Financial markets hit 2 ½ year highs – will real estate follow?

The financial markets continued to improve over the past few weeks with both the Dow Jones Industrial Average and the S&P 500 reaching and surpassing two key milestones. The Dow eclipsed the 12,000 threshold and the S&P climbed over the 1300 level for the first time in two and a half years. Both milestones are viewed by market watchers as important barometers, not only of the health of Wall Street but consumer sentiment on Main Street.

Steady improvement in the financial markets is putting the Great Recession even farther behind us. It means that retirement accounts for millions of Americans have erased much of the losses inflicted by the sharp downturns of 2008 and early 2009. Two years ago next month the Dow stood at 6,547 and the S&P at 676. Since then, they’ve nearly doubled in value. It’s an encouraging signal that the economic recovery is gaining traction, albeit slower than most of us would like.

So what about the real estate market? In general, the nation’s housing market remains fragile. While there has been improvements in many communities since the depths of the recession, including here in the Bay Area, the market overall continues to be challenged by high unemployment rates and the shadow inventory of additional homes that could fall into short sales or foreclosures.

While acknowledging all of the economic headwinds, Rick Newman, chief business correspondent for U.S. News and World Report, wrote this week that the stage could be set for a solid recovery in the housing market this year. “A buzzer won’t go off when it happens, but 2011 could be the year that the housing bust officially ends,” he said.

Nationwide, prices have fallen by about 30 percent since the peak in 2006, and Moody’s Analytics thinks they could fall another 5 percent or so in 2011. “But improvements in the overall economy will lift the housing market sooner or later, with many buyers who have been sitting on the sidelines finally deciding to take the plunge,” Newman writes. “In a few markets, that already appears to be happening.”

U.S. News says home buyers are tiptoeing back into the market, amid an increasing number of signs that the fifth year of the housing bust might be the last. “Economists are watching closely for an inflection point at which the housing market turns upward for good. But for buyers planning to live in a home for years, precise timing matters less because they also need to take into account the direction of interest rates and their own personal need for housing,” Newman said.

“With flippers and speculators largely out of business, most buyers simply want to know that the home they buy won’t plunge in value once they own it. In many U.S. cities, that now looks to be the case,” he adds.

U.S. News points to four reasons that home buyers may be feeling more confident that it’s safe to step off the sidelines:

  • In some markets, homes are now undervalued. According to the Case-Shiller home-price index, overall prices nationwide have fallen 30.3 percent since peaking in 2006. Moody’s, for instance, says that homes are undervalued in many cities, based on the ratio of home prices to median income.
  • Affordability is excellent. Falling prices, plus falling interest rates, have made homes more affordable than they’ve been in decades. The National Association of Realtors’ affordability index, which goes back to 1970, is at the highest level it’s ever been. The typical family today needs to spend just 13 percent of its monthly income to pay the mortgage on a median-priced home, compared with nearly 25 percent at the peak of the housing bubble.
  • Economic factors that affect housing are improving. Most economists believe the recession is over for good, with the risk of a double-dip fading rapidly. Consumers are spending again, and the economy is growing. Big companies have lots of cash and are in a good position to hire once business picks up. A rally in the financial markets is helping many Americans recover some of the wealth they’ve lost through falling home values. Those trends all support increased higher demand for homes.
  • The government will continue to support housing. There will likely be continued political debate over Fannie Mae and Freddie Mac, the troubled housing agencies now operating under government control. But despite some calls for a private system to finance housing, it’s likely the government will remain a key player in the mortgage market until at least 2013, after the next presidential election. And once policymakers figure out how to replace Fannie and Freddie, it will probably happen slowly, so as not to upset the housing recovery.

While it’s still too early to tell for sure where we are in the recovery, anecdotal reports from our field offices tell us that things are gradually moving in the right direction. Buyers are easing back into the housing market in many Bay Area communities. As we approach the spring buying season it will be interesting to see how this translates into sales. Stay tuned!

