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The Silicon Valley Market Report for February 2010

So far 2010 is off to a roaring start, with multiple offers again becoming commonplace, and highly qualified buyers lining up in some cases to present strong offers for well-priced, desirable properties.

As a couple of data points, our listing for a three bedroom home at 842 Sycamore Drive in Palo Alto, an entry-level home priced at $949,000, received 14 offers and sold for over $1,100,000. A similar property nearby on Greer received 12 offers the same week and sold for just under $1,100,000 vs. a list price of $979,000.

This market imbalance of large demand chasing limited supply isn’t limited to the entry level, homes in Los Altos and Palo Alto listed between $1.5M and $2M are receiving multiple offers as well, and even our office listing at 75 Coronado in Los Altos priced at $3,995,000 has been getting more interest lately.

As we begin to see more homes coming on the market as we move through the spring, I expect to see the market cool as the supply of homes for sale catches up with demand, and buyers have more choices. In the meantime, the Sellers seem to have the advantage if they have homes that are attractive to mainstream buyers.

That $45,000,000 estate on Stonebrook Drive in Los Altos Hills is a great example, as it is now an $28,000,000 estate. Do I hear $15,000,000?

In summary our current market continues to be driven by the following conditions:

• Low inventory of desirable homes for sale that are well priced
• Buyers motivated & feeling like they will miss out with limited selection
• Fears of rising interest rates are driving motivation to buy now
• Realization by buyers that they can’t buy for 20% below list now. Most sales in $1M – $2M are 10% under to 10% over list.

Opportunities:

• Interest rates are currently at historic lows
• The government is buying down conforming rates under $729,750 through March 2010, which holds down jumbo rates as well
• Consumer confidence is picking up – I’m seeing new cars more often, and new car sales are an indicator of increasing consumer confidence which leads to a strengthening economy, as consumer spending is the largest component of our economy

Threats:

• Government buydowns of conforming loans are scheduled to end in March which will lead to rising interest rates on conforming and jumbo loans
• Forecasted loan resets on commercial property in 2011. You can’t refi empty office buildings and vacancies are up
• Lots of buyers rushed to purchase before the tax credit expired December 1,2009 – Will this leave a hole in demand in early 2010? Not so far . . .
• Unemployment is 10% locally, and there is limited job growth forecasted for the next year.

In the threat department, I’ll refer again to this report from Bloomberg last month, which is especially relevant in our area:

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate. This brings the rate of default for these considerable loans up to a skyrocketing level of 12 percent as of September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages. This is quite a jump from the year prior where the rate for default on the $1 million dollar plus mortgages as only 4.7 percent.

In contrast to these ominous reports and Threats, we are seeing strong upwards trends across our area in our Market Action Index, that catch all indicator based on prices, inventory, and time on the market. We are even seeing the MAI climb toward parity in the lower price ranges in markets like Palo Alto and Mountain View.

On to the numbers:

Atherton:

The Average Price of a Single Family Home in Atherton is $6,124,821 with a range of $1,150,000 to $14,900,000. 25% (versus 33% last month) of the homes in Atherton have had price reductions, and the average number of Days on Market is 270 days versus 272 last month. It remains a Strong Buyer’s Market in Atherton, although the Market Action Index has been trending upward over the last quarter.

Los Altos:

Currently, the Average Price of a Single Family Home in Los Altos is $2,165,536, with a range of $995,000 to $4,995,000. 25% (down from 39% last month) of the homes in Los Altos have had price reductions, and the average number of Days on Market has fallen to 165 days versus 172 last month.

Los Altos Hills:

In Los Altos Hills, the Average Price of a Single Family Home is $4,983,866, with a range of $944,900 to $28,500,000. 30% (down from 33% last month) of the homes in Los Altos Hills have had price reductions, as Sellers are learning that the market has shifted, and the average number of Days on Market has declined to 247 days from 261 days last month.

Menlo Park:

This month, the Average Price of a Single Family Home in Menlo Park is $1,491,797 with a range of $190,000 to $6,495,000 (The $225,225 is in East Menlo Park, the bottom of the Menlo Park market is about $800,000). 27% (up from 24% last month) of the homes in Menlo Park have had price reductions, and the average number of Days on Market has risen to 163 days versus 150 last month.

