Antidotes to Bolster Nation’s Housing Market and Economy

Although the housing market has come a long way over the past year, the recovery is still very fragile. As one of our Bay Area managers put it, the market takes one or two steps forward, and then one back.  This is often what happens in an economic recovery after the initial burst of improvement. Rarely do recoveries go in a straight line, as much as we’d like them to.  Federal tax credits certainly helped bring the market off the bottom, but with their expiration the question many economists are pondering is what – if anything – is needed to make sure the market doesn’t fall back into a double-dip.

One of the foremost economists the U.S., Wharton finance professor Dr. Jeremy Siegel, has suggested antidotes that I found interesting – four stimulus measures that he believes can bring our economy and housing market back to health:

• Urge the Fed to buy mortgage backed securities backed by high-grade “jumbo” mortgages and other consumer and business loans;

• Reduce the interest the Federal Reserve pays to banks on reserves to zero from 0.25%;

• Create a credit to businesses to hire new workers while also cutting jobless benefits;

• Delay for one year the hefty tax increases that are now scheduled for 2011.

The Federal Reserve’s purchase of more than $1 trillion of conforming mortgages (those under $417,000, and $729,000 in much of Bay Area) has helped keep those rates low and undoubtedly helped stabilize the housing market. The 30-year fixed rate mortgage hit another record low this week, falling to 4.57 percent, according to Freddie Mac. But the market for higher priced homes has suffered, Siegel said, as the premiums that lenders have charged for “jumbo loans” has jumped markedly.

“In some cases these mortgages are not available at any rate,” he said. “The paralysis of the higher priced housing market hurts the whole industry since it prevents owners of these homes, such as empty-nesters, from downsizing. The Fed, by providing a liquid market for jumbo mortgages as well as other high-yielding credit card and auto loans, will encourage banks to lend in these markets.”

On the fiscal side of the equation, Siegel believes the government can help the private sector create jobs by providing an incentive to employers to add new workers to their payroll by issuing a tax credit to firms who hire.  “This credit can be paid by withdrawing some of the extremely generous unemployment benefits that the government has provided to the unemployed in this economic downturn,” he said. “We’ve had cash for clunkers, cash for homebuyers, and cash for appliances.  Let’s now have cash for jobs.”

Siegel’s final recommendation is to defer most, if not all, of the tax hikes that will take effect in 2011.  “Boosting income is the best way to raise consumption,” he said, arguing that imposing tax increases while the economy is still struggling is a dangerous move. He suggested that Congress and President Obama should consider keeping the tax rates for capital gains and dividend income at current levels for at least another year.

“Even without the further government stimulus, our economy will recover,” Siegel said. “But the government can provide a welcome shot in the arm by encouraging banks to lend and firms to hire, and by deferring big tax increases,” he said. “It’s time for the president and the Fed to take initiative to insure our recovery doesn’t stall out.”

Meanwhile, here in the Bay Area, the housing market in many areas has shown signs of cooling in recent weeks – perhaps the normal summer slowdown as more buyers are off on vacation. Additionally, the urgency among buyers is no longer there with the expiration of the federal tax credit deadline. Still, as always, market conditions vary city by city and even neighborhood by neighborhood. Some of our communities are still experiencing increased sales activity and even multiple offers on attractive properties, while other areas are seeing a definite slowdown of late.

Below is a market-by-market report from our local offices:

North Bay — The Greenbrae office reports that sales and inventory have slowed recently, probably due to the slow holiday week. But agents seem to be gearing up for a strong close to the month with new listings and renewed buyer interest.  Inventory is increasing and sales have tapered off as well, according to our Northern Marin office.  In Southern Marin, properties perceived as good deals continue to move quickly. A fixer/tear down in a good Mill Valley neighborhood listed at $565,000 received nine offers, the best of which was ratified with a 10 day close, all cash, well over the list price. Sausalito saw a number of new sales in the last few weeks of properties that had been on for a while at $1,399,000, then had a reduction of $100,000 got them all in escrow (still below the reduced price, but the reduced price provided motivation to at least bring in offers). Meanwhile in Santa Rosa, there are multiple offers on properties below 500k and a slow down above 500k. Buyers and sellers are slow to make decisions and quick to change them. Inventory is decreasing in Sebastopol, while sales are holding steady. It is taking price reductions to attract buyers in the high-end of the market.

San Francisco — The market has slowed down as of late, according to our Lombard office. After a good June, it has been a very slow start to July with growing inventory, slow sales, and slow open house traffic. Things are steady in the upper Market Street area. The number of listings coming to market are increasing and agents say the phones are ringing with more buyers asking for private showing – good sign.