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

North Bay – Buyers are out in droves in Marin ready to make a move, our Greenbrae manager reports.  More than half of our agents in that office have buyers ready to go as soon as they find the right house.  These buyers are not ready to settle, however, so with inventory low in Marin, they will have to decide on whether to buy something below their standards, or settle for higher interest rates down the road.  We had four offers on a house in Greenbrae priced at $1.4 million, which is great news for this price range.  The $1.5 to $2 million and beyond is a little slower, but we are seeing movement in all segments of the market.  Most listings are still yet to come on the market.  In Southern Marin, there seems to be a sense of cautious optimism.  Numbers at open houses are higher than they’ve been in a long time, buyers seem more apt to step up to the plate with offers, agents phones are ringing again and there is a lack of inventory, making the inventory that is on the market much more likely to get offers.  In Northern Marin, inventory is declining but sales activity is on the rise. Our Petaluma office is starting to see strong movement in the $500-$800k range. There were three walk-in clients over the weekend and one wrote an offer the same day they walked in! The Santa Rosa office reports they have gotten off to a solid start to the year with listings and sales. Open house attendance is strong. In Sebastopol, after a slow end of 2010 and a slow beginning to this year, our local office is starting to see improved activity. Conference rooms are filling up and agents are writing offers. A new listing priced at $1,150,000 had over 20 groups view it.

San Francisco – Our Lakeside office reports that that both sales and inventory are on the rise. Buyers are keeping open houses busy and are seriously interested in ending their search with a purchase, but they still want to be sure value is what drives the transaction.  The local manager says “there is a hubbub in the air.” The Lombard office says the local market has been steady. There has been increased open house traffic, more offers and deals lately after a slow first three weeks of January. Agents are busier than the last six weeks. Our Market Street office reports that buyers are back in the market actively looking for their homes. Prices are all over the board from 340k for a condo in Diamond Heights to $2.3m for a single-family home in Noe Valley. Lots of activity at open homes throughout the city with several disclosure packages going out after the first open. As always well priced good looking properties are selling quickly. Sales activity is increasing, according to our Noriega office. Open houses are extremely busy (the dry weather helped).  There seem to be a renew sense of urgency to purchase because a lot of buyers are thinking that the interest rate will continue to rise.  Almost half of this period’s ratified offers were in multiple offer situations. Finally, our Van Ness office reports that inventory levels are steady while sales activity is increasing at a solid pace in the early part of the new year. They had 20 ratified offers in the past couple of weeks – three multiple offers.

SF Peninsula — The story of low inventory is being repeated at every price point, our Burlingame office reports. Buyers are out at open homes and they have a new purpose about them. There are few choices of new listings and we are seeing old inventory finally moving out and the return of frequent multiple offers on just about anything newly listed, well presented and fairly priced. It is so typical for the early spring selling season as we anticipate new inventory after the Super Bowl. There is definitely a new attitude among buyers, who are finally ready to get into the market once again. Across the hills in Half Moon Bay, there has been steady activity with serious buyer’s coming to the plate and great open house traffic.  Sellers are reducing their list prices to a point that is attracting offers. Our Menlo Park offices say the local market is quiet for now. There’s a definite shortage of listings. There are far more buyers right now than sellers. Our Redwood City-San Carlos offices reports open houses are beginning to pick up – especially at first time opens. They also need more inventory. The same is true in Palo Alto, where our local manager says there’s a shortage of inventory – not a shortage of buyers –below the $2.5M range. Up to 18 offers on a property priced right – $1.5 range. Open houses are very active. Open house activity continues to be strong in San Mateo, but our downtown office says buyers still sitting on the fence waiting to make a move. Finally in Woodside, it’s been fairly quiet in the upper end of the market – some good listings are coming but sellers (and buyers) are in the market (mentally) one day and out the next. Much of it is driven by macro-economic and political events.