Palo Alto:

In Palo Alto the Average Price of a Single Family Home is $2,270,343, with a range of $750,000 to $23,950,000. 20% (versus 34% last month) of the homes in Palo Alto have had price reductions, and the average number of Days on Market has fallen to 158 from 179 last month.

If you know of anyone who would appreciate having this market information delivered to them monthly, please forward this message to them, or CLICK HERE to send an email with your cities of interest. If you are a data junkie, you can receive these reports weekly, just register at: www.REMarketReports.com to select the markets and reports you would like to receive.

If I can answer any questions for you regarding the market, please contact me directly at: 650-450-0450.

Thanks for reading . . .

Economic Forecast, Extending the Tax Credit and the Golden Window for Buyers

On October 12, I attended a SILVAR sponsored economic update and forecasting presentation by CAR EVP Joel Singer, and I thought you might find the following summary and comments beneficial:

• As we all know financing is the primary key to housing stability, and Singer is 100% confident that both tax credits and the $729,750 conforming limits will be extended into 2010—both of which are keys to continued recovery
  • 40% of first-time buyers for 2009 bought because of the tax credit
  • The Feds are on track to extend the credit, maybe even improve it, so let’s keep our fingers’ crossed
  • The CA State Senate already approved the extension of the state $10,000 tax credit, and it should pass Assembly this week—yeah!
  • Food for thought: before the competition increases due to formalizing the tax credits, first-timers should make their move sooner than later
• The move-up market here is the most impacted, but will improve as financing does; as such, he feels as though there will be some level of government involvement to stimulate the secondary market for non-conforming loans
  • Right now, inventory levels for $750k-$1mm are at 6.1 months, which is healthy; inventory levels for $1mm+ are at 12.8 months, which signals a clear buyers’ market
  • With government support, non-conforming lending will ease, but not necessarily cause rates to be lower—current margins are already at all-time highs primarily due to risk—by stabilizing the system and improving liquidity, risk is reduced, savings rates increase and rates remain about the same
• Futures point to a Fed funds rate rise of .500% to .750% and conforming 30-year fixed mortgages at 5.6% in Q2 2010
  • As such, this gives anyone needing a conforming loan about 5 months before both rates and prices are up significantly
  • And if you missed the headline on September 24th about the Fed easing their policy of keeping mortgage rates low, you’ll want to know that they are almost cutting in HALF the  the effort– $14B versus $25B
• The overall number of homes/units sold next year will be down, but that’s only because we had a record number of units sell already this year—foreclosures will be DOWN relatively significantly
  • Activity will still be high and it’s likely the $1mm+ segment that will provide buyers with the best value
  • The “second wave” of foreclosures due to rate adjustments is a farce—many people, like myself, are looking forward to loans adjusting at lower rates, which is precisely what the majority of those loans will do
• 2010 will be a growth year with GDP expected at about 1.9%
  • Great news for the economy, but growth causes higher prices and higher rates—
• The population of CA will grow another 1.1%, so that’s about $370,000
  • We’ve added about 600k people per year since 2000, and about 500k babies are born in CA each year, so I guess that means there will be more demand on housing, which is also good news
• Unemployment may be 12% in CA, but that number is tied mostly to construction-related industries. 
  • With High Tech, Finance, Exports and Travel all on the rise for the Bay Area, our property values and local economy should benefit significantly

The Latest on Rates and Activity

Even with the incredible rates that continue to drive the refinance market, over 50% of the transactions that we closed in September were purchase transactions.  Also of importance is the fact that of those purchase transactions, 35% were financed using “JUMBO” loans!   Jumbo 30-year fixed loans are running about 5.75% and that jumbo 5/1’s are around 4.50%.  And if you have a $417k conforming loan, 5/1’s are available at 3.75%!!

According to the MBAA, last week’s applications were down, but the four week moving average is up, along with interest rates (albeit slightly).  We’re seeing the opposite effect locally, but it’s likely due to the many move-up buyers looking to take advantage of the $1mm+ market through Winter.

Is it just me, or does it genuinely feel like the golden window of opportunity for buyers right now..?

