In the words of John McCain, “Hello friends”.
As 2009 comes to a close I thought I would offer you a few observations on the housing market in Santa Clara County. In the mist of great economic uncertainty it is impossible to predict the future. So I will discuss the past.
Market Stabilization:
2009 saw stabilization and some recovery in home prices. Home values plummeted beginning in middle of 2007 and continued to drop through all of 2008. This 18 month period saw the average sales price in S.C. County decline from a whopping high of $1,085,000 in August 2007 to a low of 559,000 in February 2009. Today the average sales price in S.C. County has rebounded to $748,000.
Opposing Forces:
Today’s market has some very strong yet opposing forces at work.
Positive: low interest rates, low inventory, seriously depressed prices, flow of capital.
Negative: poor economy, distressed sellers, high rate of NOD’s (Notice of Defaults on home mortgages).
In 2009 I believe that the positive pressures on the market won out. The question is which forces will win out in 2010. Here are some thoughts on key issues that drive the market.
1. Low interest rates:
The government dedicated $1.25 Trillion to dump into the bond market about a year ago. To date they have spent about $800 Million. The result of this infusion into the bond markets has been to keep interest rates low. When this allowance runs out interest rates will rise unless this artificial appetite for the bond market is picked up by another party. Our friends in the financial markets tell me that interest rates are about 1% lower than where they would otherwise be right now. Expect interest rates to rise about 1% in 2010
2. Flow of Capital:
Most people believe that it is impossible to get a home loan. Untrue. If you can prove your income (no more stated income loans) you CAN get a loan. The money is flowing in the residential markets.
3. Low inventory:
Inventory has been declining since middle of 2009. It is staggering low today. 1,800 single family homes on the market today vs. 6,000 in April 2009. This low inventory is most likely due to the fact that the only people who are selling right now are people who need to. Otherwise, owners are sitting back and waiting for the market to turn around. This low inventory has led to a recovery of the market because the renewed demand for homes we saw in 2009 meant that Buyers needed to compete with one another. This led to Sellers receiving multiple offers above asking price. This helped towards recovery as values increased.
4. Tale of 2 Markets:
Today’s housing market is divided by the “big” homes and the “little” homes. I draw the line around $600,000. The little homes, where first time home Buyers and investors are most active, experienced a strong surge and rebound in values due to a greater initial loss of value and severe competition. These homes are selling.
The big homes, where there are fewer Buyers, did not enjoy the same recovery due to a lack of competition. This market was more sluggish and these homes are sitting on the market longer. Today there are signs that Buyers are coming out in this market and homes are starting to move. In large part however, this is because Sellers are finally realizing that their homes value was not immune to the drop in values and have begun to lower their prices.
5. Sandwiching of the Housing Market:
In short, the bottom of the market is coming up in value while the top of the market is coming down.
6. REO’s & Short Sales:
Everyone thinks that the market is dominated by bank-owned properties or REO’s. Untrue. Of the 1,800 single family homes on the market today, only ~10% are REO’s. However, the banks as a whole have a large inventory of REO’s that they are simple sitting on, slowly sprinkling onto the markets. They are in short, helping to keep inventory low by not releasing their properties onto the market. We expect them to continue to sprinkle this inventory onto the market for some time, which is good as REO sales are typically distressed properties and bad comparative sales for their respective markets.
REO’s will be less and less important in 2010. Short Sales will become the dominant force. Today, about 25% of the single family homes on the market are Short Sales (when the owner’s home is worth less than what he can sell it for and he must sell because he has missed payments and the bank is threatening foreclosure). The problem with Short Sales is that these too are distressed sellers which is typically reflected in the sales price – another bad comp for the market.
The more Short Sales, the stronger the downward force on the market. NOD’s are extremely high. No community is immune from this pandemic. Los Gatos to South San Jose is affected. If you look on a map of it is staggering how many homes are in some stage of default. We need to clean out this unhealthy inventory. Until these home owners either come current on their payments, receive a loan modification, or do a Short Sale, these distressed owners will act as an anchor holding the market back from true recovery.
7. Unemployment:
Better unemployment numbers will lead to increased consumer confidence and more people will feel confident in jumping into the housing market. Economists predict a worsening of unemployment numbers through the first half of 2010 before a recovery in the jobs market.
CONCLUSION
The housing market is cyclical. It has crashed before and rebounded. The market may experience a second dip. Santa Clara County, especially some niches, are especially resilient and will rebound quicker than others. Home values are still very depressed from 2 years ago. Interest rates will rise. If you are investing long term buying today, today’s historically low interest rates (30-year fixed = 5.0%) may put you in a better position than waiting for the market to drop another 5% and then buy with interest rates at 6%. On a $600,000 loan a 1% increase in interest rates adds $140,000 in interest payments over the term of a 30 year loan.
I wish I had a crystal ball to tell you all exactly where we are headed. But if you have any insights you’d like to share please call me to discuss. I’d love to hear your perspective!
Have a great holiday and best wishes in 2010!!
Hans Heller
KELLER WILLIAMS REATLY
408-891-0212
