2010 Halftime Report: Where our Market is Today

A look at January through June of 2010 versus the First Half of 2009 in the GRUBB Company’s major market areas*, in the price range of $500,000 and above.

MLS Statistics in our Market Area*

Units          $Volume        Median Price     Avg. LP/Sq Ft      Avg. SP/Sq Ft

1^st Q 2010 184       $149,599,952          $711,000                $413                      $422

1^st Q 2009 139       $118,927,329          $725,000                $414                      $405

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2^nd Q 2010 389      $339,470,300           $770,000                $414                      $419              

2^nd Q 2009 328       $278,619,321          $742,250                $432                      $429

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4^th Q 2009 329       $270,134,685          $718,000                $418                      $423

The GOOD NEWS:

Unit Volume: Up 18.5% for the entire MLS in our market*, while as a company we are up 47%.  In previous reports, I mentioned that the 1^st Quarter of 2009 was really the bottom of the market for Sales Volume.  I admit that was part prayer, part prediction, but luckily, it remains true so far.  While the Federal First Time Buyer credit may have given the market a boost in other areas, historically low interest rates were a strong force in our area.

The BAD NEWS:

Average Price/Square Foot: We are certainly in a directionless market for pricing.  I was predicting in 2009 that we would see the bottom of the market for prices in our area during the 4^th Quarter of 2009.  Once again, I found the bottom of the market by looking over my shoulder.  The real bottom appears to have been the 1^st Quarter of 2009.  But once prices stabilized and came off the bottom, we have been in a very directionless market with respect to prices.

The Confusing NEWS:

Median Price is Up: This just means that the upper end of the market is moving again. We are returning to a normal distribution of sales across all price ranges.  As predicted, this would have a big effect on moving the Median Price Index.  In fact, the newspapers have reported some areas of California experiencing as much as a 26% rise in the Median Price Index in the 2^nd Quarter.  The rise from the trough of the market to June of 2010 can show Median Price increases in excess of 50% (figure 1).  Once again, do not be fooled by this statistical aberration.  In 2009, the lower price ranges comprised 70 – 80% of the total market, forcing the Median Price down and being a poor determinant of actual pricing.

What Will Affect the Upper End of the Market

Will Interest Rates remain low?

• At the beginning of this year, the 10 Year Treasury was hovering around 3.8%.  The Mortgage Bankers Association predicted that the yield would go to 6.0%.  It peaked in April around 4.0 and by the end of June it dipped below 3.0.  If the yield goes below 2.7%, nearly every loan made in the last 3 years will want to be refinanced and rates will be at historic lows.

Will we begin to see a continual increase of liquidity in the Jumbo Market?

• We are seeing the very finest paper being written in 40 years.  Every aspect of a loan is documented and triple checked.  And yet, Wall Street is fearful of Mortgage Backed Securities.  It is very ironic that Wall Street had a huge appetite to purchase mortgages at a time when banks were willing to loan money to people who did not have a job, did not have income and were not credit worthy.  Until Wall Street wakes up, Jumbo loans (greater than $725,750) will still be available through very few lenders.

Will “Strategic Foreclosures” increase the inventory of higher priced homes?

• We have gone through many of the mortgage interest rate resets in lower price ranges.  Now, these interest rate rises are hitting the upper end of the market.  There have been many articles written about “Strategic Defaults” among the wealthy.  That is, the homeowner can still afford to make payments, but strategically allows their mortgage to go into default as a way to leverage their lender into agreeing to a short sale or loan modification.  Since this really amounts to a financial game of “Chicken”, only time will tell if these defaults actually result in increased foreclosures and distressed sales in the upper end of the market.

* Statistics from the EBRD Multiple Listing Service areas: Albany, El Cerrito, Kensington, Berkeley (01, 02, 09.10) , Piedmont, Oakland (94602, 94610, 94611, 94618, 94619)

3rd Quarter 2009 Market Update- October 28, 2009

This has been one of the most confusing years I have ever experienced in real estate.  We saw a sharp decline in the Median Price of homes in California and rash of foreclosures on the lower end of the price spectrum.  But there was definitely some very good news for our local market as well as some troubling possibilities for the future.  I believe that we have seen a bottoming of Unit Volume of sales as well as a bottoming of Prices.  Unfortunately, we have not seen the end of Foreclosures and Short Sales.

