Housing Market Gain Momentum in 2012

The Bay Area housing market is seeing the usual year-end slowdown as buyers, sellers and yes – even agents – turn their attention to the holidays, family and friends, and last minute shopping. There are pockets of activity here and there as focused buyers compete for limited inventory, determined to wrap up transactions before 2011 closes for tax purposes. But for the most part, the year is ending fairly quietly as always.

2011 has been a wild rollercoaster ride for the nation’s housing market, the economy, the financial markets and geopolitical events. Volatility is the new normal, as some Wall Street pundits have observed. Still, through all this, there is reason for hope that the real estate sector could see better days very soon.

Economic indicators here in the U.S., as well as corporate financial reports, continue to point higher. The job market, consumer confidence, and consumer spending all continue to show decent improvement as the year draws to a close. All of these indicators are critical for a healthy housing market.

The labor department reported this week that new jobless claims hit a 3-1/2 year low last week, adding further evidence that the economy may be gaining momentum. Initial claims for state unemployment benefits dropped to a seasonally adjusted 364,000, down 4,000 from the previous report. That was the lowest amount since April 2008. In November, the unemployment rate also dropped to 8.6 percent, a two and a half year low.

Also reported this week, a widely followed measure of consumer confidence showed solid improvement. The Thomson Reuters University of Michigan’s final reading on the overall index on consumer sentiment rose to 69.9 points in December from 64.1 the previous month, a sign that Americans are feeling better about the economy’s prospects for 2012.

Finally, the Commerce Department said that the nation’s GDP grew at a 1.8 percent annual rate in the July-September quarter, down from the previously estimated 2 percent. Spending on health care dropped by $2.2 billion to drive the revision slightly lower. But encouraging news in the report showed that spending on durable goods was stronger than previously estimated, an indication that consumers still have a strong appetite to spend their money despite the economic challenges.

While the recent reports all indicate the economy could be gaining momentum, we know that there are still economic headwinds that could slow the economy and the housing recovery – the European debt situation, the squabbling in Washington and the still high unemployment rate. Nonetheless, we’re moving in the right direction. And if we see this trend continue, it bodes very well for our housing market here in the Bay Area in 2012.

Thank you for taking the time to read Weekly Market Watch throughout this year. I really appreciate your interest and your feedback. I hope you have a wonderful holiday season and best wishes for a happy and healthy New Year!

Between the euro zone debt crisis, the sluggish economic recovery here at home and the bickering in Washington, we’ve certainly had a share of bad news this year. But there were encouraging signs in recent weeks that the tide could be turning on the economic and housing front.

Pending home sales both nationally and in California shot up in October, the most recent figures available. We also learned that the economy grew faster than expected. And unemployment actually moved lower last week as well – all very positive signs for the real estate recovery.

Nationally, pending sales rose 9.2 percent in October compared to the same month a year ago, according to the National Association of Realtors. Meanwhile, the California Association of Realtors reported that pending home sales in our state were up for the sixth straight month in October, climbing 3.1 percent from the previous month and 10.7 percent from a year ago.

A sustainable recovery in the housing market depends a great deal on the labor market bouncing back. And last week we saw signs that could be starting to happen, albeit slower than any of us would like.

The Labor Department last week announced an unexpected drop in the unemployment rate in October to 8.6 percent from 9 percent, raising hopes of a solid recovery. Although some of the improvement was due to a contraction in the labor market, the country did add 80,000 jobs, marking 13 straight months of employment gains.

Finally, U.S. manufacturing expanded at a faster rate in November than expected and the overall economy grew for the 30^th consecutive month, according to a closely watched index released last week by the Institute of Supply Management.

All of this is not to suggest that the economy and the housing market are out of the woods yet. But the combination of positive economic trends – coupled with strong corporate earnings reports through much of this year – certainly gives us reason for optimism as 2011 comes to a close. If these trends continue into the new year, they will go a long way toward reigniting the housing market across the country.

