Friday, January 16, 2009

January Silicon Valley Real Estate Market Update

This information summary and analysis uses MLS Listings Inc. (MLS) transactional data for December 2008. For single family homes in Santa Clara County, December saw an increase in closings of 38% from December 2007; closings of condos/townhouses saw an increase of 10% in the same period. For single family residences, there were 676 closings in the month with 876 initiated sales (accepted offers). As you know, not all accepted offers result in a closing. Closings of single family homes also increased in San Mateo and Monterey counties whereas Santa Cruz County saw a slight drop. A positive aspect to the market for this time of year -- closings increased from November to December. This is the first time that has happened since 2001. Normally, we see a decrease in closings through December.

Inventory of available single family homes in Santa Clara County was 3,926, down from 4,622 last month and also down 3% from the same month last year. Similarly, San Mateo, Santa Cruz and Monterey counties showed trends toward lower inventory levels. Much of the decrease has to do with expiring listings at December 31st. I expect we will see increased inventory as sellers will relist their homes and banks will resume foreclosure activity that will result in more bank-owned homes coming on the market.

Days of Unsold Inventory (DUI) or the intersection of the inventory (supply) with the recent sales level (demand), shows Santa Clara County at 147 for single family residences and 187 for condos/townhouses, modest increases from last month. San Mateo County is at 160 and 171, respectively. Santa Cruz County has a DUI reading of 215 and 235, respectively. Monterey County showed DUI at 129 and 190, respectively, and is the only county where this indicator has improved from November. Please remember that a lower figure is good here and that a declining measure represents an improvement in the market. Clearly, these levels continue to indicate a buyer's market condition as a reading of DUI of 90 or above depicts. As a comparison, a seller's market will have a DUI of less than 45 and a balanced market will have a DUI between the two. Keep in mind that these are county-wide averages and some areas historically have different levels. The wider area you measure, the statistics are less reliable as a decision tool for any specific area or neighborhood and also that there is often an incredible variation between those areas experiencing terrible market conditions compared to those that are stable. That's why I've mentioned that those statistics presented in newspaper and online articles are so general as to not be of much use as a decision tool for an individual making a decision on a home purchase or sale in a particular area. Real estate is local (down to the neighborhood level) and market conditions can vary within each county and even within cities by a large amount. Recently, local real estate is even more important now than ever as we witness an even greater of variance between the different areas.

The median price for single family homes in Santa Clara County now stands at $512,450, down 35.9% from $799,000 the same month a year ago. These sudden changes in the median prices (first way up and now way down) show that the real culprit or cause in most of the drop is a shift in the mix of what is actually being sold. Currently, there are a large number of lower-priced homes that closed and thus make up a larger portion of the total sales. Before, we witnessed a mix shift toward the higher-priced homes and saw the median price spurt higher. If you want more detail please contact me. Recently, the stock market crash has caused a major pause in the real estate market but only in the moderately-priced and higher-priced areas. The most affordable priced areas haven't been affected! The bottom 10% median selling price (10th percentile) was $300,000 in December and showed a decline of 45.5% from the same month a year ago and the top 10% median price (90th percentile) was $1,243,500, saw a drop of 26.9% from December 2007.

The price range with the lowest DUI reading we call the "sweet-spot" of the market for single family homes continues to be the $450,000 and under range with a DUI reading of 94. Next comes the $450,000 to $600,000 range with a DUI reading of 145. For condo/townhouses the picture looks similar with the sweet-spot being the $300,000 and under range with a DUI reading of 144.

For real estate investment buyers, the DUI for residential investment property has dramatically decreased and in now at 289 versus 302 last month. This means under the current rate of sales of multi-unit properties, there are about 9.6 months of unsold supply versus 10.1 last month. With lower activity (29 closings in December), this remains a prime period for negotiation for a buyer with preapproved financing and adequate investment funds. As mentioned before, many lenders have substantially increased the borrower's minimum requirements to obtain a loan for investment property purchases AND many are not allowing the use of home equity credit lines for their down payments so I forecast that this area will remain weak and characterized as a buyer's market. This remains an area of opportunity for smart, long term investors with adequate down payments that have an appropriate long-term investment horizon. Matter of fact, we now see much better rates of return on rentals than previous. Rental vacancies are relatively low and steady. Last year, rents increased about 10% in Santa Clara County.

Why is following all these trends and statistics worth it? I believe that informed clients make the best decisions -- both buyers and sellers. The research and staying on top of the changes to market conditions allows me to properly advise my clients on the appropriate strategy to employ so that they make the best decision possible whether they decide to buy or sell. This is an example of how I invest my time to benefit my clients. Most other agents spend the bulk of their time working on self-promotion ads for newspapers, magazines and send you stuff that fill your mailbox. Beware the various media sound-bites or headlines as they generalize too much (i.e., the national real estate market, the Bay Area real estate market, etc.). If you generalize too much you lose the fineness of being able to use current information strategically to make better decisions.

If you're curious about market conditions in a specific area, please don't hesitate to give me a call. I review details of the supply and demand within the smallest area possible. With the credit situation we're experiencing, banks will be more aggressive in approving loan modifications which will slow down foreclosure activity. If you need advice regarding your loan situation, please give me a call and whatever you do, explore your options fully before making a decision. However, not all borrowers will qualify for a loan modification and so there will continue to be some bank-owned properties available in the future. I have access to four major sources of bank-owned homes so if you'd like to explore this area, please give me a call to set up an appointment.

Your comments are welcome! Please feel free to post them here or send me an email.

Thanks for reading!

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