Decline in home prices improves affordability

It’s no secret that we’re in the midst of the worst housing market we’ve seen in decades. The number of homes sold annually is off considerably from 2006 when the market peaked. With rare exceptions, prices have declined. According to the S&P/Case-Shiller Home Price Index, which measures the price change of the same houses as they are resold, home prices in the San Francisco Bay area fell 22.9 percent in May compared to a year ago, making it the sixth worst performing region in the country. For the Case-Shiller Index, the San Francisco Bay area includes Alameda, Contra Costa, Marin, San Francisco and San Mateo counties.

DataQuick Information Services recently reported that the median price of homes sold in the San Francisco Bay area in June dropped 27.1 percent from a year ago. DataQuick looks at nine Bay Area counties, including Solano County, where foreclosures made up 57.7 percent of all resales. In San Francisco, however, only 3 percent of the resales in June were foreclosures. It’s important to take into account that residential real estate is a local business. Looking at national and regional statistics gives you a general idea of market trends. But, it may not reflect price changes in your neighborhood. In the Bay Area, depreciation has been most pronounced in the inland areas.

For example, in Contra Costa County, another county with a high foreclosure rate, the median sale price dropped 44 percent in June from a year ago. However, the number of homes sold was up 25.5 percent from a year ago. The increase in home sales in Contra Costa County was largely due to increased affordability. Prices in the eastern part of this county have dropped as much as 40 to 50 percent over the last two years.

Investment buyers are back into the Bay Area market, picking up foreclosure properties at reduced prices to rent out to tenants. Lower home prices and relatively low interest rates make this market affordable to many first-time buyers, particularly in areas where rentals are hard to find and aren’t cheap. Rents have generally been rising over the last several years. The National Association of Realtors (NAR) is projecting a 5.3 percent average rent increase in 2008, up from 3.1 percent in 2007.

Is a turnaround in the housing market in sight?
Opinions differ as to when the housing market will turn around. Most analysts think that we have not yet hit bottom. Some think we might be close. One of the keys to the puzzle is the state of the housing inventory. In May, there was a 10.8 month supply of homes for sale at the current sales pace, according to NAR. This was a move down from an 11.2 month supply in April. When the supply reaches the 6 to 7 month level, the housing market should pick up, barring a major recession or a big jump in inflation or interest rates.

Lawrence Yun, NAR’s chief economist, thinks that pent-up demand will help fuel a recovery in the housing market. According to Yun, the current volume of home sales is at the same level it was a decade ago. But the population has grown by 25 million people since then, and there are 10 million more jobs. He believes that the housing market in many areas will stabilize by year end. Less optimistic economists see an improvement by the end of 2009.

Although inventories of homes for sale remain high, housing starts have plunged. Karl Case (S&P/Case-Shiller Home Price Index) notes that new home starts nationally dropped to 975,000 in April. They peaked at 2.27 million in January 2006. In the past, when housing starts fell from over 2 million to under 1 million, the housing market rebounded within a quarter. Case believes this could happen again if we don’t slip into a severe recession. Even so, it could take another 5 to 10 years for home prices to recover from steep declines

Should you buy now or wait?
It’s impossible to time the housing market. Despite what the economists say, we’ll only know that the market has bottomed out and turned around after the fact. So, you can wait and buy with the masses that will jump into the market with you. But, interest rates could be higher then, and you could run into more competition. Or, you can buy now, if you have a strong desire to do so, you can afford it and you plan to stay put for the long-term. Prices could dip further before leveling out or rebounding. This is not a good time to buy with the idea of selling in a couple of years. Case points out that long-term buyers who bought in the top-20 U.S. metro markets in 2000 saw their homes appreciate by 70% between then and now.

How to sell in today’s market
The best homes, in the best locations offered at the best prices are selling. But, it’s a slim market, particularly in the upper price ranges. Many upper-end buyers have homes to sell. Some are having difficulty finding financing. The credit crisis of August 2007, made jumbo financing more expensive and harder to find. Also, many homeowners who don’t have to sell now are waiting for a better market. So, some of the most desirable neighborhoods in the Bay Area are short of inventory.

You can be successful selling in this market if you’re smart about how you go about it. First, you need to assess your motivation. Do you need to sell, or do you only want to sell if you get the right price? If that “right price” is out of line with what the market will bear, you should save yourself the effort. Buyers are not overpaying. They don’t care what you think your house is worth. They know what it’s worth. Today’s buyers have the financing to make the deal work, and they study the market carefully to make sure that they don’t pay too much.

The formula for selling today is straightforward: emotionally detach yourself from your home; hire an experienced agent who will provide superb merchandising—exposure is the name of the game; put your house in top condition; price it right; and be realistic when you receive an offer from a qualified buyer. Unless you’re home is in one of those coveted locations with low inventory, you can’t afford to haggle over price with a qualified buyer if you really need to sell. There are plenty of other homes to buy. Or, they can just wait until the right one comes along, at the right price.

For help with all your real estate needs, call Dian Hymer, CRS, Associate Broker, #1 Agent in the Oakland/Piedmont Coldwell Banker Office. 510-339-4777 (office); 510-816-7076 (mobile); E-mail: dian@dianhymer.com.