Friday, August 8, 2008

Affordability Moving Into Silicon Valley

Growing affordability already appears to be clearing the logjam of unsold homes and tightfisted sellers are taking note. New data contains evidence of greater affordability likely in the near future, but the market is moving closer to equilibrium -- that market bottom where prices stop falling.

by Broderick Perkins
© 2008 DeadlineNews.Com

Unauthorized use of this story is a copyright violation -- a federal crime

Deadline Newsroom - There may not be a whole lot more wait-and-see room left for fence-sitters in Silicon Valley's housing market.

Growing affordability already appears to be clearing the logjam of unsold homes and tightfisted sellers are taking note. New data contains evidence of greater affordability likely in the near future, but the market is moving closer to equilibrium -- that market bottom where prices stop falling.

That bottom could arrive sooner than expected.

"Affordability, relatively speaking, is way up and that's driving the lower end of the market. The REO market is robust and the low end is robust. There's some languishing in the higher end where the credit crunch is still a problem," said David Walsh, president of the Santa Clara County Association of Realtors.

Right now, Silicon Valley home buyers can find homes with a 20 to 40 percent markdown, compared to last year's prices. But they can just as easily find homes with a 20 to 40 percent or even greater markup.

"My clients are buying properties well below their peaks. Just closed today -- a condo downtown San Jose purchased two years ago for $460,000. My borrower bought it for $340,000," said Stephanie Noryko, broker owner of Granite Financial Real Estate Loans in Cupertino.

Break out market

Those large discounts and markups, however, are found in fewer, select neighborhoods at either end of the price spectrum. There's a greater, more significant market segment in the middle price ground.

Comprising about 60 percent of the current market, geographically, the middle ground includes larger community swaths of homes with prices that are down by no more than 20 percent nor up more than 20 percent, according to the July 26 LaJolla-based DataQuick's weekly ZIP Code-based home price map for Silicon Valley.

"The homes that were selling slow (in the lower price range), that segment is improving slowly. The (higher-end) market that was doing well is still doing well, but less well than it was," said Richard Calhoun, broker owner of Creekside Realty in San Jose.

High end home sales had managed to keep the median price aloft for much of last year, but with some backing off in the high end neighborhoods and continued troubles in the low end, a reversed trend is showing up in the median price.

Calhoun, a number-crunching statistician of a real estate broker, said the median single-family home price (in closed sales) in June 2007 was $865,000. By this June, the median had fallen a whopping $115,000 to $750,000.

That 13 percent June-to-June decline has been largely due to overwhelming problems in middle- and low-priced homes, segments hit hardest by foreclosures and the tight credit market. Foreclosures, short sales and the like bring down prices because affected properties show up on the market as distressed properties, auction material and REOs (for "real estate owned" -- repossessed homes), all priced to move.

Foreclosures were up 194 percent from 1,275 during the second quarter last year to 3,751 during the same period this year in Santa Clara County. Only five counties had a greater rate of increase in foreclosures -- Merced, Monterey, Santa Cruz, Sonoma and Sutter, according to DataQuick Information Services in La Jolla.

Affordability growth

Unfortunately, the law of the housing jungle today means one person's anguish is another's affordability.
"There are markets, and there are markets. Some markets are good for buying, others are good for selling," said Eric Nelson, mortgage broker and owner of the Honte Group in Campbell.

The California Association of Realtors said in Silicon Valley, 31 percent of households could afford the entry level price of $663,000 in the first quarter, up from 27 percent a year earlier.

Likewise, the Emeryville-based PMI Group's Affordability Index for the San Jose Metropolitan Statistical Area (MSA) was about 68 during the first quarter of 2007, just before prices peaked. In the first quarter this year, the index rose to 80, thanks to lower prices. An index score that exceeds 100 indicates that homes have become more affordable; a score below 100 means they are less affordable.

With the lower price-spawned affordability comes less risk of further large price reductions.
The PMI Risk Index for Silicon Valley came in at 56 two years ago this summer, a year before prices peaked. Now, a year after the peak, the index is down to about 51 percent. The index score translates to a percentage that predicts the probability that house prices will be lower in two years. The latest number means there's a 51 percent chance of lower prices in the next two years. That's almost even odds.

"The market is really alive and well, depending upon what segment you are looking at," added Walsh, who is also a vice president at Alain Pinel.

But here's the rub.

Affordability generates demand that could leave fence sitters, well, perched.

More, faster sales

Walsh, in his "Santa Clara County End of July" report to association members, said the number of pending sales in Silicon Valley, at 2,290 had grown 70 percent above the 1,351 pending sales from a year ago. More buyers are buying.

"The active demand to purchase properties is still showing a climbing trend, especially with respect to lower priced and REO properties," Walsh said.

Some sales are seasonal by nature, but Calhoun also reveals closed sales of single family homes were likewise up steadily every month this year from 338 in January to 927 in June. Last June the number was 977.

"This current time is perhaps the best time to buy in nearly 20 years. There is twice the normal inventory of homes for sale, and there is an overwhelming amount of foreclosures on the market," said Nelson.

Homes are selling faster too. The average numbers of days on the market for single-family homes in closed sales was 74 in June this year, down from 88 in January, but still well off the June 2007 figure of 45 days.

Days of unsold inventories (DUI) came in at 125 days, compared to about 250 in January and about 117 a year ago. DUI is the theoretical number of days it would take to sell off the current inventory, at the present sales rate, if no other homes came on the market.

Seller squeeze

Another word of caution for hesitant buyers, sellers may already be putting the breaks on price breaks. The gap between the median asking price (what sellers want) and the actual closed price (what sellers actually get) narrowed in June this year.

Last June, during peak market times, sellers were getting, on average, 100 percent of their asking prices from buyers. This June, buyers gave sellers $9,000 less than the asking price, but that was the smallest differential for all of 2008, except for March when the difference was $5,000.

Compare that with January this year, when buyers shorted sellers by an average $25,500 and with April, when buyers paid an average $30,000 less than asking, according to Calhoun.

"It still seems to ring true that pricing your home right is hugely important. An overpriced home just sits and sits. I don't understand why people don't start with a lower price. When the owner finally decides to lower the price, it gets labeled as a problem property," said Noryko.
© 2008 DeadlineNews.Com

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Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews Group -- DeadlineNews.Com, a real estate news and consulting service and Web site and the new Deadline Newsroom, DeadlineNews.Com's news back shop. In both cases, it's where all the news really hits home.

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