Weekly Market Watch

First Time Home Buyers Are Fueling the Come Back

It’s finally happening. In my August 2008 Reality Check message I discussed our market’s need for the revival of the first-time home buyer. Because as we know, first time home buyers are a critical force that will help jump start our market rebound, creating that important domino effect that will ultimately benefit all price points. When first time home buyers purchase entry level homes, that allows the entry-level homeowners to sell and move-up to a mid-level, move-up market. By purchasing those homes, the move-up market is able to sell and ultimately purchase homes in the luxury arena. It’s a much-needed domino effect that will have significance in our market’s rebound. The numbers released over the last two weeks are showing that the process has already begun.

First, let’s look at NAR’s release this week of its March existing home sales. Now of course some media did use the nationwide month-over-month decrease in sales as an opportunity to take a negative spin but there were a lot of positives in this news. First, nationally, prices rose from February to March by 4.2 percent which is much higher than the typical 1.8 percent seasonal increase between those two months.

Second, housing inventory at the end of March fell 1.6 percent to 3.74 million existing homes available for sale, representing a 9.8 month supply at the current sales pace. This is important to note because March is frequently a strong listing month and more often than not, inventory grows in March.

In the West, existing home sales declined 4.2 percent to an annual rate of 1.13 million in March; however, of great significance is the fact that this number is 18.9 percent higher than last year at this time.

The fact is, the share of lower priced home sales have trended up, indicating a return of many first-time buyers. Sales in the upper price ranges remain stalled, but the last two weeks have produced more $1M+ pending sales than we’ve seen in a while as Buyers are taking advantage of two things in the upper end. One is the luxury of choice. Buyers can actually shop and compare. When they find what they want at an attractive list price- they are making offers. The second fact is that although Jumbo loans still have practically no secondary market (which increases competition and lowers interest rates), the Jumbo rate appears to be currently within one percent of the conforming; and buyers are seeing that it’s still a very attractive rate. For example, Princeton Capital’s rate sheet on April 20 showed a 5/1 Conforming at 4.625 –I point, and the 5/1 Jumbo at 5.3% - 1 point. FICO scores and down payment are of course key, but the market is beginning to get used to the new requirements.

Another interesting note, the Mortgage Bankers Association this week released its Weekly Mortgage Applications Survey for the week ending April 17. The index showed an increase of 5.3 percent from the previous week and that was a 76.9 percent increase compared with the same week a year ago. Yes, a 76.9% increase in mortgage applications, that’s not a typo.

While there is some criticism of certain steps our administration has taken to revive our economy, it seems some of the early work like the first time home buyer tax credit is effective. Earlier this week Inman News reported that the preliminary numbers from the IRS suggest 1.4 million taxpayers will claim the federal first-time home buyer tax credit on their 2008 tax returns, meaning the program is likely to meet or exceed the 2 million target set by lawmakers before it ends November 30, 2009.

Finally and I think this is probably most notable, the Wall Street Journal reported this week that prices have fallen back into line with what the typical household can afford to pay in most of the U.S. The report showed that home prices are dubbed “fairly” valued in 202 of the 330 markets studied. That means the average price level is within a band 14% above or below the historical norm. Twenty-one markets are “overvalued” or between 14% and 34% above the norm. And 106 markets are considered “undervalued” or more than 14% below the norm. Take a look at this graph which showcases where we were in the early part of the decade as compared to today:


I know it’s difficult to view the drop in property value a positive thing. But the fact is that though the ride was nice in the big real estate boom of the early 2000s, we couldn’t sustain those types of record appreciation levels without eliminating certain consumer niches, including first time home buyers. Now that levels are back within range, the first time home buyers are once again able to reenter the market which is why we are seeing such a strong surge in sales in that level.

Locally, we had further news this week that symbolized the first-time buyer pick-up. Rather than summarize them, I’ll simply share the links for your own reading:

http://www.dqnews.com/Articles/2009/News/California/Bay-Area/RRBay090416.aspx
http://www.dqnews.com/Articles/2009/News/California/RRCA090416.aspx

It’s just a matter of time before we weed through the remaining banked owned inventory and we should begin to see prices stabilize. Once we see that, the remaining areas of the market should begin to see an upswing, too.

With that said, let’s take a look at our week in real estate:

