Home prices ready for a second dip? Which Silicon Valley neighborhoods are at risk?

If you are reading or listening to news reports about the housing market, you may find conflicting information.  Hard to believe that three out of the four largest banks showed profits for 2010 while so many home owners are continuing to struggle.  Hard to believe that anyone above us in pay grade knows what is going on when the reports are so contradicting.   That is when I turn off the television and start digging into the local numbers.

When I look at the local real estate market, I look for several key things to tell me where we might be heading.  First, I look at the basic model of supply and demand for each neighborhood.  Which neighborhoods have a lot of houses for sale?  Which neighborhoods have desirability (schools, shopping, commute)?  Which neighborhoods have a higher percentage of short sales and bank owned homes?  Which neighborhoods have more pending disasters with owners behind on their mortgage but the homes are not yet on the market?  Where was the market before the bust for a particular neighborhood and where is it now?  All these questions brought me to the following analysis.

First, in this analysis I have only addressed single family detached homes and not condos and town homes.  The condo, town home market has an entirely different set of  issues going on with legal battles between builders and home owner associations, non-FHA certified complexes, and rules that only allow for a certain percentage of rental properties within the complex.  I will save that digging for another day.

This  first graph takes a bird’s eye view of how the local markets have shaken out from boom to current bust.  A couple of key items to note:

1.) The higher priced markets (Los Gatos and Palo Alto) did not drop quite as fast as other markets.  For the most part, they began to lose market value in 2009 instead of 2008 and most of us believe that was due to the lack of “jumbo” loans available to the consumer.  Loan values over $729,000 had over 8% interest rates and this kept size up buyers from even considering buying.

2.) The markets that had the most new construction purchases  in 2007 were hit hard.  The Silver Creek area of Evergreen and of course Morgan Hill, Gilroy, and San Martin fit this issue.

3.) Areas where schools aren’t  in the 900 and above API, tech centered commutes, and shopping (desirability) were also the quickest to fall.  Examples include Alum Rock, South San Jose, and Central San Jose.

Click to enlarge

The next graph indicates the impact the buyer tax incentives had on sales in 2010. This is a seasonal view point that shows the tax credits certainly pulled buyer demand into the second quarter of 2010 and pushed prices up in many neighborhoods.  The stronger school district neighborhoods benefited from this pull the most and created multiple offers and most likely a higher market value.  When fourth quarter 2010 was compared to fourth quarter 2009, most neighborhood markets were down – 2% from 2009’s  fourth quarter.  If we were really coming out of the bust, we should have continued to see increased average sales prices in the third and fourth quarter.  Instead we saw drops or flat average sales prices.  This simply means that buyers were pulled into the second quarter by tax incentives.  But the tax incentives did play a role in increasing the area neighborhood total 2010 market average 5% over 2009.

click to enlarge

So where do we go from here? I look for pent up supply, low demand, and desirability to continue to predict the local housing markets. (I can not predict government intervention but assume we have seen the last of that for now.)  Therefore, I researched each neighborhood for total active listings, with the greatest number of NODs (notice of default), with the largest number of short sales listed, and  the largest bank owned properties compared to current active bank owned listings.  The chart below demonstrates these details.

Click to enlarge

For those looking for a deal, I project the potential for price drops in the following neighborhoods:

1.) Central – downtown San Jose. Due to a large number of defaults not yet on the market, as well a supply of bank owned properties that have not come to market.

2.) Morgan Hill, Gilroy, San Martin.  Tremendous pent up pre-foreclosure inventory.  The bank owned inventory seems to be on the market but not being bought up as quickly.

3.) Alum Rock, Evergreen, Blossom Valley, and  Santa Teresa will continue to bring to market short sales offerings as there is a high percentage of NODs in the works.  If the loan modification process starts working, we could see these neighborhood markets stabilize.

The flip side of this chart (no pun intended) is that buyers looking for incredible deals in Cupertino, Los Gatos, and Palo Alto are most likely going to be disappointed.  If you are a buyer looking for good schools, expect that you will have competition and the bidding prices will be equal to or  higher than second quarter 2010.  Make sure your agents are showing you all of 2010 average sales prices when you are looking at Cambrian Park, Cupertino, Palo Alto, and parts of Mountain View.  Taking the last 3-6 months comps will most likely have your offer under market value and you may very well lose out to a higher offer.

If you are not buying your home  for schools, I predict there will also be some good deals to be had in Mountain View this year.    Santa Clara statistics are skewed as the neighborhood is split by 101  and because of the lottery designed school system.  The Santa Clara market is also in flux due to the stadium issue.   Willow Glen and Santa Teresa may offer some opportunities due to a good supply of inventory.  In reality, much of that inventory is not in the school assignments of Booksin or Sakamoto schools.

Before interest rates start climbing, buyers should run the numbers and see if 2011 is the year to buy.  If you have questions about your local real estate market and want to talk about a specific neighborhood or even better a particular street, contact me.  I love talking about real estate and would be happy to answer your questions or slice the data in a way specific to your needs.
This content is original to the author and is protected by copyright laws.  All information is deemed reliable based on local multiple listing data, but is not guaranteed.  Do not duplicate, or distribute without the direct consent of CJ Brasiel.

Tags: ,

Top