Some of you have received the quarterly “Market Letter” that we have sent out by conventional mail for about 10 years. Even though we are trying to entice people to use this blog as a more timely source of information, we still send out the quarterly letter. What follows is the the text of the letter. Some of it may contain information that you’ve already seen in this blog, however there is certainly new information to potentially be gleaned from it. We hope it provides you with a comprehensive view of the Lafayette real estate market and that of the surrounding areas.
One of the most challenging years in global financial history is finally behind us, so it’s important to take a look at the current economic picture, and what we should reasonably expect as 2010 unfolds. We’ll also attempt to separate fact from myth with regard to our local real estate market; as well identify some of the possible hurdles we see for the foreseeable future.
Global markets have been on a roll over the last 6+ months, led by the stabilization of the credit markets. Stock market strength is always a leading edge indicator of economic recovery, and it is apparent that the U.S. recession has recently ended. What we do not know is the strength of the U.S. economy moving forward. Employment levels are a lagging indicator, and are therefore still in a state of decline. This has had a very substantial impact on the health of our real estate market.
We believe that we saw our real estate market bottom around April 2009, but that does not mean that we’ve been on an upward trajectory since then. In fact, the data for Lafayette/Orinda sales prices shows clearly that prices are down close to 30 percent from their height in the summer of 2006. The heartbeat of sales in this year’s market has been found at the lower end price points, driven by government administered “life support” in the form of the $8000 first time buyer credit, and investors pouring into the foreclosure markets of the east county. The first time buyer credit is slated to end in April (property in escrow by end of April and must close by June), and it is unknown whether that will detrimentally impact our market. All market segments are connected. Keep in mind that the “trickle up theory” of real estate is very real. Home owners at the lower end of the price spectrum usually need to sell before moving up in price point.
The mid to upper end markets have performed much differently than the lower end of the market. The unemployment level is still growing and it has impacted affordability across all price segments. So, as we look at our mid to upper level housing market, we are seeing many people who are either reaching the limits of their financial reserves, are preemptively restructuring their housing costs, or who have no other alternative than to sell. None of this bodes well for a return to the boom days of yesteryear. We are fortunate that this has not been a huge problem for our local market, but it can be expected to have some impact on pricing as we see some upper-market foreclosures find their way to market. Furthermore, we are still struggling with a lack of liquidity in the present lending environment and an incompetent, ridiculously conservative appraisal and review process. We’ll spare you the stories from 2009, but suffice it to say, the pendulum has swung from one ludicrous extreme to another. It is definitely affecting demand for real estate, particularly in the $1M+ market where most people need “jumbo” loan financing.
Contrary to what some may have read in the media, lenders are still sending out-of-area appraisers to evaluate our local real estate. They subject them to a “review” process where someone in an administrative position often reduces the appraisal amount based upon county-wide trend algorithms which may have nothing to do with a particular sub-market. This type of situation is fairly prevalent and it DOES affect our market values because buyer and seller are often forced to renegotiate the sales price based upon the appraisal!
With all of this said, the market under $1M in Lafayette and Orinda has been very robust, and our current inventories now stand at just a little over one month’s supply. That makes for a very strong market in this price segment. Even across the broader market, inventories are at the lowest level that we’ve seen in the last year – now standing at about 3 months of inventory – down from as much as 13 months of inventory in February 2009. The $1.5M-$2.5M segment stands at about 5.5 months of inventory, but that is double the level at this time last year. By February 2009, this segment was up to about 23 months of inventory, before finally settling down to around 8 months of inventory throughout the fall and balance of 2009. Given the next wave of “Alt-A” loans that need to be purged from the financial system this year due to borrower distress, we expect that we’ll see greatly expanded inventories in this segment.
“Alt-A” loans are the ones that lie in between the nasty sub-prime loans and the prime rate loans granted to those with the highest credit worthiness. Just to put matters into proper perspective, approximately $402 billion in Alt-A loans were originated in 2006!! In fact, these loans represent the majority of all “non-traditional” loans in the marketplace… the infamous “stated income” loans, interest-only programs, as well as option-ARMs. With interest rate resets in combination with unemployment and “under employment”, the industry is expecting that the Alt-A problems will exceed the subprime mess in total dollar volume.
We expect a much better year than what we saw in 2009. The market is more prepared to absorb the Alt-A issues without the “shock” that was experienced when the subprime meltdown occurred. People are generally more positive now about the economy, as evidenced by the performance of the stock market over the last 6+ months. The psychological health of the market is as important as the economic health. We are working with several buyers who believe that NOW is the time to buy, and that sentiment seems to fairly widespread based upon discussions that we’ve had with other active agents whose clients have told them the same thing.
We are very excited about our totally redesigned marketing program for 2110 that is not only based upon taking advantage of the most advanced internet-based technology available, but also leveraging the astounding power of Social Media. We’ve built a brand new www.TeamRothenberg.com website that is state-of-the-art in every respect, with very advanced capabilities that will greatly enhance interaction with our clients and the marketing of their properties. We are still the #1 ranked agent website on Google for Lafayette, CA real estate. Additionally, the type of quality information that you’ve hopefully experienced in these newsletters can now be found updated several times a week on our blog located at Blog.TeamRothenberg.com or simply via our website. We are also harnessing the power of video and Social Media to provide rich community information to potential buyers, as well as video presentations of our listed properties. These aren’t amateur videos, rather professionally produced and optimized for the internet. In fact, you can see our first community video on YouTube if you search for “Lafayette, CA City Video Guide”.
The world passes by those who stand still. In today’s challenging market, we believe that passive “internet” marketing and placement of home ads in newspapers is only slightly more effective than when some agents merely placed a sign in front of the property and hoped that it would sell. Our clients need every advantage they can avail themselves of in this market.
We have always prided ourselves in conveying honest, fact-based information to our clients. We can’t change markets; we can only seek to understand them and to provide informed counsel to our clients – critically important in today’s complex, rapidly changing real estate market.
