I have been thinking about this topic for the last two months. Trying to figure out how to get it encapsulated into the shortest blog post as I am constantly being told blog posts should not be too long. It seems impossible to crunch this topic into a quick read, but I am going to try. There are so many little potential answers to the question that I first want to start with the facts of the matter. The real estate market in the San Jose and greater South Bay area has drastically changed in the last six months. Where it is going exactly is hard to predict. Most everyone I come in contact with is discussing the bottom of the market or the anti-bottom of the market. There are facts influencing the change and a lot of speculation on what will happen next.
One reality is that there are fewer homes for sale in San Jose. In the last six months, we have seen a drastic reduction in the number of homes for sale in San Jose in comparison to 2008. In comparison to July 2008, there are nearly half number of single family detached homes, condos, and townhomes for sale. With the supply of homes cut by 50% while demand from investors and first time buyers wanting to take advantage of $8000 tax credit and low interest rates (Today a 30 year fixed quoted at 5.14%.) stays high; the result is multiple offers and a bidding frenzy that I haven’t seen since 2002.
Affordability is a point of discussion that feeds into demand. If you know the Bay Area of California, you know that this is the first time in a long time that housing is anywhere near affordable. Almost everyone predicts that it won’t stay affordable forever and if there is any chance of getting into the market as a first time home buyer, it must be pretty close to now. With price declines of nearly 30% over peak of 2007, the California Association of Realtors® (C.A.R.) reported last week, 67% of households could afford to buy an entry-level home in California compared with 49% for the same period a year ago.
Many gauge the market by looking at months of inventory on hand to determine whether a market is a “buyer’s market” or a “seller’s market”. Obviously, when there are few homes for sale and a high demand, the market leans toward a seller’s market. When the inventory is high and demand low the market migrates toward a buyer’s market. The market barometer sped down the hill last year into a strong buyer’s market. But with inventory low, you can see how the general San Jose market barometer has risen drastically in the last few months.
It is interesting to point out that only Los Gatos, Saratoga, and Cupertino (only slightly) are indicating a buyer’s market. This is due to the fact that the higher the median price is for an area, the less affordable it is for buyers in this current lending environment. Less affordable prices leads to more homes lingering on the market and higher price pressure for each seller. We are only beginning to see foreclosure numbers increase in the >$800,000 market. The under $500,000k markets (parts of San Jose) were gobbled up in the latter part of 2008 and early 2009.
So those are the basic number facts of what is going on in the San Jose and greater area real estate market. Now to speculate on why and how this current picture could change. I admit most of what I am about to tell you now is a complete guess. I tried my best to buy a crystal ball from a lady in Cassadaga, Florida (Interesting place…) but was unsuccessful. Logic plays a role in these speculations.
First, the Federal and California moratoriums on foreclosure filings have played a significant role in reducing the number of REOs (foreclosures, bank owned, corporate owned) homes coming to the market. California’s 90 moratorium ended August 30th, 2009 and there is some speculation that we will see an increase in new REO listings. Some REO agents have stated they are beginning to see a slight uptick in new REO listings. REOs currently represent a 20% share of the active listings. Short sales or pre-foreclosures represent about 40% of the active homes for sale. If the corporate owners begin releasing the shadow inventory of REOs that are on their books, number of homes would increase and we could see another drop in home prices.
However, I do not expect to see a “flood” of REOs coming to the market like we witnessed in 2008. It simply does not make sense. If you were a corporate owner and had thousands of homes that you had already realized the maximum loss, why would you decide to dump them onto the market and erode the potential recapture price? Most likely, a corporate owner would hold back as long as possible in hope that median sales price would climb and then slowly release homes back on the market. Especially, in stronger markets around the Silicon Valley. Keeping inventory low is absolutely within the lender’s hands. With nearly 60% of the market in some state of foreclosure, they are definitely setting the pace of sales.
Hence why short sales continue to take forever. No rush to foreclose. As long as someone is in the house, taking care of it, preventing it from being vandalized the lender has more potential of recouping the loss during the upswing. Since May the average sales price for a home in San Jose has climbed nearly 20% while number of homes for sale has dropped 18%.
Some have talked about the fact that local governments have put the pressure on lenders to not release foreclosures due to the dwindling property tax revenues. Some say loan modification programs are working and the foreclosure market in some areas is drying up. Some say lenders realize they can actually make money on renting back to owners in default in a rising rental market.
I say, something will have to give. Home owners defaulting on their loans are rising and will continue to rise due to ARM adjustments due in 2010, loan modification stop gaps the have been proven to simply prolong the inevitable, reduced wages due to furloughs, reduction in hours in the private sector and unemployment rates. The banks will not be able to simply hold on to home inventory for the 5-7 years that is predicted to see a housing recovery. I anticipate they will sell the low end, less desirable neighborhood homes to wholesalers in bulk. I believe they will release moderate homes in better neighborhoods steadily as they see average sales prices climb. Higher end homes in the best neighborhoods will be held onto longest. They will use these to catch the higher end investors and buyers when all the low end homes have been consumed.
Banks are in the business of making money on other peoples’ money. They did it with sub-prime lending tactics. They did it with pre-payment penalties. They did it with “exotic” loan products such as hybrids and re-packaging. They do it now by receiving billions of tax dollars with little requirements on how to pay back into the actual economy. They continue to do it with credit card financing trickery. They will continue to manage the housing market for many years to come. In a way that does not benefit private buyer or seller but the corporation.
In conclusion, there is no bottom. There has been and will continue to be a manipulation of the housing market by large corporations. Large banks have become even larger through the absorption and mergers of the banking competition over the last two years. With 60% of the housing inventory being controlled by the lenders and 20% of the loans (more outside of California) being managed by the government (FHA), the “free market” is a misnomer. It may seem like a simple supply and demand example but really it is an economic manipulation machine. With the media continuing to manipulate our emotions with the initial doom and gloom and now the mirage in the desert of recovery, we can only hope that through this process we become smarter. Save more. Spend less. Apologize to our children for our greed. Buy a home when you can afford it for the next 30 years. That can happen whether or not the market is labeled a buyer’s market or a seller’s market.