Happy New Year!!! Welcome to 2008---Recession---No Recession---Recession---No recession. Not a day goes by (or for that matter an evening) without the same mantra from the media. The year begins with the same economic uncertainties as it ended with.
If we look closer there still is much to be happy about. Unemployment which is up, is still reasonable (95% of America is working); job growth is still on the plus side, although anemic; food and fuel prices are out of sight, although inflation is still manageable; and as far as the Fed is concerned, rates will come down. Most important for real estate here is that there is still demand. The only issue is the demand is reluctant to exercise itself. Why do you blame buyers, all they hear is wait, the prices will drop.
Traffic through open houses tells the story. Usually January tends to be slower. Not the case this year, particularly in those markets that were the strongest in 2007. In San Francisco the traffic at last Sunday’s opens was brisk. The open houses averaged 18-35 groups with some notable exceptions. A Cole Valley duplex listed at $1.349 mil. had 300 groups through and a Pacific Hts. triplex listed at $2.595 had over 100 visitors. It wasn’t just SF. In the East Bay, a Crocker Highlands listing in Oakland, experienced 300 buyers. It was listed a bit over $1.6 mil. . We are still seeing good numbers of buyers in all areas. What this early activity indicates is that there is still plenty of pent up demand.
This year is reflecting the similar trends as last. The upper end of the market is the most prolific. This year started off with a $6.45 mil sale in Ross and a $5.3 mil sale in St. Helena. There would be more, if the inventory was there on well-priced unique properties. The appetite for these upper end listing is certainly evident.
All markets depend on momentum. In summarizing last year it was a year of momentum----both halves of it---up and down. The Bay Area market was a tale two markets-----the high average sales price counties---SF, Marin, San Mateo and parts of Santa Clara were going extremely well through mid July. The counties with the lower average sales prices---Solano, Napa, Sonoma, Alameda and Contra Costa---struggled from the beginning of the year. There were exceptions in Alameda and Contra Costa counties---Berkeley, the north part of Oakland, Piedmont, Albany and the Lamorinda (Lafayette, Moraga and Orinda) areas looked more like SF and Marin.
Once the sub-prime debacle hit, the momentum in the first half of the year began slowing to a point that by December all of the Bay Area markets were off from last year on a month over month basis. This is best demonstrated by comparing the year over year (06 vs. 07) with 4th qtr. over 4th qtr. (06 vs. 07). This gives the clearest picture of how momentum can be affected by financial calamities. Each county will have two percentage numbers, the first being year over year and the second will reflect 4th quarter over 4th quarter. The comparisons are based on units for both single family residences and condos.
San Francisco -9.69% -19.11%
Marin -12.0% -29.0%
Sonoma -23.26% -39.04%
Napa -25.13% -42.02%
Solano -40.02% -48.43%
Alameda -27.53% -42.91%
Contra Costa -29.30% -42.89%
You can see the dramatic effect of momentum. Just to highlight how the briskness of upper end markets can have a positive effect on a market even if units are tending down we can look no further than SF and Marin counties. Although units were down about 10% in SF, the volume of sales was down only 4.23% and in Marin units were down 12%, however the total dollar volume was only down 1.22%----so much for broad brushing a market place.
Given those numbers above you would think sales price would be significantly impacted. Think again. Yes, in those markets with the highest variances from last year, median sales prices have been affected. The majority of our markets have not gone appreciably and in some they have actually gone up.
Here is a look at median sales prices. I will give both year over year and 4th qtr. over 4th qtr.
San Francisco +3.25% +4.3%
Marin +4.15% +4.4%
Sonoma -5.91% -13%
Napa +.84% +1%
Solano -8.13% -17.2%
Alameda +1.0% -3.36%
Contra Costa -1.0% -14.35%
Prices in SF and Marin counties have not only held, but have accelerated. This is a testament to the strong activity in the upper end. Even Alameda and Napa counties have held well. This again reflects the strength in the upper price ranges. Solano and Sonoma have been the hardest hit with prices dipping even further in the 4th qtr. Contra Costa did well for most of the year until the 4th qtr. What these three counties have in common is that there was tremendous amount new home building over the last several years. The swollen inventories due to new homes and foreclosures have led to these price declines.
Let’s take a look at inventories. Housing like any other commodity is influenced by supply and demand. We will look at months supply of inventory December 2006 vs. 2007. The first MSI will be 2006 and the second 2007 and then the variance.