A great success story for us lately included funding a loan for a borrower who had a 63% debt-to-income ratio.  We have also bridged three separate transactions that allowed buyers to move up without having to sell their current home first.  And finally, we improved a client’s credit score by 100 points and saved them over $8,000 by having an erroneous collection removed from their credit record.  So even with all the news headlining the challenges in the mortgage world, at least some great success stories continue to be made.

Right Along With the Grunge Look, the Housing Crisis is Over

Yes, for those of you gents who still may be holding on to the rather relaxed “grunge” look from the 1990’s, I’ve got a newsflash for you: grunge, along with the current housing crisis, is over.  

Articles about the housing crisis ending have been few and buried in their respective periodical, my favorite of which was in TIME magazine back in February titled, “Ignore the Headlines“.  But now we have the Wall Street Journal. claiming that the trough was reached in April with an article from May 6, “The Housing Crisis is Over“.

I agreed with Peter Lynch back in February.., and it’s becoming more an more apparent that the longer prospective home-buyers sit on the fence, the more expensive that home purchase will become.  And this is not just because I believe that home prices will rise, it’s also because I believe that both long and short term interest rates will rise.  The 10-year Treasury Note, for example, is up over 1/2% since the middle of March, and the 10-year Treasury Note is a decent barometer to use when you want to know what the trend in long term mortgage rates have been.

That written, if you really want to continue with the grunge look, might I suggest saving it for your next camping trip?

As always, kindly consult with your trusted real estate, tax and mortgage professional before seriously considering any home purchase.

Lies, Damn Lies, And Statistics: What Mark Twain and Benjamin Disraeli Would Say About Menlo Park’s Median Price Numbers (Part 2)

Continuing my earlier rant about how real estate statistics don’t always tell an accurate story, let’s look at what Menlo Park’s numbers seem to indicate for our ongoing robust spring market.

First, a recap:  courtesy of our good friends the quant jocks over at Altos Research, we saw that the median price numbers for Menlo Park had dropped by some 30% — from $1.25M to $850K — over the 9 month period from April of 2007 to January 2008.

That drop in median price, however, by no means reflected the reality on the ground in Menlo Park — in other words, it is not true that a home in Menlo Park that was worth $1M in April 2007 was suddenly only worth $700K in January 2008.  The reason for that disconnect was simply the change in the mix of properties being offered:  in the last half of 2007, the inventory of lower priced homes east of 101 swelled, dramatically pulling down the overall median.

As if to emphasize that disconnect, we see what appears to be a dramatic price recovery from January of 2008 to now in May of 2008; in fact, it looks like the market has regained all 30% of what it ostensibly lost late last year!

Again, the reality on the ground is quite different; that is, a Menlo Park home that was worth $1M in January of 2008 is most emphatically not suddenly worth $1.3M today.

Moral of the story?  Simple:  real estate statistics are good at telling some stories, but not very good at telling others.  In particular, the median often simply reflects the mix of properties currently on the market and not necessarily any underlying ups or downs in the market.

Redfin Select: School-Marmish Innovator’s Dilemma? Becoming What They Hate?

With surprisingly little fanfare, Redfin, that pesky little Seattle brokerage the real estate industry loves to hate, announced yesterday their “Redfin Select” program, which looks suspiciously more and more like … a traditional brokerage offering.

Redfin’s initial business model, which made great sense in the VC’s conference rooms, was to outsource a big chunk of the buying process to its clients in exchange for a big chunk of the buy-side commissions.  For better or for worse, however, that model has continued to run dab-smack into the middle of the reality of real estate:  the listing agent, though representing the seller, is not usually responsible for showing the property to every interested buyer.  That service is usually provided by the agent representing the buyer.  The problem?  In order to make offers on a property, Redfin’s clients have to actually, well, see it.  If they don’t manage to hustle there during an open house, then they’re SOL — unless a Realtor-magic-key-toting Redfin agent comes by to open it.  And just like that, poof! goes half the business model.

Fast forward to today.  If you’re a Redfin client and you want a regular set of property showings, just give up a portion of the commission that was coming due to you and have Redfin show you around, just like a traditional broker would do.  Instead of getting 66% of the commission back, you get 50% back.

