No Bottoming Out for Real Estate Market as Home Values Keep Falling

If you’re watching the real estate markets, the good news is that the Federal Reserve has pledged to keep interest rates low through 2014. The bad news is that the market is going to need it. The November Case-Shiller housing numbers, released this morning, indicate that prices tumbled 3.7% from the year before. That’s below expectations of a 3.2% drop.

Even worse, it contradicts a trend in which the rate of price drops had been slowing. For several months, prices had been falling, but by a slightly smaller percentage each month — indicating a bottoming out. This latest data may be an outlier, or it may (horrors!) presage another leg down. (Housing prices are currently 32.9% off their peak).

Current speculation among housing observers is that after a lull in the processing of foreclosures due to the robo-signing scandal, we may be seeing a new flow of distressed homes coming onto the market. If that’s the case, then the newly marketed foreclosures could hold prices down for the next few months.

However, there’s a lot of optimism building in the real estate community, too, so when prices turn, they may turn suddenly. Unemployment claims, for instance, hit nearly a four-year low, while the national jobless rate is at 8.5% — not spectacular by any means but certainly better than the 9% to 10% range we’ve seen in recent years.

Sentiment among homebuilders, meanwhile, hit its highest level in four years, while the National Association of Home Builders Remodeling Index rose last week to a five-year high. For housing prices, the regional picture did not change, with Washington, D.C., a bright spot for some time, posting year-over-year increases.

Phoenix, meanwhile, is a city to watch. The metro area posted an increase in prices of 0.6% from the previous month. While the market there is still down 3.6% year-over-year, the monthly pop might indicate that sun-seekers are finally biting at bargains of more than 50% off peak prices.

Pessimism in California commercial real estate giving way to cautious optimism

A mood of optimism is evident in the California commercial real estate industry, despite the mixed economic signals of the past sixth months, according to the latest Allen Matkins/UCLA Anderson Forecast commercial real estate survey. The survey polled a panel of industry professionals on their views of how the market will change over the coming three years.

In an essay titled "California Office and Industrial Markets: A Recovery Begins," Jerry Nickelsburg, a senior economist with the UCLA Anderson Forecast, writes that despite recent events, including the U.S. economy nearly stalling, with GDP growth below 2 percent, and shaky confidence in the various stock markets, the industry's cautious optimism is driven by steady employment gains in coastal California.

Those gains, Nickelsburg says, have been seen primarily among users of office space, particularly in health care and professional, technical and scientific services, as well as among users of industrial space, including the export-related sectors and manufacturing.

The survey looked at the state of commercial real estate in seven California regions: Los Angeles, Orange County, San Diego, San Francisco, the East Bay, Silicon Valley and the Inland Empire.

The economists found that in the Los Angeles and San Diego office markets, vacancy rates are dropping, albeit by an insignificant amoung, but those surveyed remained highly optimistic. In the Bay Area, San Francisco developer sentiment was unaffected by slower economic growth during the last two quarters of 2011, and in the East Bay, sentiment remained optimistic, though slightly less so, with respect to rental rates. With regard to industrial space, the Bay Area professionals surveye were most optimistic about Silicon Valley and least optimistic about San Francisco.

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Santa Cruz County median home price comes in at $475,000 in December

Home sales in Santa Cruz County in December were brisk as median price, the midpoint of what sold, was $475,000, remaining less than $500,000 for 11 of the past 12 months. The figures come from Gary Gangnes of Real Options Realty, who noted the December volume was up 24 percent from a year ago. It was the highest since 2004, when the boom was on and the median was on its way to $775,000.

About 40 percent of the December sales involved distressed property, a little less than November, when the median was $410,000. Agents have been pressing banks to speed up approval of "short sales," accepting a price that is less than what is owed, but there were more sales of bank-owned homes than short sales. The median price for condos was $249,000 on 33 sales; 64 percent were distress sales.

Tom Brezsny of Monterey Bay Properties, closed five sales in December, more than any other agent in the county but he doesn't expect that pace to continue. "We're back to 2001 prices on single-family homes," he said. "Condo prices are back to 1999. They will be the last to go up." Brezsny said he considers the spurt of sales to be the result of tension that built up, like the shock of an earthquake releasing tension underground.

"If things were busy in December, you would see a lot in January, and I don't think you'll see that," he said.
Last month listings were down 9 percent from the previous year.That's keeping traditional buyers, what Brezsny calls organic buyers, on the sidelines."Organic buyers are not willing to buy anything that's comes on, they want more, better houses," he said. "Organic sellers are not willing to put their house on the market until they are more buyers." So who's buying? "Investors are jumping in because rents are skyrocketing," Brezsny said.