One final note: Getting Congress to agree on anything these days seems virtually impossible. So it was all the more surprising – and encouraging – when the U.S. House of Representatives and the Senate pulled together a couple of weeks ago on a critical piece of legislation returning the  maximum loan limit on FHA-backed mortgages to $729,750.   

The bill that was passed by Congress and signed by President Obama will give more homeowners access to lower cost loans at higher limits, especially necessary in high-priced markets like the Bay Area. Moreover, it was an encouraging sign that our Congressional representatives understand how fragile the housing recovery is right now and the importance in doing whatever they can to create sustainable growth.

The limit on the loans, known as FHA-conforming loans, had been $625,500 after a temporary increase on limits expired on Oct. 1. The House voted in favor 298 to 121, with 101 Republicans voting against the bill. The Senate voted 70 to 30 in favor of the bill.  The vote raising the FHA limit was a big victory for the housing industry and for consumers. Credit goes to industry groups like the National Association of Realtors and the National Association of Homebuilders for making persuasive cases on Capitol Hill in recent weeks.

“Restoring the higher loan limits for the FHA will provide homeowners and homebuyers with safe and affordable financing, while providing a much-needed boost to housing markets all around the country,” James Tobin of the National Association of Homebuilders wrote in a letter to Republican Speaker John Boehner.

Housing recoveries – like housing downturns – never move in a straight line. As much as we’d like a clear, fast turnaround, real estate cycles are never that way. They seem to have lots of fits and starts, two steps forward and then one step back. We’re reminded of this economic truism as we looked at the Bay Area housing market over the past month.

As DataQuick, the La Jolla-based real estate research firm, reported recently, Bay Area home sales increased in August – the most recent figures available – by a solid 12.2 percent from a year ago. But the good news was partially offset by the fact that median sale price dipped nearly 4 percent with distressed property sales accounted for nearly half of the sales. It was the 11^th straight year-over-year monthly decline in prices.

Clearly, bargain-hunting buyers chasing distressed properties continue to be a driving force in the market. That’s as true here in the Bay Area as it is in markets across the country. And it’s not just entry-level prices that are attracting bargain shoppers. An REO listing in our Southern Marin office priced at $858,000 received 16 offers and will sell for substantially over list price.  We’ve seen similar stories play out in the East Bay and South Bay as well.

But this doesn’t tell the whole story of what’s happening in the Bay Area housing market. It’s not just the bank-owned and short-sale properties that area getting buyer attention. As I mentioned in my last column, we have a real, honest-to-goodness housing shortage in many of our communities – at least a shortage of reasonably priced, well-presented homes. And it’s not just at the lower price ranges.

A $2 million plus home went into contract immediately following the broker’s open house last week in Mill Valley, continuing to prove there are buyers for homes that are perceived to be good values, even on the high end.   Another one for $1,350,000 received offers right away.

With the traditionally quiet end of summer behind us, Bay Area Realtors are gearing up for what could be a busy fall selling season. But according to many of our local offices, one obstacle standing in the way of a solid market isn’t a lack of buyers – but a lack of inventory. There just aren’t enough good, well-priced homes for sale to meet buyer demand.

Considering the downbeat national housing market news coverage, you might think that more homes on the market is exactly what we don’t need at this time. But the Bay Area is different from much of the country. In many of our markets, buyers are continuing to snap up homes that are seen as good values. The result is that a number of listings are attracting multiple offers and many buyers are frustrated by lack of supply. Agents only wish there were more homes on the market.

I know this defies logic. After the financial crisis in Oct 2008, I was thinking it would probably be a much slower market for several years.  However, I thought it might be due to homes not selling.  I never thought that we would have the kind of demand we see today and that weaker sales numbers would be from a lack of inventory rather than a lack of buyers.

It’s been widely reported that places like Palo Alto have a shortage of inventory. But the problem goes beyond the heart of Silicon Valley. Even outlying regions of the Bay Area could use more homes to sell, whether they are entry-level properties, move-up homes or even high-end Preview listings.