Possible explanations come from two different fronts:

First is my “Innovator’s Dilemma” proposition:   Redfin as a classic disruptive company, will first figure out how to be profitable serving the lower end of the market, the price-conscious clients that traditional brokers don’t mind losing.  Then it will move upmarket, charge more, and offer more service — ie. become more like a traditional brokerage, but with fatter margins.

At first glance, Redfin’s move seems to fit this pattern.  However. by Redfin’s own admission, they’re not growing as quickly as they would like, their business model is not as scalable as they had hoped, and they certainly are too young of a company to have taken significant market share yet.

So perhaps the better explanation comes from Mike Simonsen over at Altos Research.  Mike suggests it’s a simple pragmatic response to the harsh realities of the market place and their VC backers:  they need to become a $100M company as quickly as possible, and doing it at $10000 rather than $5000 per transaction will bring that about more quickly.

Other commentary:

• The Bloodhound notes that the rules around home showing seem strict and, well, a bit school-marm-ish.
• Greg Tracy suggests Redfin is becoming what they hate: a traditional brokerage.
• Jon Washburn notes the progression leading to this model and wonders if Redfin may end up becoming simply a lean-and-mean traditional brokerage.

Irony Of Ironies: The Mechanical Turk Behind The

Zillow, the perennial surprise-maker of online real estate, has just launched its long-anticipated foray into the mortgage world with a “Mortgage Marketplace.”  The company’s original online real estate product — the controversial “Zestimate” — is a computer algorithm estimating the value of homes.  The logical mechanism behind a “Mortgage Marketplace” would thus also be a computer algorithm — say, a mortgage pricing engine that spits out rates from lenders based on the borrower’s situation.

In a delicious twist of irony, however, the mechanical Turk behind this new product is … a person.  As in, homo sapien.  Specifically, a mortgage professional.

In a pre-launch briefing with “What would David Gibbons do” David Gibbons, he described the all-too-typical grief that a potential borrower goes through with many lenders, whether online or offline:  bait-and-switch salesmanship, hidden fees, inflated rates, and perhaps most egregiously, a complete lack of anonymity.

Zillow’s solution?  Let consumers ask for mortgage quotes without revealing their name.  Let mortgage brokers respond to these requests.  Let consumers sift through the responses and choose the broker they want to work with; then and only then does the buyer have to reveal his or her name.

What about the whole bait-and-switch thing?  Zillow deals with that in a very Web 2.0 way — consumer reviews of mortgage broker performance.  Plus, the participating mortgage brokers are vetted — at least minimally — to confirm that they are, in fact, licensed mortgage brokers.

And here’s something sure to make at least some mortgage brokers sweat a bit:  the competing mortgage offers are visible not just to the consumer who requested them…but also to the other mortgage brokers who submitted offers!

The cost to mortgage brokers?  Zero.  In David’s words, Zillow remains committed to being an advertising platform.  The data they can now gather about consumers — what their home is worth, other homes they’re interested in, and now their income and credit score — makes it possible to target-advertise with nearly pinpoint precision.  David assures us this is not being done in a “Big Brother” kind of way, but if I understand him correctly it may soon be possible, for instance, for Mercedes to target ads that will appear only in front of prospective buyers with an income of at least $100K and a credit score of at least 720.

Other commentary:

• Todd Carpenter likes it.
• Tribute Media reviews the product.
• Further explanation from Rich Barton, Zillow CEO.
• Drew Meyers weighs in.
• Greg Swann notes that this product reduces the information asymmetry in the mortgage lending business, and sheds further light on how Zillow manages the wealth of personal information they’re able to gather about consumers.
• Joel Burslem has some questions, but is submitting a loan request as we speak.

Market Bottom Officially Reached At 2:34pm This Afternoon; Impasse Between Buyers And Sellers Finally Resolved

The news that all fence-sitters have been waiting for finally happened: at 2:34pm this afternoon, the bottom of the real estate market was officially reached when 356 Avocado Lane in Stockton finally sold — with multiple offers — after 30 months on the market.

Said listing agent Trevor Blackstone of Stockton Realty: “Phew! I’m glad that’s over. I’m the fifth Realtor for these folks! They went on the market at $750,000 and after 25 price reductions they finally reduced it $275,000 and it sold! In fact, we got two offers, both just above the list price.”