Sales Volume:

Just a reminder that all local statistics that I am quoting are derived from our Multiple Listing Service for properties $500,000 and above in the geographic markets of the El Cerrito Hills, Kensington, Albany, Berkeley Hills, Oakland Hills and Piedmont.  We experienced the slowest sales I have ever seen in January and February of 2009.  The first figure below reflects this bottoming in Unit Volume sales in January and February 2009.  The market certainly improved at the end of spring, although we are still down 10% in total sales comparing September of 2009 to September of 2007.

However, as you can see from the next figure, the inventory of properties coming to market was extremely low.  For most of the last 2 years, this has helped keep our supply and demand in balance thereby avoiding the multi-month supply of homes for sale and long marketing times that has plagued other markets in California, until the spring of 2009.

In the period from January to March 2009, we saw a bottoming of the number of sales.  The graph below tells the supply and demand story in our local marketplace.  The bottom line is that unit volume was not solely a function of low inventory.  The inventory has been significantly down year over year.  But demand in January and February was at a true low point.  We were changing administrations in Washington during this time and the world seemed frozen into inaction.  Then the world began to thaw.  Notice how demand in June was even higher than the demand in the Spring Market.

Amazingly, demand increased in October in our area and nationwide.  First time Buyers feared the end of the $8,000 tax credit.  Now that the Holidays are upon us, and the inventory is rapidly shrinking, demand remains unabated with 65% of our sales resulting from multiple offers and prices going as high as 18% over the asking price.

Home Prices:

Prices in our market really seem to have bottomed in August to September of this year.  In the Spring Market, you could sense that prices were still weakening.  On average, it seemed to require two or three offers in competition for a home to sell at full asking price.  Now, in the fall market, 3 offers will create enough competition for the sales price to go significantly above the asking price.

Even the Case-Shiller Home Price Index reported a 2.8% price increase during August in the San Francisco Metro area.  The good news is that the Case-Shiller index for San Francisco Metro now stands at 132.47.  That means that prices are still 32.47% higher than in January of 2000.  So compare the investment value of Real Estate in the San Francisco Bay Area compared to the value of the Dow Jones Industrial Average, the S&P 500 or the NASDAQ over the same time period.

Distressed Sales: The Big Unknown for 2010

Distressed sales are defined as Short Sales (the lender agrees to be paid less than what is owed on the property), Pre-Foreclosure Sales (the loan is in default and must be sold before the bank forecloses) or REO Sales (Real Estate Owned by the bank after foreclosure).  Nationwide over the last year, distressed sales have accounted for one third of all transactions.  Many of these sales were to First Time Buyers taking advantage of the Federal Tax Credit of $8,000.  In fact, nearly 40% of all transactions nationwide were First Time Buyer purchases.

Contrast the nationwide figures with our local market.  In the first nine months of this year, distressed sales accounted for 2-8% of all sales each month.  There are certainly markets near us where 60 – 70% of all homes on the market fall into the Distressed Sale category.  The preponderance of Distressed Sales in some markets has caused a disruption of the hierarchical nature of home sales.

Notice in the chart below, how lower priced properties began dominating the market in October of 2007, while middle price range volume dwindled markedly.  Even the $1M and above price range fell significantly as a percentage of all sales, from a high of 18% of all sales to a low in January of this year of only 2%.  In a distressed sale, the homeowner either cannot afford to purchase another property or has already lost the property to the bank.  Most of the first round of distressed sales has been in the lower price ranges.

As a result, we lost the Move-Up Buyer purchasing their second home.  This interruption in the “food chain” resulted in stagnation of the $500,000 – $1,000,000 price range in many markets throughout California.  While we have not experienced such a severe interruption in our local marketplace, we did feel it.  We had quite a bit of activity in the $650,000 – $900,000 price range, which, for us, is a mixture of Move-Up Buyers and First-Time Homebuyers.  However, there was a noticeable slowing of sales in the $1M + range.

The other major effect of the explosion in the number of sales in the lower price points was to artificially lower the Median Price of homes in California through a statistical aberration rather than a real drop in value.  Remember the definition of Median Price.  If you have 101 sales in a market, the Median Price is the price of that sale where there are 50 sales prices higher and 50 sales prices lower.  So imagine a year where no one that owned a house that was worth $500,000 or more wants to move.  Therefore, there are no sales in the upper price ranges.  The definition of Median Price would force the Median lower.  In this extreme theoretical circumstance, Real Prices could actually rise with a precipitous drop in the Median!