Active inventory is down 34.5 percent in the East Bay in September from a year ago, 44 percent in San Francisco, 49 percent in Santa Clara, 35 percent in San Mateo, 25 percent in Santa Cruz, 39 percent in Monterey, 42 percent in Marin, and 39 percent in Sonoma.  In most cases, the average sale price has held steady or even gained.

My guess is that a lot of potential sellers are sitting on the sidelines waiting for a number of issues to sort themselves out, whether it’s the direction of the housing market or the volatile financial markets. While the housing market was quiet as we closed out summer, the stock market has been anything but. This past week was particularly bumpy as the major indexes fell 3-4 percent on fears of a new recession and European debt contagion.

So where does this all leave us?

Despite the volatility of the financial markets we’re not seeing current buyers walking away. Given the global economic headwinds buffeting the financial markets, we’re likely to continue experiencing volatility for some time to come. Still, I think most homebuyers in the Bay Area are looking past the week-to-week gyrations of the stock market and focusing on the long term. If anything, the recent dip in the stock market makes real estate all the more attractive as a long-term investment option.

On the seller’s side, my sense is that we’ll start seeing more people coming back into the market to list their homes this fall, once they begin seeing the real demand that’s out there for well-priced properties. This is particularly true for those sellers who have lived in their homes for a number of years and, despite declines in prices in recent years, stand to walk away with significant gains when they sell.

One final note: As every Realtor knows, it can be hard enough to hold deals together in this turbulent market without added obstacles. But recent national reports say that mortgage financing and appraisal hurdles are increasingly knocking deals out of escrow and possibly holding back a housing market recovery.

Time magazine reported that 16 percent of all sales contracts failed in July because the buyers could not secure a mortgage, up from 4 percent just two months earlier. In other words, one out of every seven contracts is going down due to problems that buyers are having getting mortgages.

Difficulty in securing financing isn’t the only hurdle facing buyers. Low appraisals are also blocking sales, according to a recent article in the Wall Street Journal. According to the Journal’s reporters, real estate appraisers, who were criticized by some for being too generous in their property valuations before the housing market fell, may be going overboard in the other direction.

In talking with my offices around the Bay, this doesn’t seem to be a significant problem for us yet. But it’s worth keeping our eyes open to the potential. The last thing we need at this time are more roadblocks to home sales.

While it’s important for lenders and appraisers to be cautious and prudent given the problems of the past, they also need to make sure that the pendulum hasn’t swung too far in the other direction. The recovery of the housing market is too important to throw more hurdles in its path.

Anyone who has followed this column knows the many challenges facing the nation’s housing market today. While some areas of the country, including Silicon Valley, have held up reasonably well, much of the country is still struggling to recover from the sharp downturn of recent years.  The housing market is arguably the most important foundation of our nation’s economy. Without a solid, sustainable recovery in real estate it will be difficult for the overall economy to see strong growth once again.

With that in mind, our parent company, Realogy Corp., has issued a formal request to President Obama calling for a White House summit on housing to address some of the major hurdles holding back the housing market. Richard Smith, chief executive of Realogy, urged the President and his Administration to seek recommendations from real estate business leaders to help stimulate a sustained housing recovery.

As Smith noted, housing has an enormous impact on our nation’s GDP and given its substantial influence on all aspects of the economy, he believes it warrants special attention from the White House.

The key to the proposed White House summit on housing would be its emphasis on bringing together real estate business leaders to make actionable recommendations designed to stimulate the growth necessary for a sustained recovery in housing, which would have an ensuing positive effect on job creation and the broader U.S. economy.

Frontline business leaders from the residential real estate industry would add a valuable perspective to the process, and the summit would give the Administration the benefit of “unfiltered, real-time market feedback” from residential brokerage operators, real estate franchisors, homebuilders, mortgage lenders and other related industry groups.

In a letter sent to the President last Friday, Smith concluded by saying “your leadership on this issue would bring together the top business minds of the residential real estate industry at a time when practical business experience may very well offer the guidance necessary to stimulate housing, and thus, the U.S. economy.”

