SubscribeMortgage Mania 25 – Now What?
November 14, 2008
Henry giveth, and Henry taketh away . . .
When Treasury Secretary, Henry Paulson asked Congress for $750 Billion (yes, that’s with a B) financial bailout package, the justification was to buy up distressed mortgage assets so that banks would start lending again, and hopefully the epidemic of foreclosures sweeping the nation would be stalled.
The new plan doesn’t include that, of course, which has led to everyone asking, now what?
Lately, I have been holding open houses in Palo Alto pretty regularly, and almost everyone coming in asks me the same question: How is the Market? We discuss the market trends of homes taking longer to sell, increasing numbers of price reductions, the importance of pricing and preparation, etc.
The big shift we are seeing now is the effect of the stock market crash last month. Much of the wealth in Silicon Valley is tied to the stock market (options, grants, etc.). It’s how we pay our executives and employees, reward performance (bonuses), and fuel the venture capital engine. When the market drops over 30%, suddenly, potential home buyers are faced with the prospect of selling stock that is devalued by 30% to pull together the down payment on a home that is priced 5 – 10% off its high (typical Palo Alto home, your results may vary). That is pretty tough to justify, and in many cases potential buyers don’t have enough in their portfolios any more to cover the 20 – 30% down needed for that typical Palo Alto home.
So, we are seeing a bunch of Buyers exiting the market, while the inventory of homes for sale in Palo Alto is about double what it was at this time last year. The result is a Buyer’s Market. Good news if you are a Buyer, bad news if you are a Seller.
Many people in Palo Alto don’t NEED to sell their homes. They may be retired and wanting to move to a smaller home or relocate, or they may be a growing family needing more space. With the exceptions of people relocating out of the area, moving into retirement homes, or those who are selling for financial reasons, many sellers can afford to wait for the market to turn in their favor.
In the short-term, I predict that we will see the inventory of homes for sale drop, even more than the usual seasonality, as potential sellers wait out the market. The big threat to sales and prices is interest rates rising. Remember, that if the rate on a loan goes from 6% to 7%, the payment goes up about 15%. That is a big hit when you are talking about $1M loans, and a economy falling into recession.
For the longer term outlook, I’ll defer to this article that was recently in Money magazine that discusses how the credit crisis nationally is affecting ALL real estate, even here in Palo Alto. We Realtors love to say “All Real Estate is Local”, which is great unless the money to buy that local real estate is affected but national events. This time around, the events are international.
Be sure to follow the links above to see the latest market data for Palo Alto and the surrounding communities, but you may want to fix a drink first. Or, you can register to receive updates on the market in local communities delivered to your email weekly at: www.REMarketReports.com
Thanks for reading . . .
Have we really hit bottom? Market statistics vs. media hype
April 25, 2008
As our resident expert, Kevin Boer noted in his April 1 posting, the housing market officially hit bottom a couple of weeks ago. For those of you who were skeptical of his information given the April 1 posting date, and Kevin’s well known reputation for satire and irony, the California Association of Realtors published some new market data yesterday (April 24) showing how real estate really is local, and that the local real estate market in Silicon Valley is humming along nicely, thank you:
In case you’ve been wondering why high-end real estate markets continue to perform relatively well: One out of every 10,000 American families has an annual income greater than $10.7 million, according to two university professors who study the super-rich. By their tally, there are some 15,000 Americans who fit into that category. These individuals also are getting an increasing share of the economic bounty: In 2006, the super-rich possessed 3.89 percent of total income, up from .87 percent in 1980 and the highest level since 1916.
Strong employment and wage growth are two factors that have helped the San Francisco Bay Area stave off the kind of home sales and price declines experienced in the inland regions of California. For example, Santa Clara County residents earn nearly double the nation’s average weekly wage and surpassed Manhattan as the county whose residents take home the largest paycheck, according to the U.S. Bureau of Labor Statistics. Santa Clarans take home an average of $1,585 per week, slightly more than Manhattanites, who earn an average of $1,544 a week. San Mateo County ranks fifth in the nation at $1,322, while San Francisco is eighth at $1,286. Nationally, the average is $818. San Francisco ranked tenth in new-job generation, adding 18,000 jobs for the twelve months ending Sept. 30, 2007.
Despite the above, some worry that California’s technology sector may be in for another “dot bomb.” But experts say technology and Internet companies are better prepared to weather the storm this time around. Their reasoning? Many Web 2.0 companies learned a lesson from their free-spending predecessors and have discovered ways to operate with fewer employees and at lower costs. That appeals to venture capitalists, who have tightened their criteria but continue to seek companies with strong revenue models.
Lately, I have been describing the market as “upside down”, where I am seeing unusually strong sales activity in the over $3 million market, while under $1 million is about the same as last year, or a little off depending on the neighborhood. What is interesting, is the $1 million to $3 million market, what I call “tweeners”, because these homes are in-between the entry-level and high-end.
Gross simplification warning: Buyers of “tweener” homes have significant amounts of cash or equity to put down, but still need a mortgage, and often a significant one. As banks and other mortgage providers have tightened their lending guidelines from recent years, it has become harder to get a $1.5 – $2 million mortgage, and those have become more expensive. As a result, more people aren’t upgrading, or they are getting priced down from say, $2.5 million to $2 million. Thus reducing demand relative to supply and creating a soft spot in the market.
In my experience, in the $3 million and over market, Buyers have more cash, Euros, Rubles, Yuan, Dinars, stock, gold, trust money, etc. to use to purchase their new “executive home”, so they are less concerned or affected by interest rates and loan qualification hurdles.
Let’s hope that VC money mentioned in the article above keeps flowing so we can keep paying for our million dollar tract homes and $5 a gallon (you know it’s coming!) gas.
I know you will have an opinion or comment, share it here.
Thanks for reading.
Waiting to Exhale – Again
January 9, 2008
Tomorrow (1/10/08) Ben Bernanke is scheduled to speak on his outlook on the economy, and the pundits are all expecting that by examining his comments repeatedly, reading tea leaves, and consulting their favorite oracle, they will be able to predict whether the US economy will slide into recession in 2008, and whether the Fed will cut interest rates again at their next meeting.
The stock market seems optimistic, with trading up today as investors shifted into sectors that are seen as resistant to recession and economic contraction. These are things that we spend on whether things are good or bad; food, medical care, gasoline and heating oil.
Some economists say we are already in recession because of a jump in unemployment in December coupled with little growth.
Nationally, I tend to agree with the doomsayers. Here in Palo Alto, Los Altos, Mountain View and Menlo Park however, we are still beneficiaries of the strong local economy. Local executives are still complaining that they can’t hire enough engineers, the housing market continues to be strong as we are seeing a net inflow of people, and minimal relative increase in housing (no more land), and we have a unique concentration of educational instituions, venture capital and innovation that enables Silicon Valley to continue to reinvent itself.
In summary – We will likely see a national recession in 2008 and 2009, with housing prices potentially falling by up to 30% in some areas where prices have been driven up by speculators/investors. The local real estate market will remain constrained by supply, so we will see fewer homes being sold, but prices will remain at current levels, or even continue to increase. Great news if you are planning to sell your home in Palo Alto, bad news if you want to buy in Palo Alto.
In the Central Valley this will sadly not be the case . . .
Stay tuned for a recap of tomorrow’s commentary by Fed Chairman Bernanke.
Thanks for reading.