East Bay—Berkeley reports that open houses were very busy with up to 70 groups. Even properties holding their third open had a steady stream of visitors. Some buyers are still holding back, waiting for that mysterious "bottom,” or building in a bottom by offering 10% less. Castro Valley reports that in its micromarket, listings at the entry level present the same challenges we have been experiencing for weeks. Lots of competition for dwindling inventory. Agents with buyers in that market have learned the ropes, to bid as high as possible over asking, and to be patient. Fremont reports that it seems that people are still looking for a great deal. This week things have been slower, but it looks like buyers are starting to move as is seen in the multiple offers we have had this week. Oakland reports they are very busy and sales are strong however listing inventory is shrinking and not as many new listings are coming on. Some sales are taking longer to close and they are now seeing some appraisal issues because of new lender guidelines.
Monterey County—Had an exceptionally busy Easter week and last week, with many offers being written, and although 30 went into escrow, many didn’t come together due to seller and buyer being too far apart in price. Also have had a greater number than usual of properties in escrow falling out due to various problems encountered during escrow that were unable to be resolved. Buyers are being very cautious and picky!
North Bay—Greenbrae reports that a buyer’s Agent participated in multiple offers for a property in Larkspur that went at the least $200,000 over with five offers. The asking price was $1.2 million. A listing Agent in Greenbrae received four offers on a $1.3 million property in Greenbrae. There are signs of life plus buyers are out buying in Marin. As hot a week as Greenbrae had, Southern Marin wasn’t quite as warm. The office is reporting a slower week in sales though it was quick to note that it was expected during Spring break. Agents have been involved in many multiple offer situations on short sales and foreclosures. Properties might have five or six offers, with none at or above list price. Sebastopol shares 30-50 buyers were at two new listings in Sebastopol. They need more low end inventory, however, as that is what the buyers are looking for. Santa Rosa notes that Spring has arrived with heavy open house traffic, multiple offers and a large increase in distressed property open escrows. Agents are reporting as much as 60 groups through open homes and Agents are picking up buyers. Floor call leads are picking up as well.
Peninsula—Burlingame reports that the heat was a definite factor on open house attendance. In some areas it made for lighter than usual traffic and in others, turnout was excellent. They are definitely seeing a change in buyer attitude and confident that now might be the time to get serious about buying. Menlo Park El Camino reports a very busy week. Activity is the best it has been for about eight months. Lots of stealth activity, too, with sellers selling due to duress and wanting to be under the radar. Palo Alto reports that things appear to be more optimistic. There is a lot of attendance at open houses including upwards of over 100 people in price ranges of $1.2-$2.2 million in the prime locations of Palo Alto. San Mateo states that if a property is in good condition and is priced well, you are “gold.” Inventory is up 22% over 2008, pending sales are even with 2008 and solds are down 57% over 2008. Open houses are well attended. Lenders are still difficult in conforming and impossible in nonconforming.
San Francisco—The Lakeside office reports that buyers are finally pulling the trigger and writing offers. Lombard reports that inventory is steady or growing slightly. They’ve had good open activity at all levels. One home went slightly over in the $900,000 range; one condo took an extremely low offer in the $1.5 million range. FHA fees, rules and roadmap require an education on everyone’s part. The Market Street office reports that on one of the ratified offers this week the same buyers wrote on it two weeks ago, the owner would not accept the offer because there were additional disclosure packets out and wanted to hit her “magic” number. Two weeks passed and no offers came in, the buyers rewrote the same offer and got the house. The Agents have found that reps at the new construction units are negotiating verbally and once negotiations are finalized you need to get your buyers in to sign ASAP. A deal was almost lost because the buyers took their time getting in to sign and another buyer was put in place. It cost our buyers more money to get the unit.
Santa Cruz County—Market activity has picked up in April and we should finish the month with approximately 45 new sales. They’ve also had several million dollars in lost sales primarily resulting from some aspect of the lending process whether it be an appraisal issue, last minute conditions, lenders pulling their commitment, or last minute borrower issues, job loss or "cold feet." They’ve had great response from the Agents and the lenders regarding the short sale packages and these have been received very well by all parties. Overall, they’re moving forward with optimism; managing client expectations throughout the process.
Silicon Valley—Cupertino DeAnza reports things seem to be more active with buyers ready to make the plunge. The Cupertino Stevens Creek office concurs noting that they’re starting to see an increase in sale pendings; buyers seem ready to make a deal. Los Gatos reports that the market is definitely heating up with good consumer confidence. Prices are holding; however, still seeing short sales. The San Jose Almaden office reported numerous first time buyer calls coming in. Seems like many are deciding NOW is the time to buy and are. Our Princeton Capital loan officer is working long and hard hours every day and we’ve noticed a surge in floor calls. Terrific prices in the low million ranges and even above are selling in Almaden. Recently a property that was listed for $6 million four years ago sold this year in less than 30 days for a little less than $4 million. But it sold! The San Jose Main office reports a very active week for both sales and Open House traffic. Listing inventory dropping mostly in the mid range to lower price range properties. We’re seeing increased buyer interest.
South County—Gilroy reports that inventory continues to decrease. Multiple offer situations are the norm. Hollister reports low inventory compared to last week. Multiple offers are still going strong on the REO listings. Summer weather is bringing people out to investigate open homes. Morgan Hill reports optimism is the key word in South County. Though our sales continue to be dominated by REOs and Short Sales, there seems to be a sense that the worst is behind us. Agents are reporting good attendance at open houses and homes that are priced right and show well seem to be selling quickly. Good interest rates are also a significant factor—as are FHA loans.

Next week will bring some more interesting news. Check out this article that ran Monday in The Wall Street Journal: http://www.washingtonpost.com/wp-dyn/content/article/2009/04/19/AR2009041901875.html. Once we see the results of new home sales (existing home sales were already reported), we should have a better indicator of where we are. I’ll leave you with this excerpt from the The Wall Street Journal’s story:
“Whatever the March numbers say, there are good reasons to think that home sales will improve as the spring selling season gets underway. Anecdotal reports suggest that low mortgage rates and an $8,000 first-time home-buyer tax credit are coaxing buyers back into the market. And while foreclosures are set to rise as banks begin to move on delinquent homeowners, that actually could boost home sales as banks auction homes for whatever the market will bear.”
The market is without a doubt changing and we may finally be seeing the end of the great housing challenge of the 2000’s. I’m sure we are all up for that.
Until next week-
Have a great one,
Rick
Rick Turley
President
Coldwell Banker Residential Brokerage San Francisco Bay Area