What is clear is that we have begun working through the first wave of distressed sales, which were predominantly in the lower price ranges.  Unfortunately, the second wave is coming.  Historically, 55% of all homeowners that got behind in mortgage payments managed to bring their loans current before foreclosure.  Not so today.  The currently only 6% of homeowners cure their defaults.  The two greatest factors for defaults on mortgages are rising unemployment and the perception that the home is worth less than what is owed on it.  In fact, 25% of all defaults are “strategic.”  That is, the homeowner is able to pay their mortgage, but feels that they are throwing good money after bad.  This strategic decision is often made by someone who is comfortable making business decisions and likely to own a more expensive home.

We are beginning to see a rise in Short Sales and Foreclosures in the higher price points.  More notices of default are being recorded on homes.  Even the San Francisco Chronicle reported that there are currently 85 notices of default recorded on homes in Piedmont.  We can assume that the same holds true for higher price points in other parts of our market.

Perspective and Forecast:

Many factors are pointing to a recovery in the Bay Area.  Venture Capital companies invested $2.2B in local startups in the Third Quarter, which is up significantly from the low point reached in the beginning of the year.  The Federal Government has extended the Stimulus Jumbo Conforming Loan Limit of $729,750.  Interest rates are low and remain steady.  Many older adjustable rate mortgages are tied to the 1 year LIBOR which currently hovers around 1.2% and is predicted to hit a low of 1.1% in the spring of 2010.  This means that many existing adjustable rate mortgages may actually be adjusting lower.

There are many new buyers coming into the market, showing that there is real demand in our area.  I believe that 2010 will have a significant increase in the volume of higher priced sales.  Even though the First-Time Buyer tax credit has been extended, they will not be the dominant purchasers in 2010 as they were in 2009.  In fact, the Federal Tax Credit has been extended to the Move-Up Buyer, although at a lesser amount.  As a result, don’t be surprised when the newspapers begin reporting a sudden rise in the Median Price in California.  This does not mean that prices have suddenly gone up.  The normal ratio of lower priced sales to mid and high priced sales is simply beginning to return to normal.  This will push the Median to a higher price without real price appreciation.  I would expect to see no more than 2% Real Price Appreciation next year.  It will surely be a while before we see double digit yearly appreciation again.

I am very interested to see what a little good news will have on Homeowner optimism.  Currently, 25% of all Americans have negative equity in their homes.  A little good news on Median Price rise, even if just a statistical artifact, may go a long way to stopping the “strategic” foreclosures and short sales.  Perhaps all it takes is a little good news and a long Holiday season surrounded by our families, to realize that our homes mean much more than a line item on our balance sheet.

International Perspective Update From Our London Office – Mayfair International

Buy, Hold or Sell?

By Nick Churton, Mayfair International, London

Just like the stock market there is a right time in the real estate market to buy, hold or sell. But, unlike the stock market, buying real estate is usually allied to selling, so a clear financial advantage is harder to anticipate or achieve. Despite the turbulence of the past year the market now in the UK, against all odds, is rather good for selling. Here’s why.

Figures just out show that the rental market is reaching some sort of equilibrium, with the numbers of available properties having dropped over the past six months or so. This is an important indicator. It suggests that those owners who couldn’t sell their homes in the recession, and were thus letting them instead, have now begun to find buyers. This erosion of inventory in the rental sector indicates a new dynamic in the sales sector.

Just as in the US, over the course of the year, buyers have been snapping up those properties priced keenly to sell. These bargain seekers have, in the main, been cash buyers or those with sufficient funds to require only a small mortgage. Now two things have happened in the market. Cash buyers are drying up along with the bargains. In many areas prices have been rising to reflect the paucity of available stock.

Will more inventory become available over the coming months as home-owners see more chance of a sale? Would a greater supply of property for sale suppress, or even reverse, some surprising price advances of the past few months? These questions are hard to answer in a post recession economic environment that even yet threatens greater job losses and higher taxation.

In the UK, with a general election less than a year away, we are now in an all-important political party conference season. Those of us in the real estate industry and those whose plans include buying and/or selling property over the coming months are busy analysing how the policies of an aspiring new government may affect our real estate market. All the parties have new ideas. But what good, if any, these measures would have in practise is difficult to see just now. But the real drivers of the real estate market are deaths, births, confidence and taxes. Any incoming government next year can’t do too much about the first two. But how they manage the latter pair will be crucial to them and to the population.

