Stress Test Reveals More Work to Be Done By Banks- While Entry Level Local Real Estate Market Heats Up! 

This week the results of the long-awaited Stress Test on US banks were released.  What the government hoped to accomplish through this Stress Test was to determine how much capital the banking sector currently has, and what level they deem appropriate to withstand the recession.  The result was that 10 of the nation’s 19 largest banks will need to raise a total of $74.6 billion in capital.  The Stress Test revealed that banks like Goldman Sachs and J.P. Morgan seemed to be better positioned than Citigroup and Bank of America. 

At this point, according to Kiplinger, “The stronger banks will actively do what they can to return any money borrowed from the government to get out from under restrictions on dividends and executive compensation. Their ability to sell common stock to the public is far better than their weaker counterparts, who may have to privately sell stock to investors or raise capital with so-called mandatory convertible preferred shares.” 

According to industry analysts, it seems that until the banks get back on their feet, credit will continue to be tight. That leaves the Federal Reserve responsible for filling in the gaps with its own programs aimed at jump-starting lending.

On a brighter note, however, the real estate sector of our economy continues to show some positive signs.  USA Today reported earlier this week that “More homes for sale are attracting multiple offers as buyers pursue lower-price homes and banks low-ball asking prices to attract competing bids on foreclosures.”  It’s exactly what we’ve seen locally, the entry level home buyer market is fueling this recovery.  We forecasted this, and now that multiple offers are the norm in the majority of our entry level markets, some frustrated buyers are scratching their heads and wondering what happened to the buyer’s market.  We warned that things could turn on a dime, and it seems in many starter home markets, prices are already on the rise.   

Here are some links to some interesting news stories from the week:

• USA Today:  More homes get multiple offers; downturn may be nearing end (http://www.usatoday.com/money/economy/housing/2009-05-05-foreclosure-home-sales_N.htm?loc=interstitialskip)
• Business Week:  Want to Sell Your Home?  Lower Your Price (http://www.businessweek.com/lifestyle/content/may2009/bw2009055_075566.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis)
• RISMedia:  Relocation.com Survey Shows Consumers Moving Further Due to Economy (http://rismedia.com/2009-05-05/relocationcom-survey-shows-consumers-moving-further-due-to-economy/) – This is a good reminder to consumers on why they should choose an Agent who is affiliated with a large, global real estate company that has the breadth and influence to reach the largest pool of buyers.
• NYTimes:  Where Home Prices Crashed Early, Signs of a Recovery (http://www.nytimes.com/2009/05/05/business/economy/05turnaround.html?_r=2&hp)
• Realty Times:  Real Estate Outlook:  Sales Rising in Some Areas (http://realtytimes.com/rtpages/20090505_realestateoutlook.htm)

 Now, let’s take a look at this week in real estate:

• East Bay—Castro Valley reports short sales continue to dominate the market.  Listing inventory is so limited that properties are going pending as soon as they hit the market.  One property went pending one day after listing.  Many of our Agents are frustrated because they set appointments with buyers to view properties, but the properties are already in escrow.  REOs are starting to reappear in the market.  Fremont reports it seems that the market is starting to pick up and buyers are feeling more confident in the economy—they are starting to move forward, not just looking!  Livermore notes the major part of our market are properties priced below $500,000.  We continue to see multiple offers on almost all properties in this price range with the majority of the sales being REOs and short sales. Something noteworthy is that they had two sales in the office this past week in $800,000 range which has not happened in several months.
• Monterey County—The market continues on with slowness in the higher prices ranges and multiple offers on the REOs in Seaside, Marina, Las Palmas in Salinas and South County, where you can now buy a 5-bedroom, 3-bath home for around $265,000.  Seaside is the “hot” spot and has had 86 closings this year, with only 43 active properties at this point  (10 of those in escrow), while Pebble Beach has had only 18 closings this year, with 106 active listings and only one of those pending.
• North Bay—Greenbrae reports that Spring seems to have sprung in the million price range.  We are seeing increased activity in all Marin cities.  San Rafael notes that there is still a huge turn out of buyers at open houses in San Rafael and Novato at the lower end of the market.  Southern Marin reports a great week as well.  Agents were involved in several multiple offer presentations and won! The market is definitely picking up in Southern Marin.  Santa Rosa reports that they are starting to really feel the effects of the shortage of REO inventory. Sales of non distressed properties have picked up. Short sale escrows have increased but no apparent increase in the percentage of short sales closing.  The Sebastopol office reports multiple offers in all price ranges.  A dearth of new REO properties is pushing short sale offers.  We’re seeing that 10-15 offers are not uncommon.
• Peninsula—The Burlingame office reports that the rainy weekend didn’t dampen the open house attendance.  Burlingame, Hillsborough and San Mateo opens were well attended. The Agents are reporting that many buyers are feeling that we are at the bottom and now is the time to buy. There is such a need for quality inventory in the $800,000 range as this is where so many of our clients are looking. Menlo Park Santa Cruz Avenue reports that open houses were packed over the weekend in all price ranges. There seems to be a ground swell of activity with Agents writing offers that will hopefully translate to transactions next week.  Palo Alto reports some optimism and some movement in the area. As inventory builds, buyers have more selections.  San Mateo had a good analogy about the market:  Buyers seem to be “on your mark, get set…there just isn’t enough ‘go” yet but open houses are well attended.”  It’s the indecision on the part of buyers that we’re still seeing in this market.
• San Francisco—The Lombard office is reporting good traffic and sales activity in the $500,000-750,000 price range. They saw more multiple offers, winning and losing, this week than any time in the last year. But buyers above $1.5 million continue their reluctance to make a move.  This will all come in due time.  The Market Street office reports that this is the third week in a row that a property was brought on the market and sold with multiple offers in less than one week.  The list price was $749,000. The other property that was in multiples had been on the market for 90 days when two offers came in on the same day.  More offers are being written and open houses are well attended.  The Noriega office reports two out of the three multiples were REOs, the one that was not is an Outer Sunset home listed for $539,000, original fixer, received 11 offers, 8 out of 11 were over asking.  We’re expecting a flood of REO listings coming, starting mid-late June this year. Their BPO activities were way down in Feb/March, but it really picked up in April. If you have a “value minded” buyer on the sideline, get them ready, get them pre-approved and get your Agents ready to sell these REOs. The “sale” is a limited time offer only.                                                      
• Santa Cruz —With some positive news abounding in the news and some positive indicators in the market, it seems consumer confidence is beginning to come back (we are very cautiously optimistic).  We are expecting another wave of REOs to come through within the next couple of months.  The inventory in South County has for the most part dried up and there are multiple (multiple) offers on what is left of the REO properties.  We are seeing prices increase in South County from three months ago.  Overall throughout Santa Cruz County, inventory levels are way down and we have experienced multiple offers on many properties below $800,000.
• Silicon Valley—San Jose Almaden reports distressed sales continue to dominate our market.  11 or the 13 sales are distressed.  Almaden which had been slow is beginning to pick up nicely.  Three properties sold in Almaden within two weeks of being listed last week from this office.  San Jose Main reports activity and sales continue to be brisk in the price range of $550,000 down. Many multiple offers on $250,000 to $550,000 homes and condos. Sales are up but listings continue to lag.  Saratoga notes we’re still experiencing a slow upper end. We’re seeing some multiple offers on REOs and well priced lower end properties.
• South County—The Hollister office is reporting that last week in San Benito County we had 198 active single family listings and 140 pending transactions.  This week we have 183 active single family listings and 200 pending transactions.  The month of April reports 52 closed single family transactions for San Benito County.  Multiple offers are still being seen on most REO properties.  Last month the Morgan Hill office had incredible sales activity.  Agents were very busy writing offers and getting them accepted.  Response time for short sale and REO offers is much more acceptable.  Interest rates continue to be attractive.  Our goal is to keep up the momentum.

What do we do with this information?  The responsible thing is to make sure everyone hears it.  It’s one thing for me to talk about a recovering market but it’s another when even the most pessimistic analysts are doing the same.  The stories above share the real story.  All of our offices are reporting similar stories and as I visit our offices and talk with our Agents, I’m hearing the same scenario:  the market is heating up. The window of opportunity has been open and it has been inviting buyers in for months.  With the speed that buyers are responding today, it won’t be open long.  I can assure you there will be people years from now who will say “Why didn’t I buy more real estate in 2009?”

- Rick Turley

Foster Weeks publishes a weekly mortgage report which is updated every Monday morning. How is this affecting the San Francisco real estate market? Read our weekly and monthly market reports. Here’s what Mr. Weeks says about last week’s activity:

“REALITY IS THE LEADING CAUSE OF STRESS AMONGST THOSE IN TOUCH WITH IT.” Lily Tomlin. The reality of the recession has been stressful for many of us, but various pieces of news this week show things may be starting to turn around.