East Bay – The market is steady in Berkeley, but there is not enough inventory. Buyers have begun to hold off again, maybe waiting for even lower interest rates or the new listings.  There are a slew of “coming soon” properties, mostly in various stages of preparing for the market. Their agents are definitely hoping they are ready soon. Castro Valley agents are seeing an increase in the number of calls they are receiving from past clients expressing their interest in putting their homes on the market. There is also an increase in the number of all cash buyers in the lower priced range. Inventory is tight in Danville. There is less than three months of inventory in the San Ramon Valley.  There are sellers still unable to participate in the market because of their negative equity. Our Fremont office reports a good start to the year, both in terms of sales and new inventory. The story is echoed in Pleasanton with multiple offers on several homes. There has been a slight increase in total pending sales of single-family homes in Livermore.  About 84% of the total pending sales of detached homes in Livermore during January were listed at or below $700,000. Our Oakland/Piedmont office says that momentum picked up the last 10 days of January.  Sales were more robust than one year ago, but the market needs more listings to meet demand. In Orinda, buyers are very active at open houses. A large number of homes have gone pending in a very short period of time. It seems too early since we are “pre super bowl” but perhaps buyer confidence is returning.

Silicon Valley – Our Cupertino office reports sales activity is on the rise, but inventory levels remain low – frustrating some agents and buyers ready to make the move. The low end of the market is seeing offers on properties that were ignored for months. Los Gatos is also seeing unseasonably high activity for this time of year with both sales and inventory increasing. The San Jose Almaden office says the local market has been off to a fast start as well.  Listings are growing but our region is keeping pace with the increase in sales. In Saratoga, after a slow start to January it seems as though the activity level and energy level is quickly rising.

South County – This January was the best in regard to sales in the last four years, our Gilroy office reports. Agents are busy and reporting good activity at open houses. Inventory is increasing slightly as many sellers have waited for the holiday season to pass before going on the market. Similarly, the Morgan Hill office had an incredible January with over 35 sales and almost that many new listings.  There is a good “buzz” in the office and agents are busy.  The year has started off with high expectations and great attitudes.  Agents, buyers and sellers seem more optimistic that perhaps the market has stabilized.

Santa Cruz – Overall the market is getting off to a typical start for January.  The inventory levels are very low with still not many new listings coming on the market.  Open houses are fairly busy and agents are finding that buyers are actively looking.  We are seeing beach property prospects/and investors looking for great deals & the offers rarely come in at asking or near asking price.  There does not seem to be a lot of consistency – a new listing came on the market today, bank owned, 4800 sq ft, on 5 acres, in gated community which was listed for $2 + million – came on at $799,000.  One of our agents also sold a beach house after several months for close to asking at $1.345 million.  The spring market is right around the corner and we are expecting good things!

Monterey Peninsula – January has proved to be a very active market on the Monterey Peninsula.  In spite of the usual holiday slowdown at the beginning of the month, our sales associates have been very busy writing offers and counter offers and have opened 54 new escrows and taken 46 new listings, with 20 of those coming in this last week!  Of course, this region tends to get very busy with new listings in January, as sellers are often anxious to get their properties on the market before the influx of people from out of town for the AT&T–this year from February 6-13.   However, it appears that it is even busier than usual with new listings, with a number of those actually listings that were taken off the market for the holidays and are just now going back on the market after a 30-day hiatus.

One final note on the Previews market: Our Southern Marin office says it is seeing a surge of sales in the higher end, primarily in Tiburon.  A Tiburon office listing at $2.5 million went into contract immediately after Broker’s Open and another Tiburon office listing went into contract after being reduced to $3.5 million. Our Burlingame offices report that high-end inventory is looking like it did in 2006 and 2007. There are only 42 active listings in Hillsborough and 20 pending sales. There are four pending sales in Livermore over $1 million, twice the normal level for this time of year. One new Peninsula listing had more than 300 groups attend.

That’s it for now. Have a good week!

 

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