Silicon Valley Housing Market Update for July 2009

Summer Selling Season in High Swing

Overview:

The numbers are out and things are continuing to improve in our local real estate markets. All across Santa Clara County, the median home price is rising (up 11% last month to $540,000 in July), supply is falling and demand is still growing. We're by no means showing full recovery as the median home price is still down 17% year over year, far under the 2008 mark, but values have definitely stopped declining. And for the second month in a row the median sales price has risen over the half-a-million dollar mark suggesting that our high-end housing market is beginning to show a pulse.

The median sold price marks the halfway point, meaning half the homes sold for more and half for less. This information is gathered from all publicly recorded sales of single family homes in Santa Clara County closed during the month of July.

A total of 1,531 previously owned single family homes sold in the county last month, 35% more than in July 2008, and the highest total for any July since 2005 when the housing boom was still in full swing.

Digging deeper:

Existing home sales are continuing to increase each month as we progress through summer. The latest theme has been a tale of two markets - the lower-end of the market (currently referred to as the "distressed sales" market; representing sales prices up to $650k) and the upper-end of the market (also known as the "step-up" market; representing sales prices over $650k).

The lower-end of the market has been moving strongly for the past few months and lately can even be described as hampered due to a lack of inventory. Sales in this market are dominated by distressed sales of foreclosed properties, also known as bank owned homes or REO, and short sales, the sale of a home where the sales price is less than the outstanding liens.

As we make our way through summer demand is continuing to increase while inventory levels have continued to decline (see graph below). We are down to 1.3 months of supply and an average of 67 days on the market for properties selling for under $650k.

During the month of July there were 2453 (down 49% from July 2008) properties for sale of which 844 were newly listed properties (down 22% from last year), 934 were put under contract (up 86% over last year), and 740 (up 73% from last year) actually sold and closed escrow by month's end. 

Demand in this entry-level market is being controlled by first-time homebuyers and investors. First-time homebuyers are seeing great opportunities in the current housing market with the highest affordability witnessed in recent years as supported by historically low interest rates and a multitude of home financing programs and government tax incentives. But first-time homebuyers are not the only one's gobbling up these fantastic prices, real estate investors are also being attracted to these undervalued homes finding that the real estate market may offer better returns presently than the volatile financial markets.

Due to this growing demand for housing and shrinking inventory we are beginning to see multiple offers and even bidding wars breaking out on many properties in the entry-level market. It is not uncommon for sales prices to be much higher than the original listing prices and for first-time homebuyers to compete against all cash offers from real estate investors on the same property. It seems that one of the most important things that first-time homebuyers can do at the moment to prepare themselves for making an upcoming purchase offer is to get fully approved for purchase financing before they begin their home search.

The opposite is true for the upper-end of the housing market which has been suffering from a lack of jumbo financing programs severely limiting the number of qualified buyers for these properties. But even with the current jumbo financing available (which can require large down payments that can make up to 30% of a home's sales price) we have finally started to notice an increase in sales activity. It seems that sellers who have been waiting for the market to change dramatically are getting realistic with today's market conditions and are beginning to price their homes more competitively. 

In July we are down to an average of 49 days on the market and 3.9 months of inventory for this price range. Also, during the month of July there were 2432 (down 29% from July 2008) properties for sale of which 711 were newly listed properties (down 25% from last year), 420 were put under contract (up 7% over last year), and 512 (up 4% from last year) actually sold and closed escrow by month's end. 

Other major challenges affecting our markets, in addition to the lack of inventory in the "distressed markets" as well as lack of jumbo financing in the step-up market, would be the newly passed Home Valuation Code of Conduct (HVCC) and most recently the Home Economic Recovery Act (HERA).  The HVCC, effective as of May of this year, is wreaking the most havoc on the housing market.

The Home Valuation Code of Conduct is a law governing appraisal guidelines and has created a situation where appraisals are less accurate, not provided in a timely manner and are more expensive for the consumer. New appraisal protocol requires lenders to order appraisals through large third party appraisal management companies, some based on the east coast, who then in turn assign the task to a local appraiser near the subject property. Realtors in our area have witnessed appraisers from outside our market area, as far away as Southern California, performing appraisals for their sales.

Also affecting the financing side of the market through the passage of HERA there have been changes made to the Truth in Lending Act, which took effect last month, requiring lenders to provide certain disclosures about mortgages fees in an attempt to help borrowers make better-informed loan choices.  However, some in the industry believe the new regulations could create further delays in the lending process by requiring re-disclosure when fees and annual percentage rates change from initial disclosures sent out at the time of loan application.

The chances of re-disclosure as required under the new law are very probable given the recent volatility in the interest rate market and likelihood of borrowers changing their initial fee schedules. Following the required re-disclosure of initial loan terms, borrowers would not be able to fund on their loans until 7 business days have passed, not too mention the 4 day requirement before appraisals can even be ordered.  

Previously, lenders could begin underwriting the loan the same day they received an application and have the ability to charge fees to borrowers such as paying for property appraisers.  The new regulations now mandate a three-day review period for the loan documents before the loan process can begin which correlates to a 4 day delay in the appraisal ordering process.

Although these new laws only add to the confusion seen in the current real estate market they are unlikely to hinder the current moment that we have seen over the past few months. Thirty-year fixed-mortgage interest rates averaged 5.22 percent during July 2009, compared with 6.43 percent in July 2008, according to Freddie Mac. Adjustable-mortgage interest rates averaged 4.82 percent in July 2009, compared with 5.24 percent in July 2008.