SF Peninsula — June sales were significantly better than May in Burlingame, which hopefully reflects higher consumer confidence.  In Hillsborough, there are currently 86 active listings and 26 pending sales – a significant increase in sales over the last month.  Entry-level buyers are swooping in and snapping up properties listed in the $1.5 – $2.5 million “entry level” market. When you compare the minimum half acre lots, the award winning school systems and the community prestige, now could be the greatest time to buy in Hillsborough. Across the hills in Half Moon Bay, there has been slower real estate traffic these past couple of weeks with the 4th of July holiday. Very little activity over the $1m range but brisk in the $600k – $800k price range.  Still needs to be the best condition, best location, and best list price. Under $1 million market in Menlo Park is doing very well and $1-2 million will move if everything lines up. There is some life but very, very picky buyers. Homes need to be good new construction or the Taj Majal to get a big number in Menlo now. Buyers will make an offer and simply walk away if the seller does not come back with something reasonable.  In Palo Alto, more than half of the homes are sitting on the market, perhaps overpriced. The other half, if well priced, gets multiple offers – as many as 20 offers – as much as 20% to 30% over list price.  A very contrasting market. Inventory in the high-end is extremely low in Palo Alto, while it is building in outlying areas like Atherton & Woodside. The Woodside high end segment has slowed sharply with lots of properties on the market.  In Redwood City, the necessity to purchase in a timely manner seems to have slowed down. Buyers are taking their time to make a final decision. But properties that show well, have a good location and are priced at fair market value are still drawing buyers.

East Bay – The last two weeks of June were busy, according to the Berkley office, with agents writing offers and many getting accepted in multiple offer situations. Inventory is declining while sales have remained steady. The Previews luxury segment has gradually picked up as well.  The Orinda office reports sales and inventory holding steady. Open home attendance has slowed due to summer holidays. In Castro Valley, open houses continue to be well attended, although the local market has slowed.  Even so, there is no shortage of buyers for the listings which, if well priced, continue to go pending within days or weeks of hitting the market, always with backups.  We continue to see great bargains in Hayward, San Leandro, and Oakland, especially.  Still a great market for the first time buyer. The Fremont market is becoming more challenging over all, with sales dipping. Buyers are more hesitant to write offers due to economic concerns. The Livermore market has seen a 5% reduction in active inventory and a 3.5% decline in total pending sales. Agents are working harder than ever, as they have to write multiple offers for buyers to get one accepted with a number falling out of escrow. Our Pleasanton office reports that buyers still out looking but they are waiting for the right priced homes before making offers. Inventory is lower in Pleasanton than in Livermore.

Silicon Valley – It was very quiet over the fourth of July holiday weekend, according to our Cupertino office.  But with buyers, sellers and agents getting back to business this week, it could translate into increased activity. One third of the sales continue to be multiple offers. With school out and vacations underway, the Los Altos office reports open houses and tours are slower with fewer in attendance. In the Previews luxury market, sales have been slow above $1.9M and very slow above $3M. Meanwhile in Los Gatos, inventory and sales are holding steady. Agents are seeing an increase in multiple offers due to a lack of inventory in certain areas and historically low interest rates. The Previews market is steadily improving. In San Jose, the Almaden market seems to be steady while sales are picking up again in the Willow Glen area with fewer REOs coming on the market. Our Saratoga office reports that properties there that are priced well and are in good locations commonly sell within two weeks. While the over $2 million market is lagging, the $1.5 to $2 million market is very active.

South County – Sales activity in the South County seems to be slowing with the summer months. Our Morgan Hill office reports that the buying public is confused (and rightfully so.)  One week the media reports are positive, the next negative.  Interest rates are incredibly low, but it is difficult to obtain an appraisal at sales price. Buyers are eager, but inventory remains limited. Lending guidelines seem to be a big hurdle for most buyers. The conclusion is that the market is recovering, but as many have predicted, the recovery will be a long, slow process – not suited for the “faint of heart”.

Monterey Peninsula – Our Carmel area offices are reporting more high-end sales in last two months. While short sales are still too common and REO’s becoming rare for lack of inventory, they are seeing a pick-up in “regular” sales in the higher-end properties, mostly with all cash.  Our local offices just reported two sales that both closed in one week, which is unusual these days, at $8 million and $3.3 million, respectively.

If I were to generalize, I would say the current Bay Area real estate market is a study of contrasts.  On the one hand, we have well-located, impeccable condition, and very attractively priced homes receiving multiple offers, often within the first few weeks.   On the other hand, we have the balance of the inventory experiencing inadequate number of showing appointments, and then price reductions.  Of course every seller is hoping to enter the market with the perfect economic balance of a reasonable staging expense with a prudent and wise list price.  It seems you know when you’ve hit that balance within the first 10 days or so.  The market speaks to you.

That’s it for now. Have a great week!

Rick

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