'Serious buyers were out in December," said Debra Frey of Intero, who's been working in real estate for 35 years and received the lifetime achievement award from the Santa Cruz County Association of Realtors.
Paul Bailey of Bailey Properties said investors are going after homes less than $500,000 and about 35 percent are paying cash. He had a cash buyer for apartments who expects a return of 5 percent to 6 percent. "It's a values market, not an ego market," Bailey said. "Above $800,000, buyers are not sure the values are there."

Investors are coming from over the hill and beyond. Pacifica Cos., based in San Diego and doing business as REO Seastone, bought five foreclosures, four homes and vacant land, from Bank of America at year's end. The five transactions totaling nearly $1.3 million were recorded on the same date. An affordable condo behind Target at 146 Rio Del Pajaro Court, Watsonville, which fetched $334,000 in 2006 sold for $142,500; a townhouse at 1200 Capitola Road in Santa Cruz that fetched $410,000 in 2004 sold for $210,000, and a home at 1100 White Road, Los Gatos, where the owner owed more than $900,000 sold for $199,000. Pacifica, run by the Israni family, did not return a call for comment, but according to a 2008 announcement on the company website, the family sees investments in distressed residential real estate as a good opportunity.

Other out-of-town buyers are trying their luck at the foreclosure auctions that take place Monday through Friday at 1:30 p.m. on the steps of the county government building. A bidding war broke out Friday over 194 Calabria St. in Aptos, a 2,900-square-foot house with four bedrooms and 3 1/2 baths. Listed for $799,000 and described as "stunning newer construction," there had been no takers. The lender set the opening bid at a little more than $658,000, which covered the entire debt.
About two dozen people watched in fascination as the two bidders sent the price higher, and higher, and higher - up to $711,100.

"The property's very good. It's an ideal location," said the winning bidder, a man who described himself only as a San Jose investor. He was represented by Peter Tiemann, of Santa Cruz Capital, which has bought up other distressed homes this year. The losing bidder upped the price by $100 more than three dozen times on behalf of the investor at his side."Things are slow here (compared to over the hill)," said the investor, who declined to give his name. Brezsny found the bidding war surprising. "It's indicative of how poor the choices are," he said, suggesting that discretionary sellers could improve the market by putting their homes up for sale. "The more distress sales, the more property will go down in value."

Appraiser Glenn Fuller said, "The high end is coming down faster than anyone realized." A Sunny Cove home overlooking the ocean sold for $5 million, then $3.6 million and most recently $1.8 million, he said.
"There'a huge inventory of people thinking their house is worth more than it is," he said, noting 299 homes are listed for more than $1 million but only six to seven sell at that price range in a month.

December 2011 Statistics

Single-Family Homes
Median price: $475,000 ($503,250 a year ago, $549,500 in 2009 and $450,000 in 2008)
Listings: 705 (773 a year ago, 690 in 2009 and 944 in 2008)
Sales volume: 159 (128 a year ago, 146 in 2009 and 114 in 2008)
Unsold Inventory Index: 4.4 months (6 months a year ago)
Average price: $548,333 ($578,052 a year ago)

Condos
Median price: $249,000 ($275,000 a year ago, $338,250 in 2009)
Listings: 239 (251 a year ago, 209 in 2009)
Sales volume: 33 (33 a year ago, 36 in 2009)
Unsold Inventory Index: 7.2 months (7.6 months a year ago)
Average price: $276,639 ($316,629 a year ago)

Has the Housing Market Finally Hit Bottom?

Has the U.S. housing market hit a bottom? Do we have further to go? When will a recovery start? These are the questions every homeowner and real estate investor are currently asking themselves — or should be.


Wall Street firms have optimistically been betting that the bottom’s here. Research firms like Zelman & Associates predict the sector will pick up this year and hedge funds have been jumping into real estate-related investments from brick-and-mortar building purchases to shares of home builders stocks. In December Goldman Sachs Group released a report stating that “The home price bottom [is] in sight,” according to my colleague Agustino Fontevecchia.

Indeed, national home price data indicates that the worst of the catastrophic home price implosion is behind us. Clear Capital, a Truckee, Calif.-based real estate research firm, reports that 2011 saw a national decrease of 2.1% in home prices when compared with 2010. While still a loss, it’s a measly drop compared to the double-digit plunges felt in the years before. For 2012, the firm’s Home Data Index (HDI) Market Report also predicts a humble 0.2% gain across all markets. “Overall, 2011 was a relatively quiet year for U.S. home prices compared to the last five years,” said Dr. Alex Villacorta, Clear Capital’s director of research and analytics, in the report. He further notes that “the current balance the market has found will continue through 2012.”


What does all of this mean? Housing from a national standpoint is flattening out; the macro level data suggests we could possibly be at the bottom or near it.


