Thursday, August 27, 2009

1Q08 Piedmont Market Update

So What's Going on in this Market??

Only 11 homes sold in Piedmont this past quarter, compared to 18 homes during the first quarter of 2007 (and 21 during 1Q06). The average price per square foot settled in at $606/sf, lower than last quarter's $631/sf, but consistent with the pattern of the last several quarters. The typical home sold in 28 days for $1.609 million. Prices ranged from $815, 000 to $2.85 million, with only one home selling for more than $2 million.

Perhaps more interesting than what has sold is what has not sold. On the market are six homes in the over $2 million price range. Three of these have seen price reductions of between $400-500,000 in the past several months. And only three have sold in that price range in the past five months.

Two active listings are of particular interest, because they illustrate a bit of the story behind the Case-Schiller Index. As do we, economists for years relied on median or average prices to track market movements. Case and Shiller instead rely on same-home sales over time for ''apples to apples'' comparisons. See to play with the data for the San Francisco metro area. Two homes, one originally sold in 2002 and one in 2005, are now on the market for prices lower than those for which they were bought.

A recent Chronicle story sure woke us up: ''Home values are eroding at an accelerating rate in the Bay Area as the credit crunch and a game of chicken between buyers and sellers pushed last month's prices down nearly 15 percent and held the number of homes sold near a historic low.''

What's happening?

As I've mentioned in past updates, average and median prices in northern California were still going up because sales activity in the below $500,000 market had stalled. Many of those buyers faced tougher downpayment and credit score requirements than last summer, and a number of the sellers were ''underwater''--that is, they owed more on the property than it was worth, and they would have to take money from savings to pay off their mortgage at sale, or get the lender to agree to a ''short sale'' and eat the difference. Lenders were taking a month or two to sign off on short sales--or not. With sellers feeling unable to reduce prices to market levels, and buyers unable to offer the same higher prices they could six months ago, the market was paralyzed. What IS a market price in this environment?

Now, many of these short-sale properties have moved through the foreclosure process and are REO or real estate owned [by the bank]. The REO managers have taken over from the loan servicers and are selling at fire sale prices left and right. For instance, of the 10 sales below $500,000 in zip code 94605 in the last month, seven were REO, probate or short sales, selling at as little as 75 percent or even 65 percent of formerly reasonable asking prices. Seventy-four percent of currently pending sales under $500,000 in Berkeley and Oakland are short sales or REO. What is a market price in THIS environment? It's not what a home sold for even last week; it's what the REO guys are willing to take for the other homes on the market.

(Think about that for a minute. Three-quarters of households selling lower-cost homes in our area are facing great financial pain, whether they invited it or not. And think about their neighbors, whether long-time homeowners with plenty of equity, or recent purchasers who are making mortgage payments on homes that aren't worth what they currently owe. These neighborhood-wide effects and disinvestment are what city leaders are particularly worried about.

Contact me if you want to explore investment property--we're now seeing prices so low that rentals are again ''cash-flowing''--that is, the rent and tax benefits cover expected costs. A thoughtful market watcher outside the biz said to me last week, ''those guys [investors] are the heroes in this market.'')

In contrast, the upper-end market is relatively stable. If we look at single family homes of at least three bedrooms and two baths selling in 94610, 94611, and 94618 (Piedmont and Oakland), there have been 67 sales since 1/1, an average of 47 days on the market, and an average sales price of $1.044 milion ($437/sf). Same time last year, we saw 65 sales, in an average of 28 days on market, at an average $1.1 million ($449/sf). A modest number of these are short sales or REO--don't think our market isn't immune. About seven percent of currently pending Oakland and Berkeley homes above $500,000 are ''distressed,'' according to the listing agent, who is required by MLS rules to note if the home is a short sale or in foreclosure.

And the mortgage market chaos is being felt here. I've heard of buyers planning to write a hefty home equity line check for a downpayment on a new home before selling the old. And a day before closing, the bank says, ''that was last week. We've just reduced your line of credit by 50% this week.'' Or 80/10/10 loans locked in a month ago, but the second mortgage documents just never show up at closing, leaving the buyer to come up with $50,000 (in one case) in two days. Or lenders asking for a second appraisal a couple days before closing--or docking the existing appraisal by x%, because the broad East Bay market is considered a ''declining market'' by the GSEs.

In either case, the buyers need to find the cash to cover any shortfall, or face losing the house AND their 3% initial deposit. During last August's initial flush of chaos, I thought one of my sellers might have to step in with seller financing to cover a gap like this, but the situation resolved itself. I think we're likely to see more of these creative solutions in the coming months in our market--once lenders get stabilized enough to be clear about their constraints up front, which is not necessarily in their capacity right now.

Tough times for the buyer and the seller. Definitely a time to put your business in the hands of a thoughtful, smart agent thinking about all the angles and potential pitfalls, and communicating them clearly and with compassion.

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