Friday’s important Jobs Report showed there were 539,000 jobs lost in April versus expectations of a 610,000 loss, representing the smallest job loss since October. Even though the Unemployment Rate moved higher and hit a 26-year high of 8.9%, this is a lagging indicator, and many other data points hint that the worst could be over for the job market, and could lead to lessening stress in this area during the months ahead.

Speaking of stress, last week’s “stress test” results showed the banking system is on the mend, and in better shape than it was a few months back. 10 of the 19 largest banks will need additional capital to cope with potential future challenges, but as a whole the banking system is solvent and regaining health. A crucial point to remember is that almost all of the institutions under scrutiny elected to choose the cash flow method of asset valuation, as opposed to the mark-to-market method. This would not have been possible without the Financial Accounting Standards Board (FASB) allowing for this change last month.

Positive news came from Wal-Mart, saying that their sales for April were better than forecast. And they say, “As goes Wal-Mart, so goes the entire retail sector”, so this may mean health is also coming back to retailers at large.

Bonds attempted to regain some ground in the early part of the week, but the good news from Thursday’s bank stress test, the better than expected Jobs Report on Friday, and the rally in Stocks caused Bonds to fall below key support levels. As a result, Bonds and home loan rates ended the week slightly worse than where they began.

Read the entire report here.

C.A.R. is opposing SB 407 (Padilla), a bill that would require that ALL residential and commercial properties be retrofitted at point-of-sale with low-flow toilets, shower heads and faucets. SB 407 also requires that real estate licensees representing both the buyer and the seller in the transaction disclose the retrofit requirement to the seller and purchaser. While C.A.R. appreciates the goal of conserving water, C.A.R. opposes SB 407 because it will not achieve the objective of significantly reducing water consumption and because it could further destabilize the already weak housing market. SB 407 is scheduled to be voted on in the Senate Judiciary Committee on Tuesday, May 12th. Your Senator is a member of that committee.

Last week I reported on positive indicators in the first-time homebuyer market.  New mortgage applications for home purchases and refinances were up 77 percent from the same week in April 2008. Mortgage rates continue to average well below 5 percent – 4.7 percent last week on average for 30-year fixed rate loans and 4.5 percent for 15 year loans.  Rates like these are a major factor pushing applications. Nearly 600,000 home buyers have already claimed either the $7,500 tax credit from last year or the $8,000 credit for this year, according to IRS data cited by the National Association of Home Builders.

Statewide, CAR reported improvement in both sales numbers and median price. March existing home sales were up 64% from prior year, and median price had the first month-over-month increase since August of 2007.  California’s inventory of unsold homes also fell in March to five months, down from 12.2 months in March 2008, making March ‘09 a three year low for existing inventory.

Locally, I want share what’s going on in the East Bay (Alameda and Contra Costa Counties) which has been one of the markets hardest hit by foreclosures and price declines.  We are starting to see some real positive news in this market.  Specifically (as displayed in the graph below), when comparing accepted offers to new listings, we are currently at 112% which is a 69% increase year over year and an 86% increase from this time two years ago.  The graph tells the story:

The positive trend in the East Bay numbers above are impacted greatly by the brisk sale of distressed properties; REO properties are selling at a faster pace than new bank-owned properties are getting released.  Good news from our local branch offices in the East Bay is that entry level priced homes which are not bank-owned and not distress sales are also selling faster than new listings are being brought to the market. This is also what we are seeing in our Sonoma County offices and our Santa Clara County offices – the entry level is really moving.

With regards to the luxury market, we’ve had a flurry of high end sales in our San Francisco offices, so I took a look at some recent luxury market statistics.  As per the San Francisco MLS, April 2009 was the third consecutive month of increased sales activity over $2 million. With 29 San Francisco $2M+ pending sales in the month, April’s high end activity was more than twice that of March 2009.  The same trend occurred in San Mateo and Santa Clara Counties in the $2M+ market, although not as dramatic month-over-month increases.

The note of caution here is that while the numbers of sales are increasing in the high end – we still have a 21 month’s supply of inventory in San Mateo and Santa Clara Counties in the $2M+ market, which is nearly triple the 7.6 month’s supply we had in April ‘08.  And San Francisco currently has 19 month’s supply, versus 5.5 a year ago; also nearly triple the MSI for the $2M+ market.   Agents in all three counties say that it is the really competitively priced new listings, and the dramatic price reductions of older listings which are causing our recent sales activity in the high end, with a lot of other inventory just sitting.