CAR chief economist Leslie Appleton-Young broke out the champaign at CAR headquarters in Los Angeles. “We’ve been keeping our eyes on that property for a long time. We knew that when it sold, the housing recession would officially be over.”

Mike Simonsen over at Altos Research had this to say: “Our charts predicted this a few months ago already. The 7-day rolling average of the ratio of the median days on market for the upper quartile in the worst area of Stockton has been steadily moving upwards. That’s the sign that’s accurately predicted the bottom of every single market since 1900!”

TJ Shanahan of Realty World in Sacramento was also not surprised. “Seven of my top 10 ways of predicting the market bottom came true literally in the last week!”

Astoundingly, every single market bottom has also happened on April 1st, and at the exact same time. Here’s the Altos Chart to prove it:

Bubblistas are already salivating over the next real estate recession, scheduled to start in late 2024. The domains IToldYouSo.blog and WorstHousingRecessionEverWillStartIn2024.com have already been reserved. “In the meantime,” said a prominent bubblista, “I’m gonna stay renting.”

Eliot Spitzer and Making Sense of the New Conforming Loan Limits

If you’re Eliot Spitzer, probably three feelings come to mind: panic, disorientation and regret.  But if you’re a potential home buyer in the Peninsula region of California, you have good reason to feel excited, encouraged and confident!  Why?  If you read my last post last month, you know that the conforming loan limits for many California Counties are going up and that means cheaper mortgage rates on loan amounts between $417,001 and $729,750.  Now that HUD has made it official that ALL bay Area counties qualify for the revised maximum conforming loan limit, that means potentially big savings on mortgages for qualified applicants looking to purchase single-unit properties up to $810,000 with as little as 10% down!

We’ve all heard the cliche, “the devil’s in the details”, so what are the latest requirements to obtain a conforming loans between $417,001 and $729, 750?  Since I’ll provide you with a link to Fannie Mae website and announcement , I’ll provide you with some highlights that I think are most relevant and let you read further at your leisure:

1. Single-unit properties only

2. Purchase and “limited cash out” transactions only (i.e. no greater than $2,000 going into your pocket upon settlement)

3. If primary residence purchase, up to 90% loan-to-value (”LTV”) allowed if fixed-rate program is selected–700 minimum FICO(R) required; 80% LTV if an adjustable-rate loan is selected–660 minimum FICO(R) required; if refinance

4. If second home or investment property purchase, maximum 60% LTV allowed with minimum 660 FICO(R) regardless of eligible loan program selected

5. If refinance, regardless of type of eligible mortgage program, up to 75% LTV allowed, plus subordinate financing allowed in addition up to 20% LTV–660 minimum FICO(R) required

     a. SPECIAL NOTE, consolidating existing first mortgage and subordinate mortgage into one loan NOT eligible AND six  months of “seasoning” (six payments made on existing mortgage) required to refinance!

6. Loans are eligible for origination NOW 

7. Eligible programs include 30-year fixed, 15-year fixed, LIBOR-based 5/1 ARM (amortized and interest-only payments allowed for this program)– more programs may become available

8. Sufficient employment, income and assets must be verified and each file will require manual underwriting– automated underwriting engines not allowed at this time

Again, I do encourage you to read the Fannie Mae announcement from the 6th of March for all the details, but the above are the top highlights.

So what will pricing look like on these “new” conforming mortgages?  Well, pricing has just recently been released by only a few institutions, but it looks like the 30-year fixed is running at about 6.375% and the 15-year fixed is running at about 6.25%.  The 5/1 ARM pricing is expected to be released next month.  What I do think is that pricing may actually get a little better in the short term as more institutions post pricing and auctions are successful with Fannie Mae and Freddie Mac. 

What’s right for you as a would be home buyer on the Peninsula?  That depends of course on your specific situation, and I do encourage you to consult with your trusted mortgage and financial consultant before placing an offer on a home or refinancing your mortgage.  What I can say is that the majority of our clients who are buying or refinancing today are selecting a jumbo 5-year ARM in the mid-5% range due to its balance of savings, security and flexibility.

Introducing … Cindy Lin…Stager Extraordinaire!