So what to do now to make the most of this UK market before the general election next year and even Christmas this year? Why, sell of course. But if there is a property to buy as well it really does not matter too much in the financial scheme of things. What surely does matter is that we and our families are happy and safe in the homes we have or the homes we wish to buy. These are always the best reasons to determine whether to buy, hold or sell and no market or political party, whatever their policies, will ever change that.

http://www.mayfairoffice.co.uk/index.aspx

John Karnay’s Market Update January 1 – June 30, 2009

Okay, let me try to make some sense out of this market for you. First of all, you must make a distinction between what is happening in our unique market versus the rest of California. We are not in an area where 60% of the inventory and /or sales are due to an REO (Real Estate Owned by a bank) or a forced sale due to an imminent foreclosure. There are certainly markets that suffer this dynamic such as parts of Santa Clara Valley or the Inland Empire. Clearly, distressed sales result in lower sales prices. When the percentage of distressed sales climbs above 10% in any given area, this has a significant impact on any statistical analysis of price. For example, imagine that for the next 3 months there will be no sales above $800,000 because no one with a home above $800,000 wanted to move. What do you think such an anomaly in our market would do to the median sales price? Is that a real reflection of falling prices? Probably not.

So with the warning that statistics don’t tell the whole story, let me recap our marketplace statistics.

For Closings January 1 – June 30 in our Market Areas of El Cerrito, Albany, Kensington, Berkeley, Oakland and Piedmont above $500,000

Dollar Volume: Remember, the first 6 months of 2007 should be considered “pre-financial crisis.” With total volume in the first 6 months of 2009 at $537,358,565, this was a reduction of over 45% versus the same period in 2007. However, March proved to be the worst month for actual closings, off 62.5% from the March 2007 levels. A comparison between the first half of 2009 versus 2008 shows a fall in dollar volume of only 22.7%

Unit Volume: Total unit volume of sales declined over 40% from 2007 with March again being the worst month, off over 58% from 2007. June of 2009 was a marked turnaround, down only 28% from June of 2007. But comparing 2009 versus 2008, total unit volume was only off 18.2%

Median Price: Interestingly, the Median Price in our area has fallen a little more than 8.3% since 2007 any only 6% from 2008. A similar trend is seen in the Average Sales Price, having fallen just over 8.7% from 2007 levels and only 5.4% from the first half of 2008.

For Pending Sales incepted January 1 – June 30 in our Same Market Area.

Dollar Volume: It is important to remember that all the closing listed above occurred 30 – 60 calendar days after the Pending Sale was incepted. That is why I consider Pending Sales to be a truer indicator of actual momentum in the marketplace. Here, we can see the early signals of a turning market, with the worst months being January, February and March posting declines of 51%, 52% and 54% respectively. April saw a distinct and sharp reversal of that trend declining only 42% from 2007 levels. Continued improvement was seen through the end of the quarter with June posting a 40.3% decline from the same month in 2007.

Unit Volume: This follows the same trend as Dollar Volume. Overall, the largest declines were once again in January, February and March. But in April, the volume of Pending Sales rebounded, down only 34% from 2007. That trend appears to be following through to May and June saw a 30.7% decline from June of 2007.

Median List Price: Even though our median sales price is off over 8% from 2007, to get properties into contract, the listing price must be rather aggressive. The Median Listing Price of those properties with accepted offers from January through April was off 13% from the Listing Price in 2007. Yes we are still seeing some multiple offers. However, when multiple offers are presented, there is not wild overbidding. Rather, it requires 2 to 3 offers presented in competition to reach the asking price or a price 1 to 2 percent above. Clearly, Buyers become motivated to write offers and even compete for properties when the Listing Price is perceived as a good value. A property that is even slightly over-prices will be ignored by the market.

Conclusion:

Now I understand that Economic Predictions were invented to make Astrology seem accurate, but I truly believe that the market is beginning to turn around and that the worst months will prove to be the last quarter of 2008 and the first quarter of 2009. While we have not experienced the staggering price declines seen in other areas, our market is significantly down in the sheer number of sales. The months of April, May and June have certainly seen renewed enthusiasm from Buyers. Perhaps they too feel that either the market is near bottoming or that interest rates will not stay this low forever.

John Karnay, CFO – The Grubb Company