A Tuesday report from Zillow, a publicly listed Seattle, Wash.-based real estate data and listing site, shows that November home values “remained essentially flat” from October of 2011 through November, falling only 0.1%. The Zillow Real Estate Market Report, which analyzes home values in 165 metro areas, notes that the addition of 200,000 jobs in December, improving consumer confidence and stronger retail sales indicate that home sales may be more consistent and more frequent in 2012. “With stronger home sales, we’ll see a reduction in the amount of vacant housing inventory and an improved ability to absorb foreclosed homes. This increased demand will eventually start to put a floor under home values later this year,” the report says.

It sounds rather promising, doesn’t it? For Wall Street firms snapping up stocks and/or using the market as an indicator for economic activity, it is. For homeowners, however, a different story prevails.

If you are a prospective home buyer or seller wondering if now is the time to make a play, the decision should come down to something much more tangible than a “flat” national market number. It should come down to location.

Clear Capital warns that the relatively flat national average is composed of metro markets that have been anything but: “Individual markets reacting to their local economic conditions continued to exhibit a wide range of performance levels in 2011, with only 12 of the top 50 metro markets (24%), returning year-over-year price movement that can be considered stable,” the HDI report cautions. Stable price movement means price swings of less than 2.5%. The company believes only 40% of the country’s largest metro areas will be stable in 2012. Among them: Denver, Colo., San Jose, Calif., Boston, Mass., Oklahoma City, Okla., and San Francisco, Calif.

As for the areas where prices may actually appreciate the most this year, the firm expects Orlando, Fla. home prices to rise 11.7%, hard-hit Bakersfield, Calif. 11.1%, government jobs-driven Washington, D.C. 9.3%, foreclosure-riddled Phoenix, Ariz. 8.9%, and sales-heavy Miami, Fla. 8.8%.


Markets that will experience further price drops this year include Atlanta, Ga. (14.4% anticipated loss), Los Angeles, Calif. (10.3% anticipated loss), Seattle, Wash. (7.5% anticipated loss), Oxnard, Calif. (6.7% anticipated loss), and foreclosure capital Las Vegas, Nev. (6.4% anticipated loss).

Zillow’s November data shows price fluctuations from metro area to metro area, as well. It clocks 66 markets where home values depreciated in November, 66 markets where values rose and 33 where values simply remained flat. Zillow’s economists caution that elevated foreclosure rates and negative equity will continue to impact local markets in 2012, meaning still lower values yet to come in some markets. For that reason, the company doesn’t expect a true stabilization in home values to occur until the end of this year or early 2013.

I think they are right. Even if the worst of the price depreciation hemorrhage is over, we still face a wave of distressed inventory undergoing the tedious foreclosure process and an estimated shadow inventory of 1.6 million bank-owned or distressed homes that have not yet hit the sale block, according to CoreLogic. It will mean millions of discounted units flooding markets already saturated with more units than buyers, dragging overall home prices down in terms of both listing prices and property appraisals.

So whether a bottom in housing is here or not depends on the local market. Most foreclosure-riddled markets will likely have years to go before values meaningfully move upwards. Markets where employment is plodding back and/or where overbuilding didn’t occur in the mid-2000s will and are showing more promising, more stable prices. ”It will be very important for consumers to draw a distinction between the end of sustained home values declines, which are maybe a year away, and the return to normal market conditions with historically normal appreciation rates,” Zillow notes.

Huge Loss in Home Values Craters Bay Area Economy

Bay Area homes have lost more than a third of a trillion dollars in value since the housing bubble burst about four years ago. And in the process, they have taken a big chunk of the economy with them.


During the boom, homeowners borrowed against that mountain of money, fueling a huge surge in everything from yacht sales in Silicon Valley to home heating upgrades in Antioch. Later, when home prices collapsed, their loss of money and confidence crushed those same businesses. Adding more strain, while the equity went away, the debt remained, further hobbling those who hung on to their homes.


While the devastation of the housing crisis has been well reported — foreclosures; people stuck in homes they can’t sell; houses sold for a fraction of their value — one issue that has received less attention is the remarkable loss of housing values and its impact on the economy. Home equity loans, for example, are running at about one-tenth the level they hit four years ago.

But it’s probably not overstating the issue to say that the economy’s ultimate recovery depends on restoring stability to the housing market. “Consumer spending won’t fully recover until the housing market stabilizes and people feel that their main assets — their home — will grow in value,” said Jed Kolko, chief economist with the real estate website Trulia. And consumer spending makes up about two-thirds of the American economy.

Reversal of the “Wealth Effect”
Homeowners spending freely during the bubble because their home equity made them feel rich, the loss of equity when the bubble burst “magnified the income and jobs effect in the recession,” he said. “Both of those hold back consumer spending. It especially hurt industries that served a local market — retail, restaurants and local services.”