Here is what our offices reported this week:

• East Bay—Berkeley reports they had a slow week two weeks ago and things really picked up this last week.  Lots of visitors to open houses, 20 – 45 groups at many of our properties.  Getting some good price reductions on some listings that have been out there for awhile.   Agents are beginning to have that pricing conversation early on with sellers to not get caught chasing the market downward.  Castro Valley reports that short sales continue to dominate the market.  The $300K price range buyers have incredible competition.  Listing inventory is the lowest that it has been in years.  New listings in the market this week are 47 SFR vs. the 200 or so we have seen one year ago.  Multiple offers are starting to surface in the $500,000 market.  Danville reports the spring market is gaining steam.  Inventory in some of our market area is less than two months and the number of new pending sales in the past week shot up 50%.  In the Tri-Valley in the past three weeks we have seen a very positive shift in the market.  Overall listing inventory declined 6.25% in Livermore; declined 4.8% in Pleasanton; and declined 9.2% in Dublin.  Walnut Creek is begging for more inventory.
• Monterey—The market continues on at a steady pace as far as new listings and escrows.  There seem to be more buyers on the prowl for good buys these days.  Some are voicing the opinion that we may be about to turn the corner, so this could be best time to buy, what with good selection of inventory, motivated sellers and very low interest rates.
• North Bay—Greenbrae reports they’re seeing multiple offers in Greenbrae, Larkspur and San Rafael.  Houses that come on with a value price and offering the elements a buyer is looking for are winning the real estate game.  Southern Marin reports a busy week with five new listings, three pendings, and many more closings scheduled for this week and next.  Open house reports are good, continuing to see more qualified buyers out and about.  Listing Agents report getting more activity (requests for showings, disclosure packets, etc.) from seemingly real buyers.  Most interesting is the below $1 million price range in Mill Valley, Tiburon and Sausalito.  Units sold 2009 YTD are actually higher vs. same time a year ago.  Santa Rosa reports open houses with 30 groups or more.  An increase in escrows opened on non-distressed properties and a few more opens in the higher price range.  Sebastopol reports six offers on a Sebastopol property listed at $629,000.  There were four offers on one listed at $649,000 and five on a Santa Rosa listing listed at $250,000.  We’re seeing new life in the step up market.
• Peninsula—Our Burlingame office reports a Baywood San Mateo open—first time on the market in 40 years—had over 125 visitors.  Other opens were well-attended across the board.  Agents are reporting more serious buyers coming through and the activity in the office and conference rooms would indicate a much more positive direction. The Menlo Park El Camino office reports multiple offers on some properties and yet others still sit.  We have a 12 month supply of inventory in Menlo Park vs. five months this time last year.  We have 29 months in Woodside versus eight months last year.  The oversupply is keeping downward pressure on prices.  Redwood City reports that open houses were very well attended.  Buyers are beginning to see the value of making offers in this market.  Interestingly, both multiple offers were on Previews (luxury) properties.  San Mateo reports active listings are up 12%, pending sales are up 7% and solds are down 43%.  With active listings about even and pending sales on the rise, it would appear that we are building a solid base for a real estate recovery.
• San Francisco—Our Lakeside office reports that sellers and their Agents are seeing the benefit of a well-priced home and buyers are starting to sense the urgency of buying now.   The Lombard office reports open traffic was slower this week.  They did have two multiple offer situations with one REO in the $400,000 range and a Victorian fixer upper with great potential.  The Market Street office reports lots of traffic at open houses.  Some Agents felt a different mood about the people attending.  They felt more of a sense of urgency on the buyer’s part in looking for homes.  A single family in District 10 had its first open on Sunday and went into contract on Tuesday with multiple offers.  The Noriega office reports activity in the $500,000 to $700,000 range is very robust.  The problem is that good inventory in this price range is very hard to come by and therefore multiple offers are common.
• Santa Cruz—Activity has definitely picked and there continues to be a multitude of buyers out there.  There is still some reluctance to move forward with some buyers and the price point between $800,000 to $1.5 million continues to have a lack of buyers.  Inventory levels are low and seem to have leveled off; there are currently about 800+ homes currently on the market. 
• Silicon Valley—The Cupertino De Anza office reports this is the highest number of pending sales for a single week in the last several years in Cupertino.  The Cupertino Stevens Creek office concurs noting that it seems like things are picking up; the last two weeks we’ve seen a lot of action.  Our San Jose Almaden office reports that 16 out of this week’s 21 sales were distressed properties.  The San Jose Main office reports buyer interest continues to be brisk and we’re seeing excellent open house traffic in the $250,000 to $600,000 price range. Increasing interest in upper priced properties mostly due to lower interest rates. Listing inventory continues to decrease which is producing more multiple offers on available properties.  Our Willow Glen office reports that the office is busy and buyers are coming out of the woodwork.  We don’t want to jinx anything, but things are looking up in Silicon Valley!
• South—Hollister reports that short sales are becoming more noticeable. Multiple offers on most REO sales. Open house activity is on the rise. The Morgan Hill office reports that the big question (for Agents and for clients) is, “Are we there yet?”  It seems that everyone is wondering if we have, in fact, reached bottom—in terms of price declines.  In South County the inventory of “very affordable” homes is shrinking quickly.  Investors and first timers have swooped in and bought most of them.  It would seem that prices are stabilizing (at least at the lower-end).