I’m proud that Coldwell Banker is taking a leadership role in finding solutions to get the nation’s real estate market humming again. While there are many challenges facing our economy, much of it begins and ends with housing.

Maybe we just had a late spring. That’s one possible explanation for what we’re seeing in the Bay Area housing market. Normally, the real estate market picks up in March, April and May and then takes a breather over the summer for vacations, graduations, weddings and other activities. But this year it seems like that’s being reversed.

After a modest spring, the local housing market has been heating up this summer with strong sales in June and even into July in many areas. Sales activity has been especially robust in the higher end of our markets – over $1 million in much of the Bay Area and $2 million and up in San Francisco.  But even the mid-level market was surprisingly active (more on that below).

As I was combing through last month’s sales figures, I noticed an interesting trend: In most of our Bay Area markets in June we had the highest level of million-dollar home sales since the summer of 2008. You might recall that was just weeks before the collapse of Lehman Brothers sent the financial markets into a tailspin and pushed our economy into the “Great Recession.” Now, three full years later, we’re seeing a much brighter picture for the local housing market.

Coldwell Banker Residential Brokerage will be issuing our luxury market reports next week, but I thought you’d be interested in getting a sneak preview today. Here are a few highlights from various markets:

• East Bay – Sales of million-dollar homes jumped 26 percent in June from the previous month to 159 transactions, the most since last summer. Even more impressive, multi-million-dollar sales quadrupled from a year ago to 16 last month. The median price was also up nearly 13 percent;
• Silicon Valley – There were a whopping 284 million-dollar home sales in June, up from 230 the previous month and the highest level the region has seen since June of 2008. The very high end of the market – those homes over $2 million – saw sales spike to 52 from 36 a year ago;
• Marin County ­– Million-dollar sales totaled 80 in June, up from 60 in May and the most that county has seen since July of 2008;
• San Francisco – $2 million sales spiked from 50 in the first quarter of the year to 86 in the second quarter, the most since 2008. And sales of $3 million-plus homes more than doubled to 33 in the second quarter (April-June) vs. 16 in the first.

The high-end of the market is not the only segment doing well. The entry level and mid-level markets have shown solid signs of improvement as summer rolls along. Bay Area home sales overall rose sharply last month to the highest level for any month since June 2010, when expiring tax credits gave housing a final boost, according to DataQuick, the La Jolla-based research firm.

The only thing holding back the lower end of the Bay Area market in many cases has been a lack of inventory. “Inventory remains elusive,” Sebastopol manager, Stephen Liebling, said in speaking for many of the managers around the Bay. Because of the shortage of good, well-priced homes, multiple offers are picking up in many communities. In nearly every one of our regional markets, you can almost be assured of multiple offers for a well-priced, well-located, and nicely staged home in the entry price level for that market.

Clearly, the Bay Area’s relatively strong economy  – especially the robust tech sector ­– is playing a key role in our housing market. As Inman News put it in a Friday article, “Tech is back — and tiptoeing along behind it, at least by some measures, is the San Francisco-area real estate market.”

The Inman story recounted what a lot of the local media have discovered in recent weeks: That the tech sector is giving new life to housing in many parts of the Bay Area. “Tech jobs are on the rise, and with the increase in high-paying jobs, we are seeing more and more younger, first-time homebuyers,” one San Francisco agent noted.

“Indeed, technology-based industry — which drove Bay Area home prices to fabled levels during the headiest days of the housing boom — seems to have found its legs,” Inman reported. At the end of 2010, San Francisco had an estimated 30,700 tech jobs, compared with the 32,800 at the peak of its tech boom in 2001, according to an analysis by real estate firm Jones Lang LaSalle.

This all is not to suggest the housing market is completely out of the woods. Real estate is very much a local business. And while many of our markets are on the mend, others are still softer than they were a few years ago. And there still is an overhang of distressed properties that will continue to come on the market as bank owned REO sales in the months ahead.