I’m delighted to announce that local stager Cindy Lin has graciously agreed to become a 3 Oceans contributor.  She runs Staged4More and its accompanying blog.  Talented, opinionated, humorous, a little sassy and irreverent  … what more could you want in a contributor — or a stager?

Her inaugural post gives us an Elliot Spitzer object lesson…

Take it away Cindy!

Jeff Brown Descends On The Bay Area … Barbers Everywhere On Alert!

This has been in the works for a while, but we’re thrilled that the Bawld Guy himself, Jeff Brown, plus his son Josh, will be gracing us with their presence next weekend.  No, he’s not coming up here for a haircut…he’ll be holding three real estate investing events.  We’re pleased to sponsor his trip up here, along with our friends at Equitas Capital.

Hint:  Jeff’s the one on the right.  Josh is on the left.

We’ll kick things off on Friday night (February 29th) from 6pm to 8pm with a light dinner/reception for Jeff and Josh.  On Saturday (March 1st) from 10am to noon and 2pm to 4pm, he’ll be giving a talk on real estate investing in general, concentrating on his thoughts for the Bay Area.

If you’d like to attend, click here to register.
Jeff was kind of to provide some information in the form of a guest post.  Those who have been reading his blog will know that there are many reasons why he recommends folks with real estate equity in California should sell or refinance and invest in other areas.

Take it away, Jeff…

How Bay Area Investors Can Safely Improve Their Portfolio’s Performance

I’m asked this question everywhere. “How can I improve my annual returns, and/or capital growth rate?” This is invariably followed with the need for them to stay local, as if the ability to drive by their property makes their investments safer.

The answer is simple – you can improve your capital growth rate by stepping back and being objective. For example, I’m based in San Diego, an area often associated with Paradise. Yet I’ve been saying for years now – get outa Dodge. Real estate investors are a curious breed. They focus like laser beams when looking for an investment, yet shoot themselves in the foot time and again by insisting on investing in their own backyard. Allow my smart aleck self to emerge here – your capital doesn’t know where it’s been invested.

As bad a place for your investment dollar as San Diego is these days, the Bay Area is even worse. If the investor’s agenda is to take current capital and grow it through real estate investing, they will tend to avoid high priced areas offering horribly low rent to price ratios. Let’s say that more plainly. Are you as an investor more attracted to a million dollar property with $25-50,000 annual gross income OR would you prefer a properties worth a million bucks sporting gross annual incomes of around $95-100,000?

Your choice – take your time – no rush.

Here’s the point: Insisting upon local product in San Diego or the Bay Area will not only retard your capital growth within an inch of its life, but in chronological terms you’ll delay your retirement many, many years. In the 30 years ending in 2005, those who chose to invest in San Diego (not in most of those years absurdly valued) instead of the Bay Area were literally two commas ahead in terms of dollars. How is that possible? Weren’t there some years when the Bay Area out appreciated San Diego? Possibly, but so what?

In 1975 San Diego leverage was at least twice that of the Bay Area. By the mid-’80s it may have already been triple. When you as an investor can control more property safely your capital growth rate is turbo charged. This isn’t anything new or groundbreaking – just widely ignored. Real estate investors as a group have become infatuated with appreciation. Wrong wrong wrong.

Given the same $250,000 with the ability to make an informed decision regarding what region in which to invest, anywhere in California isn’t even on the C-List. Why? It’s a simple 8th grade math problem. Would you prefer 5% appreciation annually on $2 Million in property OR 10% appreciation on $500,000 in property? The former enjoyed capital growth of $100,000, or a capital growth rate of 40%. The latter accumulated capital growth of $50,000 or a capital growth rate of 20%.

Now bring in the concept of compounding and tax deferred exchanging to periodically recharge your growth rate, and those numbers grow further and further apart. After only 5-10 years the investor who chose to go where it made sense can’t even see the other guy in his rear view mirror any longer.

The lesson is clear: Keep your eye on the ball – and the ball is capital growth rate not appreciation rate. California properties simply can no longer compete with other growth regions.

If you’re a Bay Area investor wishing to safely improve your real estate portfolio’s performance, just keep your eye on the ball – the right ball. That ball cannot be found in the Bay Area.

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