San Francisco 2.3 4.1 +1.8
Marin 4.8 5.7 +.8
Sonoma 8.1 12.0 +3.9
Napa 14.6 14.7 +.1
Solano 9.5 15.9 +6.4
Alameda 4.7 10.9 +5.2
Contra Costa 7.7 13.7 +6.0
Every county is up from last year. What is obvious is that in the counties with the smallest increases in inventory supply, median prices have held or gone up. Alameda is the only exception and that could be due to the strength of prices in northern Alameda county where inventories are close to those in SF and Marin.
Looking at the current inventories only Marin and San Francisco would be considered balanced markets. A balanced market is one with 4-6 months inventory----far lower than the national average of 10.7 months. The rest of the Bay is in double digits which is a strong buyers market. What does this mean going forward? If inventories increase there will be further pressure on prices. My view is if we look at the trends in the fourth quarter we can gain some insight into the future of inventories.
Let’s view the months supply of inventory October through December by county.
San Francisco 3.2 3.6 4.1
Marin 5.5 5.8 5.7
Sonoma 12.3 11.6 12.0
Napa 15.9 14.9 14.7
Solano 18.4 15.5 15.9
Alameda 9.2 10.2 10.9
Contra Costa 14.0 13.6 13.7
If the fourth quarter is any indication of what the first part of 2008 will look like, it could signify that we are at the bottom of this cycle. Inventories have not moved up much and in some cases have moved down. If this trend continues we could be looking at a flattening out and then it is just a matter of time before the market returns to equilibrium. It will still take some time for those markets in double digit inventories to recover, but before you go down you have to stop going up.
For buyers it is a time of immense opportunity in some markets, certainly those that have inflated inventories. These opportunities are like windows they open and close. For the savvy buyer the opportunity is now. Interest rates are at the lowest they have been in several months and could drop a bit lower, but will then rise once again.
Buyers also need to be aware that not all markets are created equal. Even in this current market we are still seeing multiple offers. They may not be going well over asking, but nonetheless they are occurring. I have attached a column by Carol Lloyd that illustrates that point. All markets are not the same even within the same city. For buyers interested in the most desirable areas in the Bay Area they may find themselves competing with others for their dream home.
Sellers need to be aware that this is not a market to try and obtain your price. I think by now most sellers are conscious that today’s world is different from that of 2005. We are in new territory. This is a market that sellers should have a reason to sell. It is not a time to test the market. It is well beyond that. A seller must price accurately and prepare their home to stand out among the competition. In spite of the times there are still opportunities for sellers, particularly the move up seller. That seller that is moving up to a higher priced home. Even if they have to take less on the home they are selling the discount in absolute dollars on the home they would be buying would be larger (i.e. if the market is off 5% the discount on a $600,000 home would be $30,000---if the home they are buying is $1,000,000 that same 5% is worth $50,000—a plus to the move up seller of $20,000). This is not a new concept. Many move up sellers benefited from this during the early 80’s and 90’s. If sellers are thinking of selling this year it is better to come on earlier to avoid the rush of listings in the second quarter. It cuts down on your competition. If the past is any indicator, best to come on not later than April. The sooner the better.
If a listing has been on the market several months it is likely it will be difficult to sell in the current market. Buyers in today’s world are looking at new listings that are coming on and those listings that have had price reductions. The best advice I could give is either reduce the current list price to adjust for the market along with making any needed improvements or withdraw the listing and wait for a more opportune market.
Back to recession vs. no recession----who cares. Most recessions aren’t called for several months after they have actually happened. If in fact we are in or going into a recession, this one should be mild, at least for the Bay Area. The Bay Area is the strongest segment of the California economy much due to the diversity of its economic base----technology, bio-med, financial, media and export/import. The positive news on the dollar is that American goods globally are more affordable, including real estate. We will see more foreign investment both from Europe, Canada and Asia. There still is a great deal of wealth in the Bay Area. Plus it is no denying, there aren’t many better places in the world to live.
As someone once said “perception is everything”. We saw how quickly the market changed this summer once the consumer began losing confidence in the economy. Until the majority of consumers begin to regain confidence it may be slow sledding for the first quarter of the year. Momentum is a two street. Lest us not forget it is a Presidential election year. It is always interesting to observe how an economy perks to life as we get closer to election. Look forward to better times beginning in the second quarter or perhaps even sooner.
