Last Friday, November 21, 2008, Leslie Appleton-Young, Chief Economist for California Association of Realtors presented her analysis and forecast of the California and Santa Clara County housing market to Alain Pinel Realtors in Silicon Valley.  Click >here for a link to the charts.

Here’s a summary of my notes with my conclusions at the bottom of this blog post:

The Nation:

• Technically, the USA entered a “recession” (defined as 2 consecutive quarters of decline) in the third quarter of 2008, but actually we have been feeling the effects of slowdown 6 months prior.
• Consumer spending (which accounts for 72% of economic activity) has dropped (down -3.1% in the 3rd quarter).
• We currently have a weak job picture with unemployment up.
• In October, 2008 the Consumer Price Index hit at an all time low (since 1969) with an index of 38!
• The CRITICAL CONCERN is how soon will the financial market stabilize and enable economic activity to return to normal.

California:

• California has been hit harder than the nation as a whole because prior job growth was housing related (construction employment is down 45%).  California’s unemployment rate is now at 8%.
• California home sales numbers peaked in August 2005 with 650,800 homes sold and then declined to a low two years later in fall, 2007.
• While home sales numbers “bottomed” in October, 2007, they are up in 2008 because of increased sales of distressed properties.
• However, since that time the median price had been declining (which has never occurred before).  We are now seeing a 30% decline in California’s median home prices from that peak.
• California currently has a “Bipolar Housing Market” – a “distressed” market, which is highly localized and the “regular” market.
• Initially, the lower price range (under $500,000) were the hardest hit (number of sales), but since September 2007, homes in the $500K-$1 million price ranges and above have also been affected by the credit crunch.
• The decline in the state’s unsold inventory this year has resulted in a 24% improvement YTD in the “affordibility” index.
• 92% of all California home sales in 2008 YTD have been below the $729,750 maximum conforming loan limit – this is currently poised to drop to $625,500 on January 1, 2009, unless Congess sees the wisdom of restoring this temporary ceiling.
• Sellers who were primarily motivated by a desire to have a larger home or better location in 2006 are now motivated by “having trouble making mortgage payments” or “mortgage payments moving up due to reindexing” and a “desire to cut costs by moving to a rental” in 2008.

Santa Clara County

• Santa Clara County has experienced a 30.9% drop in the median price of homes sold from a peak of $868,410 in April, 2007 to $600,000 in September, 2008.  This is due to the increases in lower price inventory now being absorbed.
• Between September 2007 and September 2008, home sale numbers in Santa Clara County actually increased from 550 to 982, a YTD 69% increase!

How did this all happen?

• To counteract the NASDAQ crash early in this decade, the Fed adopted an “expansive monetary policy” and lowered discount interest rates during the 2001-2004 period, which fueled the housing boom.  The Fed changed course upward in 2005 and downward again in 2007.
• At the height of the boom in 2006, 40% of first time buyers and 20% of all California home buyers had zero downpayments; this dropped to 5.7% and 3.4% respectively by fall of 2008!  Subprime loans were a very small percentage of all loans until 2004 onward.
• The “Perfect Storm” hit when a series of factors coalesed: lack of personal financial accountability; exotic loan products; Wall St. Innovation: derivatives, CDO’s; Wall St. leverage; inaccurate pricing of risk by rating agencies; trade and budget deficits – huge global pool of money seeking high returns; low interest rate environment in US; and behavioral assumptions based on past history.

Forecast:

• Expect a new stimulus package by the January 20, 2009 inauguration.
• Inflation is no longer a concern, but “be prepared for it to be a problem 12-18 months out” as the Fed will probably change course again after the financial markets have stabilized.
• “The recession will last through mid 2009, with an improved outlook the second half of 2009.”

What does this mean for Saratoga home sellers &  buyers?  (conclusions are those of Rick Bonetti):

• Since fall 2007 it has been increasingly difficult to get jumbo mortgage loan financing because there is no secondary market.  This limits the source of mortgage funds to lenders who are able to portfolio their loans rather than package and sell them.  Understand that the marketplace has changed, even though there is still strong demand for well priced Saratoga homes with the right school district.  Seller financing will become increasingly important to buyers and may represent a prudent investment for sellers.
• While it may not have a huge impact on the Saratoga market, it is in your interest in terms of property values to call your congressmen and senators in an effort to pursuade them to continue the current Freeddie Mac/Fannie May jumbo loan ceiling at $729,750.
• Understand that even Silicon Valley is not immune to the effects of this major national and global downturn, but buyers are looking for safe place to invest and many are choosing Saratoga real estate rather than the stock market.  Many are also holding on to cash to support their business interests take advantage of opportunities as they arise.
• Discretionary buyers are motivated by lifestyle choices and will not purchase homes that don’t meet their wants as well as needs.  They are astute and cautious buyers who will wait until “overpriced” homes are dropped in price before they write an offer.
• Keep what you read in the newspaper or hear on the TV in proper perspective and drill down deeper to understand the true market dynamics rather than being mislead by soundbites.  Call Rick Bonetti at 408-857-8800 for an advice regarding your specific real estate situation, whether it is in Saratoga, Los Gatos, Monte Sereno or surrounding Silicon Valley communities – real estate is very localized.