All in all, it seems it was a great week in SF Bay Real Estate – good activity in all price points.

Rick Turley
President

Our May newsletter is now online and may be seen here.

- Janis Stone

Foster Weeks publishes a weekly mortgage report which is updated every Monday morning. How is this affecting the San Francisco real estate market? Read our weekly and monthly market reports. Here’s what Mr. Weeks says about last week’s activity:

“YOU’RE MOTORING.WHAT’S YOUR PRICE FOR FLIGHT?” 80′s band Night Ranger’s ballad “Sister Christian” perhaps describes the question some spring break travelers are asking travel agents as they reschedule plans to visit Mexico, in light of last week’s sudden swine flu outbreak. And while the quickly spreading illness has made this Spring’s travel season especially challenging, there are some bright spots on the horizon for the economy.

Last week, the Fed signaled that the recession may be easing, and this news was echoed by the Economic Cycle Research Institute (ECRI), who also said that the recession would probably end by the time Summer is over. The ECRI, whose leading indicators have a solid track record of predicting turns in the business cycle, said that enough of its key gauges have turned upward to indicate with certainty that a recovery is coming.

The beleaguered auto industry has been big news of late, and while Chrysler struggled to find “Mr. Right” in Fiat, the price for their flight ended up to be bankruptcy.while on the other hand, it looks like Ford will be all right tonight, as their Stock is up big from just one week ago. What’s more, as you can see in the chart below, Stocks in general had a great April. In fact, the S&P 500 had its best month in nine years, gaining 9.4%, led by the financial sector. This is further evidence that the changes in mark-to-market accounting were a great decision.

In addition, there were several good economic reports to note as Consumer Confidence for April came in at its fourth largest gain in the history of the survey, while Consumer Sentiment also came in better than expected. The improvement in the way consumers are feeling is likely influenced by the improvement in Stock prices.

But Stocks are near an important ceiling of resistance that has been difficult to break. Just like Bonds, Stocks respond to floors of support and ceilings of resistance – and a look at the above chart shows how the level of the S&P 500 between 875 and 880 has put a lid on Stock price advances eight times during the past few months. Interestingly enough, Friday’s close was right at the ceiling, at 877.52. Should prices break higher next week, it could lead to another 8% rise in the overall Stock market before the next ceiling is hit. However, should the S&P 500 Index fail to advance further, prices will likely drift down to the nearest floor, about 5% below current levels. That’s what makes this pivotal point so important, and worth keeping an eye on in the coming week.

Yet our economy isn’t in full bloom just yet. The Advance Gross Domestic Product (GDP) Report showed that the US economy contracted more than expected in the first quarter. The combined contraction of the last two quarters is the worst in more than 60 years. Continuing unemployment claims are still a problem, coming in at a record 6.27M, while the Personal Income and Spending Report showed that consumers are still watching their wallets very carefully.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates to improve, while strong economic news normally has the opposite result. Bonds were buoyed in the beginning of last week due to Stocks losing ground on the swine flu news, but the variety of good economic news gave Stocks a boost later in the week at the expense of Bonds and home loan rates. As a result, Bonds and home loan rates ended the week slightly worse from where they began.

Read the entire report here.