While we take quite serious the nation’s fragile economy, and most recently the stalled talks to come to terms with our national debt limit, we can be thankful for the Bay Area real estate activity that continues to move forward.  We are fortunate to live and work where we do.  The limited housing stock, diverse job base, incredible universities, and great weather are all factors that help homebuyers focus on these terrific home values and low mortgage rates.

The median price of single-family houses sold in Palo Alto, home of Facebook Inc., climbed 20 percent in May from a year earlier to $1.63 million, the biggest jump since 2008, according to preliminary figures from research company DataQuick. In Mountain View, the base of LinkedIn Corp., prices rose 3.1 percent to $957,500, the ninth year-over-year gain in 12 months.

The advances are defying a U.S. housing slump that has sent national values to an eight-year low. Share sales such as the IPO of LinkedIn — which doubled on its first day of trading — and an expected offering from Facebook will fuel a boom in some Silicon Valley cities into 2013, said Kenneth Rosen, an economist at the University of California, Berkeley.

“It’s just the beginning of the story and I suspect we’ll see an explosion in the next couple years,” Rosen, chairman of the school’s Fisher Center for Real Estate and Urban Economics, said in a telephone interview. “You’ve got young people with real money, and it’s not surprising they want to have a house.”

IPO Filings

Almost 300 companies have filed for IPOs in 2011, the most for any year during the same period since 2000, and more than 10 percent of those are in California, according to data compiled by Bloomberg. Silicon Valley is the U.S. hub for early-stage companies, receiving almost 40 percent of the $23.3 billion in venture-firm investments last year, estimates from the National Venture Capital Association show.

Pandora Media Inc. climbed 8.9 percent today as shares began trading on the New York Stock Exchange. The online radio company, based about 35 miles (56 kilometers) north of Silicon Valley in Oakland, raised $234.9 million in its IPO. Shares were priced at $16, above the expected $10 to $12 range.

The real estate gains in Silicon Valley, located primarily in the San Jose metropolitan area, are mostly occurring in towns where million-dollar values are already the norm. The median price in Cupertino gained 12 percent last month from May 2010 to $1.08 million, and values in Saratoga rose 4.7 percent to $1.62 million, according to San Diego-based DataQuick.

U.S. Price Declines

Housing in much of the rest of the nation is struggling as foreclosures and unemployment of more than 9 percent weigh on consumer sentiment. Home prices in 20 U.S. cities dropped 3.6 percent in March from a year earlier to the lowest since 2003, according to the S&P/Case-Shiller index of property values. The measure has declined 33 percent from its 2006 peak.

In Palo Alto, traffic at home showings has tripled in the last three weeks, with the average age of potential buyers dropping from about 50 to the mid-30s, said Daniel Siciliano, an associate dean at Stanford Law School who attends the tours because he’s in the market for a bigger house.

“People at startups have a lot of pent-up demand and tend to spend a portion of their new liquidity pretty quickly,” Siciliano said of his newfound competition for residential real estate. “They want to manifest their wealth.”

Past Silicon Valley property booms started in Palo Alto, adjacent to the Stanford campus, and Cupertino, home of Apple Inc. (AAPL), because of those institutional links and their coveted public schools, said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. Buyers from China have also been drawn by education resources in prestige valley locations and pushed up demand.

‘Happening Place’

“We’re a happening place because of the university and a lot of the folks that have been buying are relatively young,” said Levy, who has viewed downtown condominiums selling for double what he paid in 2005. “We have the best train service to San Francisco. I can be downtown in 35 minutes.”

Sean Scott, head of sales for Redwood City-based software firm Ingenuity Systems Inc., looked at a four-bedroom, two-bath home in Palo Alto last month priced at $1.8 million. The house has “soaring ceilings and generous living spaces,” two patios and a “lush backyard garden,” according to a marketing flyer.

A sale is pending for more than 20 percent above the asking price, or at least $2.2 million, after five bids were received, said Denise Simons, the listing agent at Alain Pinel Realtors.

“The market seems to be returning to the crazy days and the question is whether or not it is a false recovery or a sustained recovery,” Scott said in an e-mail after viewing two more homes at $1.25 million or more, and declining to make any offers. “I suspect that it is a sustained recovery, given the planned liquidity events with social-networking companies.”

