How's The Market? Napa Valley Update, Dec 2009

As a real estate professional and trend spotter, this is one of my favorite questions! If we’ve already has this conversation you are familiar with the gleam in my eyes.

Here’s the most straightforward, honest assessment of the St. Helena real estate market based on my 10 years of experience, following and analyzing market stats, and the up and downs and arounds of the cycles:

It’s all about Control right now.

There are no absolutes in real estate timing; no one can make a sweeping statement about when it’s a good or bad time to buy or sell real estate since most real estate decisions are tied to life strategies and events that are often beyond our control. Right now, sellers are feeling anything but control. If you are upside down on your home’s value (in other words, you may owe more than it’s currently worth), behind in mortgage payments, trying to negotiate with your lender, or perhaps you’re already getting those nasty letters threatening foreclosure, you’re experiencing a gut-wrenching anxiety 24/7.

If you just want to sell your property for personal reasons but your Realtor has informed you your house is worth 30% less than it may have been a few years ago because the guy down the street got foreclosed on and that sale affects the value of your home, you feel you’ve lost certain control over your equity’s destiny. You played by the rules. You were conservative. You didn’t over-leverage your equity. So why are you suffering the sins of your neighbors? It’s not fair but it’s a reality. Why? Because the definition of ‘market value’ is “the price an informed buyer will pay and the price a motivated seller will accept.” So long as there are sellers (lenders and short sales) more motivated than you they set the bar on values.

Is Recovery in the Visible Future?

The underwriting and appraisal world has played a significant role in causing and extending the length of the paradigm shift in declining market values. Underwriters now require appraisers to use only the most recent comparable sales to determine a home’s current value. A sale more than 90 days old is considered irrelevant these days as far as lenders and appraisers are concerned. Plus, the lack of sales is fueling the fire on declining values.

Housing inventory is typically absorbed from the bottom (lowest price) up, which means short sales and REO’s sell first. The lack of relevant comps throws the entire appraisal process into a guessing game tailspin, made worse (for sellers) by the fact that the majority of those rare comps are short sales and bank-owned sales, which are selling for a fraction of the 2005/2006 market values. Now we begin to see the self-propagating cycle, which explains why recovery is expected to take longer than 2010, which many experts were hopeful of.  

Past cycles of declining values, aka ‘market corrections’, were spared the viral, compounding, one-two-punch causing the current market conditions; restrictive (over-reactive) underwriting, coupled with the onslaught of seemingly never ending waves of foreclosures continue to pound at efforts to get a footing.

What’s a Buyer to think?

From the buying perspective the lack of activity stems from a three-headed obstacle: the inability to qualify for a loan and/or to come up with a down payment; the lack of evidence that market values are stabilized; and the overall lack of confidence in the stability of the big picture economy.

After reading all this it makes one wonder why or how any houses are selling at all, right? St. Helena’s immediate and short-term real estate picture is less discouraging than you might think. However, sellers and would-be-sellers of local properties are falling prey to a classic real estate mistake of chasing the market. The stats in the table below illustrate this fully:

Market Snapshot: St. Helena, December 5, 2009

St Helena’s upper end has faired well, all things considered. Year-to-date there has been seven sales at $2,000,000 or more, at an average price per square foot of $754. The seven multi-million dollar sales took an average of 326 to get sold, and the original average asking price of each was well over $900 per square foot.

The condominium/townhome market has taken the brunt of the decline in values. With only three condo/townhome sales year-to-date, averaging $339 per square foot, nine remain active on the market at a per square foot asking price of $392.00.

St. Helena has had very few short sales and foreclosures, but according to some prognosticators, higher end home values could be in the next wave. The gist of these predictions is that second-home real estate destinations could follow suit with first time home foreclosures, but as much by ‘volunteer’ surrender as involuntary. Some second-home owners who have been carrying a heavy second mortgage are beginning to pencil out a ‘lesser loss of two evils’ by walking away rather than continuing to ‘throw good money at an upside down mortgage”, figuring market values are not going to catch up and make up for both value decline, and the outgoing cash flow for quite some time. It may take but a few, high-profile short sales of high-end homes to start a viral value decline.

Another market factor that could affect higher end home values is the waiting game being played between supply versus demand. The steadfastness of seller’s price expectations is shown here:

St. Helena’s Multi-Million Dollar Real Estate Market, December 2009

Of the 6 estate homes sold, significant price compromises were made to accommodate the demands of today’s confident, emboldened and patient buyers. This practice of compromise has been applied to all sales categories across the valley.

Katie Somple of Lifestyle Properties is a 10 year veteran real estate broker in St. Helena.