selling and retaining any equity, there are no buyers to trade-up for middle tier homes which also eliminates those owners from trading up to the high end. Nonetheless, the recent Obama change to increase the conforming loan limit to $725,750 from $629,000 in high-cost areas like ours will help the middle price segment.
There are two issues that could forestall a housing rally. First, family finances are still being reset as savings increase and credit use declines. In 2008 personal disposable income covered only 75% of household liabilities. In 1991 it was 114%, so we have a ways to go before the average houshold is living completely within their means. Secondly, the spectre of unemployment continues to haunt even Silicon Valley. With unemployment up again in March to the highest level since 1983, and no end in sight for more bad job news, some potential homebuyers are sitting on the fence. Some must think the light we see in the housing "tunnel" is an oncoming train, but many see the situation as the dawn of a once-in-a-generation opportunity. Personally, I am betting on the latter and helping as many new buyers as possible achieve their dreams of homeownership.