We have been commenting on the steep decline in U.S. consumer confidence.  But our local real estate market on the south SF Peninsula is holding up nicely - why? 

Ans: The local job market has been stable.  As long as it remains so, local home buyers will continue to buy.  Watch for layoff notices, if any, in the near future as a sign the local market may weaken.

Jeff Stricker

On Sunday 4/27, the SF Chronicle ran a short piece on tips for sellers: SFGate Article that I thought was to the point and well done.  See if you agree.

At the end of April we can report that:

1.       Consumer Confidence continues to fall nationally Consumer Confidence Index - The Conference Board

2.       The number of home sales in our market area is at the lowest  level since 2001

3.       Values however are holding steady because the quantity of homes for sale is also at a very low level (but rising in Menlo Park)

4.       Interest rates are still extremely attractive, but likely to rise soon due to inflation worries

5.       The Silicon Valley economy remains upbeat

Steve TenBroeck

Consumer confidence (Consumer Confidence Index - The Conference Board) continues to be an accurate leading indicator of what’s in store for the local real estate market.  It was reported today that consumer confidence is currently at a 25-year low.  Looking at the numbers from the first quarter of 2008, the public’s lack of confidence is clearly reflected in the extremely low number of home sales.

For this article, we will focus on two cities: Palo Alto and Los Altos [Please note: If you’d like Q1 data for your town, simply send us an email].  In Palo Alto, there were 65 single family home sales in the first quarter of this year – the 10-year Q1 average: 97 sales.  That is the lowest number of home sales in Palo Alto on record.  In Los Altos, there were 46 sales (tying the lowest number on record in ’01) – the 10-year average: 71. 

However, average prices have not fallen, so far.  The reason is that pick-of-the-litter homes are still garnering multiple offers and are still selling over the asking price.  On the other hand, homes with perceivable “issues” (poor location, bad floor plan, etc.) have had to reduce their asking prices to obtain offers.  So far, these two factors have been canceling each other out.  The average percentage of list price received by sellers in Q1 of ’08 was 100% in both Palo Alto and Los Altos.

Sales prices are still well above last year’s.  The Q1 - 2008 median sales price in Palo Alto ($1.62m) is up 7% from ’07.  The Q1 - 2008 median sales price in Los Altos ($1.89m) is up 15% from ’07!

Days-On-Market (DOM) is another statistic that most of us watch closely, as an indicator of market trends.  However, it can often be counter-intuitive.  As market demand picks up, homes that have been sitting unsold start to sell, thereby lengthening the average DOM.  Conversely, as the market cools, only the best-priced homes attract buyer attention and they typically sell quickly, thereby shortening the average DOM.  This year, as one would expect, the average Days-On-Market is shorter than in it was ’07.  The average DOM in Los Altos in ’08 was 31 vs. 65 in ’07.  In Palo Alto: 20 vs. 43 in ’07.

For Q2, the big questions will be:

1. Will the inventory of homes for sale rise?
2. Will Buyers continue to hold off on purchasing homes?
3. Will interest rates begin to rise as inflation takes hold?
4. Will the median sales price begin to fall?

We’ll find out very soon.

Steve TenBroeck

The two most important leading indicators for real estate prices in a given area are consumer confidence and employment.  Even though consumer confidence nationally has plummeted Silicon Valley real estate prices have held up reasonably well because jobs have been stable and little inventory has come onto the market (see our 3/6 Blog entry on inventory).  We are now hearing reports of upcoming layoffs at major companies in the valley which have not yet been publicized.  Watch the local job reports in coming weeks as a predictor of where local real estate prices will head later this year. 

Jeff Stricker

As the old Buffalo Springfield song goes:  “What it is…ain’t exactly clear!”

The difference between this “slowdown” in the local real estate market and previous slowdowns is stunning! 

When consumer confidence drops (and it is currently free-falling: Consumer Confidence Index - The Conference Board ), usually the number of homes for sale increases dramatically. That is what occurred during the slowdown of 2001 to 2003, ’90-’93, ’81-’83, and all the previous economic slowdowns that we know of.  This time, however, something’s different, something has changed.  Purchases have declined over the past few months, as we would expect during an economic slowdown, but the number of homes for sale has declined in our area, too.

Why?  Why wouldn’t people want to sell when they know that values may decline in the near future?

We think there are a couple of new dynamics affecting potential sellers’ decisions as to whether or not to sell:

1.      Since 2003, reverse mortgages have become more common, allowing folks to tap into their equity and (as the AARP puts it) “Age in Place”.  Instead of moving into a retirement home when empty-nesters can no longer care for themselves, they can now afford to hire caretakers and stay in their homes.  Therefore, fewer potential sellers.

2.      With the current falling value of the dollar, why would anyone want to sell their real estate holdings and convert their equity to cash?  Over the past six months, commodities have been the only consistent appreciating asset class (again, due to the declining value of the dollar) and what better commodity, over time, is there than real estate?  Again, fewer potential sellers.

So, for these reasons, coupled with the property tax penalty in California when trading real estate, few want to sell.  Only a small number of folks: those who may be trading up or down, those moving away for career reasons, and adult children selling the estates of their parents desire to sell – that’s about it.

And that’s not many, unfortunately, not in Palo Alto and surrounding towns!

While homes in other parts of the Bay Area are declining in value, most homes in our area are selling over the asking price, simply because buyers outnumber sellers.  And we don’t expect to see this phenomenon changing anytime soon.

Steve TenBroeck

Does it pay to be a long-term owner of real estate in Santa Clara County?  According to DataQuick statistics it does.  Cumulative 10-year appreciation (1997-2007) for the county was 168% or an average of 11% annual appreciation.  At that appreciation rate a property doubles in value every 7 years.  Add in leverage and tax benefits and your return on cash invested would be off the chart.  You might say better than Google-like returns!  Jeff Stricker

Pricing high-end homes (over $2.5 million) is difficult at best, given the variability of the features of each home, buyers’ personal preferences, and subjectivity.  Each home is usually unique in characteristics. The exact value to potential buyers of those characteristics is unknown.  As a result, only approximations can be used to compare two high-end homes.  This is why appraisers consider a 10% range of value to be “accurate” and the closest one can come to divining fair market value.Jeff Stricker

The official start of the spring home selling season began February 4 with the passing of the Super Bowl.  There was an immediate increase in listing activity across many areas as typically happens each year.  Low loan rates and more homes for sale equals a great opportunity for buyers.  Please note: Product selection and the ability to hold 7-10 years are critical at this stage of the market cycle.Jeff Stricker

Accurate pricing of a home for sale has become important again.  In red hot markets homes will receive multiple offers and the price will be bid up to market value.  In a more balanced market multiple offers are not a certainty and a home can be sold for less than current market value.  Of course, overpricing it will cause a home to sit and not sell in any market.  Now, more than ever, pricing it right matters! Jeff Stricker