The month of April gave many people in the Lamorinda real estate market hope that we were embarking upon a recovery in the upper end market segment. With seven $2M+ homes pending within the first 3 weeks of April, it almost seemed like a return to the days of irrational exuberance. Fortunately, we haven’t turned the clock back to the crazy times when people sent pictures of their children, a box of warm chocolate chip cookies and pleading letters accompanying their home offers, but it would be nice to see a bit more upper-end market energy this month.
First of all, the highest velocity in the market is in the sub-$1M price range. We’ve talked about this before. It’s more affordable, homes previously unseen in the price range are hitting the market, and our state and federal governments have provided financial incentives to first time buyers. And yes… our bankrupt state is still providing a tax credit to these buyers without regard to the buyer’s income. It’s expected that the state of CA funds will dry up by mid-June.
As we move up-market, the story begins to change. The segments of $1M – $1.5M and $1.5M – $2M both are performing about the same with about 5 months of inventory based upon the leading edge of the market — the “pending” sales. These are properties in escrow that have not yet closed.
The upper end market is dominated by Lafayette real estate and Orinda real estate, and there are very few rays of sunshine penetrating the dark clouds overhead. In the $2M – $2.5M price range, there are 7.5 months of inventory, but in the $2.5M – $3M range, there are 11 homes on the market and there hasn’t been a single sale since May 1st! In the $3M+ range, there are a whopping 16 homes on the market, with 1 home pending in escrow in the same time frame.
What lies ahead in Lafayette and Orinda’s upper end real estate market? It’s pretty clear that April’s splash of activity was isolated, and caused a lot of people to jump into the market thinking that we were going to see a robust return to the days of old. Most of the homes in $2.5M+ price range are significantly over-priced, even assuming that there are a sufficient number of buyers to absorb the inventory. We know this is not the case. There are very few buyers in this range, and they are well-educated, financially savvy people who are generally seeking homes that represent a sound economic investment.
Concurrently, we are seeing financial distress properties hitting the market. At least two bank-owned upper end Lafayette homes hit the market in the last couple of weeks, and there are others that involve short-sales or financial hardship situations within the Lafayette and Orinda real estate markets. I expect to see further compression in this market segment as the distressed inventory sells and becomes the benchmark for pricing over the coming year. Bottom line… there will be increasing downward pressure on our upper end market that will easily extend through the 2010 selling season, and most likely influence next year’s, as well.