Facebook IPO

Speculation that Facebook will go public in the next year is mounting even as the world’s largest social-media site remains silent about its plans. The company may have an IPO in the first quarter of 2012 with a valuation as high as $100 billion, cable channel CNBC reported June 13, citing people familiar with the matter.

Some investors have already cashed in equity in their companies through private share sales, boosting Silicon Valley housing demand and contributing to price gains, Rosen said. Stakes in closely held firms can be sold on secondary exchanges such as SharesPost Inc., which connects buyers and sellers. The exchange values Facebook at almost $53 billion.

Shares granted to employees of public companies can’t be sold until 180 days after the IPO, under U.S. securities rules.

New Millionaires

“You will probably see hundreds, if not thousands, of newly minted millionaires in the next two or three years,” said Steve Eskenazi, a tech investor in Hillsborough, north of Palo Alto, where the minimum lot size is a half acre (0.2 hectare). He sold his portion of an online advertising network to Sunnyvale-based Yahoo! Inc. in 2007.

“Most people in their 20s who find themselves millionaires feel it’s their inalienable right to buy real estate, and they’re typically not price sensitive,” Eskenazi said.

Facebook founder Mark Zuckerberg, 27, bought a house this year in Palo Alto, said Larry Yu, a company spokesman. He declined to disclose details. Zuckerberg paid $7 million for a 5,000-square-foot (465-square-meter), seven-bedroom home in a “leafy and affluent” neighborhood, the San Jose Mercury News reported May 5, without saying where it got the information.

The purchase was made before Facebook’s scheduled move to Menlo Park, just north of Palo Alto.

15 Miles

As more firms go public and workers cash in shares, real estate within 15 miles of the office will climb, said Rosen, who gave a presentation at Google Inc. (GOOG)’s Mountain View headquarters before the company’s 2004 IPO to educate employees on housing. Sales are usually concentrated in the “middle to upper end,” he said.

In Cupertino, about 12 miles from Palo Alto, a three- bedroom home listed for $908,000 got more than a dozen offers and sold for $950,000 on June 8, said Albert Kao, an agent at Giant Realty Inc. in the city. The prior owner, who bought the property in 2002, decided to sell after her children graduated from the public schools. She made a $290,000 profit before commissions, Kao said.

Lower-priced areas are still struggling with weak demand. In all of Santa Clara County, which encompasses some Silicon Valley cities, prices decreased 5.1 percent in May from a year earlier to $498,000 as distressed sales pulled values down in the broader market, DataQuick said in a report today. The drop was smaller than in the rest of the San Francisco Bay area, with the nine-county median in the region tumbling 9.3 percent.

Groupon, Zynga

Groupon Inc., an online coupon provider based in Chicago, filed for an initial share sale June 2 and is hiring engineers in California, according to its website. As early as March, Groupon was in talks with bankers about an IPO that would value the company at as much as $25 billion, two people familiar with the matter said at the time.

Zynga Inc. of San Francisco, the largest maker of games for Facebook and valued at $8.8 billion on SharesPost, may file for an IPO by the end of the month, a person with knowledge of the matter said June 3.

Those firms are among the companies that will help Silicon Valley grow by about 20,000 workers in 2011, said Levy, the California economist. Software publishers and Web portals accounted for 5,600 of the 13,400 jobs added in the year through April in the San Jose metropolitan area, according to the California Employment Development Department.

“We’re at the beginnings of an expansion of the job base,” said Levy. “There will be a lot of hiring.”

Simons, the agent for the four-bedroom Palo Alto home, said there were five “excellent” offers for the 2,257-square-foot residence. It was constructed in 1973 by California developer Joseph Eichler, who built thousands of “progressive” tract houses in middle-class neighborhoods, according to a website devoted to the properties.

“There are people who want to get in and they’re willing to pay,” Simons said outside the home, which was repainted, landscaped and staged with furniture before the public showings. “We’re just starting to see the market come back.”

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net