The loss in home value in five Bay Area counties from 2007 to 2011, calculated by DataQuick for this newspaper based on the average price per square foot paid for housing, was $387 billion, a 33 percent decline. That figure is necessarily an estimate, because it’s based on the value of houses sold, and the types of homes sold in both periods.

Contra Costa County was hit the hardest, followed by Alameda, Santa Clara, San Mateo and San Francisco in that order. There was a wide variation within counties, with some areas hit harder than others.
From 2007 to 2011, homes in Oakland lost an average of $350,000; Concord $289,000; San Jose $267,000 and San Francisco $205,000, according to an analysis by the San Diego real estate information company. That was equity homeowners tapped for kitchen remodels, new boats and trucks, vacations and college tuitions. It also served as a security blanket for those nearing retirement.

Businesses Struggle
The collapse has hit business hard — everyone from remodeling contractors in the wealthy enclaves of Silicon Valley to heating and air conditioning installers in hard-hit Antioch have felt its sting. “It’s all changed since the equity money died,” said George Sikich, a yacht and ship broker whose Bay Area business dramatically slowed when the housing bubble burst. “There’s no doubt — the business is down.”

Four years ago, Sikich’s customers were only thinking about buying a bigger boat than the one they had. “They were using their home equity, buying boats a lot. They had an ATM in their home,” he said.
Since 2008, boat prices have plunged along with sales, he said. “I have a little market niche and I expect to muddle along and be OK,” he said. “I don’t see things changing a lot until we see the money flowing again. I don’t see things turning around for a year to two.”

The steady slide in home value has also slowed real estate sales. The Santa Clara County Association of Realtors dropped from 9,370 members in 2007 to 6,200 today, the association reported. “People have lost confidence,” said Ken Rosen, chairman at the Fisher Center for Real Estate and Urban Economics at UC Berkeley. “No one thinks prices go up any more.” But housing prices already are beginning to stabilize in some parts of the Bay Area, he said.

That can’t happen soon enough for Jeff Scalier, who owns Blue Star Heating & Air Conditioning in Antioch. Scalier said he’s doing mostly repairs to furnaces that should be thrown out, and installing few new furnaces.
“In the old days, one or two people a week would drop their credit card down on the table and buy a new air and heating system for their families. Now it’s more ‘How much to fix it?’ And when you give them prices to fix it, they always cringe. No one asks to replace it. No one upgrades anymore. People only buy what they need to buy and very little else.”

Scalier says the company he worked for five years ago is out of business, as is one of his competitors. His business “went from having work every day, day in and day out, to the point where you don’t have work every day, you don’t know if you have work for the rest of the week. And if you have work, there’s generally less profit.”

Wary Consumers
Taxable sales, an indicator of business health and consumer spending power, were down 17 percent in Alameda County and 14 percent in Contra Costa County between the third quarters of 2007 and 2010, the latest period for which the Board of Equalization has data. There has been a recovery since a low in 2009, but consumer spending has undergone a permanent change, according to some economists.

“Consumer spending is going to be lower going forward for two reasons,” said Jon Havemen, chief economist with the Bay Area Council’s Economic Institute. “Consumers have waked up to the fact that ‘Wow, I need to save for retirement, and not only do I need to save, but I don’t have all this money in my house.’ ”

Fewer Lines of CreditNew home equity lines of credit originated by banks have plunged in Santa Clara, San Mateo, Alameda, Contra Costa and San Francisco counties by nearly 90 percent, from $6.1 billion issued in the second quarter of 2007 to $674 million in the third quarter of this year, according to DataQuick. That has starved remodeling businesses — among others — for customers. The East Bay has seen a 37 percent drop in the number of specialty contractors since 2007; the Silicon Valley has seen a 28 percent drop.

Antonio Perez, 43, of San Jose, had a flourishing custom cabinet business until work dried up early in 2008. His business is shuttered and he’s back in school, taking courses in San Jose State University’s business department. “A lot of people I know in the industry are forced to do things they’ve never done before, and take jobs they had never done before. My brother, one of the greatest finish carpenters I know of, is reduced to building fences,” Perez said.

“It’s rough to watch — such fine talent that used to work for me reduced to lot of menial tasks. Someone who spent his whole life in a trade, refining his skills, and there’s no demand for it. You can have the greatest skills, but it’s all supply and demand.” The struggling small-business man is sometimes also a struggling homeowner wondering when the spiral of equity loss, debt, business hardship and job loss will end.

If there’s anything positive to say about the state of the housing market, it’s that if you have the money, it’s a great time to buy. “We’re going to see prices stabilize,” said Rosen of UC Berkeley’s Fisher Center. “It’s already happening in pockets like Silicon Valley and San Francisco. If you want to buy a house, it’s probably the best time in California in 30 years.”