Thursday, August 27, 2009

2008 East Bay Market Update--Are We Done Yet?

While the Piedmont market has weathered the national real estate bust remarkably well, we're not immune from the pressures swirling about us, as recent data illustrate.

Through 2008, the average price of a Piedmont home settled in at $1.575 million ($583/sf), down about 3 percent from $1.62 million ($612/sf) in 2007. The typical home sold in 26 days for just a bit below the asking price.

The number of transactions, 76 through the year, was down 30 percent compared to last year (and down 40 percent compared to 2005's peak). By themselves, fewer sales wouldn't necessarily affect buyers' and sellers' outcomes directly. But they directly affect the City's transfer fee income (we've seen roughly $55 million less in dollar volume this year compared to last, according to Multiple Listing Service statistics), and they certainly reduce the net income of real estate agents, stagers, title companies, and fix-it-to-sell contractors. As is the case across the roiling economy, strong market players will increase market share; weak ones are already out of business, and will realize it soon enough.

We saw a slip in home prices in the third quarter of 2008-down a bit on a price per square foot basis from the $600/sf that's been the norm for a couple of years now. The fourth quarter, however, saw a slide in average prices (as well as median prices): The average home sold for $1.085 million ($512/sf), compared to $1.69 million in 4Q07. Real estate markets, ours included, have been hit from many sides-unexpected unemployment, dearth of financing for high-end homes, declining equity making move-up buying more difficult, and a general inclination to sit out the chaos on the sidelines.

Of the 16 homes sold last quarter according to the MLS, only one home sold for over $2 million (three more are currently pending), while 13 sold for less than $1.4 million. Homes that did sell went quickly-in an average 19 days on the market.

You might think, "well, maybe only small homes sold this quarter." But in fact the average size for both 4Q07 and 4Q08 was 2600 sf. Perhaps more long-held homes in need of updates sold this quarter, partially explaining the drop in prices. Fundamentally, however, there's no doubt that some sellers are holding their homes off the market in hopes of better conditions, while buyers are postponing plans in case the market and economic conditions further deteriorate.

A big contributor to the trends is the shortage of financing for high-end buyers. As discussed last quarter, financial institutions have pulled way back on their willingness to extend credit for real estate. In response, the federal government created an emergency facility to buy home loans of up to $729,000 through the end of 2008. Lenders relaxed, knowing that they could offload these loans from their books with ease, but rarely would extend credit for the typical Piedmont buyer, who might have $500,000 in cash but still might need a $1.1 million loan. Complicating matters for high-end buyers, that loan limit declined to $625,000 on 1/1, and buyers needing more than that are having a hard time getting credit, or are paying high rates to secure it, or both.

Outside of our immediate market, the news is grim. Throughout the entire East Bay, 71 homes sold in the fourth quarter for over $1.5 million, our average sale price for 2008; there are 146 currently on the market, and nearly seventy over-$1.5 million homes have come off the market this quarter.

The Oakland market continues to be driven by bank-owned ("REO") homes, and by homes likely to sell for less than is owed on the property ("short sales"). Toward the end of the year, upwards of 80 percent of homes going into contract under the $500,000 price point in Oakland fell into one of these two categories, and a surprising proportion of more expensive homes were distressed as well. Median sales prices in Alameda County were down 37 percent while those in Oakland were down 60 percent between November '07 and '08.

The number of home sales in Berkeley is off by about 35 percent in 4Q08 compared to the same period last year, and prices are down about five percent. Substantially more homes came off the market in the last quarter as sold during that window.

San Francisco finally lost its immunity. Median prices there dropped 19.8 percent between November 2007 and November 2008 according to the CA Assoc. of Realtors (they'd dropped less than eight percent in the year ending June '08). A startling graphic in the New York Times over the holidays (see related story for a link) indicated a 31-percent drop in home prices between October '07 and '08 in the San Francisco Bay region (compared to an 18-percent drop among 20 cities across the country).

Fundamentally, the functionality of homes in the Bay Area has not dropped by 20, 40 or 60 percent. But the prices garnered by those who had to sell in recent months declined dramatically. Many of these desperate sellers are the same lenders we still look to for our real estate financing.

So what's next? Who could know? Who could have thought that the stock market would have declined so abruptly? Policymakers in Washington and around the world are furiously attempting to stem the tide, inject trust and confidence in markets, and avoid a downward spiral in the economy. The rate of price declines in a number of the worst-hit metro markets appears to be slowing, so perhaps the bottom of the curve is near.

At the end of the day, a home is a hard asset that can shelter you and yours for many years to come. And that is worth a lot.

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