Lamorinda Real Estate 2012 — Where the market is now, and what lies ahead — Chapter 2

29 01 2012

As we continue with “Chapter 2″ of a three-part series on our forecast for the Lafayette real estate market, Orinda, and Moraga — commonly referred to as “Lamorinda”– we find that in 2011 the strength of the market continued to be the sub-$1M homes.  This is underscored by the fact that the average list price of a Lamorinda home on-market in the 4thquarter was approximately $1.4M, while the average price of a SOLD home was just below $1M.

Looking in a more focused manner at the Lafayette real estate market, the $2M+ segment is still extremely slow, while the $1M – $2M market has been very active and suffers from a lack of quality inventory.  As of the end of December 2011, there were only 10 homes on the market in this segment, with 8 closed sales during the month and 1 pending sale.  Below $1M, 6 homes went into escrow during the month of December against an inventory of 22 homes — so a little better than 1 in 4 homes found a buyer.

A number of other external factors appear to give rise to further optimism for the 2012 market.  Since most people require a mortgage in order to purchase a home, the underlying interest rate of the note plays an important role in determining home affordability.  Interest rates for 30 year fixed rate mortgages have fallen to an all-time low, averaging about 3.89% for conforming loans – those under $729,000.  For those able to afford a higher payment in exchange for only a 15 year term, they are being rewarded with conforming loan rates averaging just 3.15%.  Jumbo loans – those over $729,000 – are readily available for qualified buyers from most major lenders at rates in the low 4% range!

Nationally, foreclosure filings have dropped to the lowest level since 2007 – another signal that the tide may be turning.  Some believe the decline may be due to delays by the banks in processing foreclosures and that we’ll see an increase in them as we head deeper into 2012.  Even if that is the case, the increase may be more than mitigated by new programs packaging large blocks of foreclosed homes for investors.  Numerous large commercial enterprises are now entering the single-family home market, seeking to bulk purchase large numbers of properties that will be turned into rentals.  One of the recent market entries is the private equity fund, GI Partners, out of Menlo Park.  They envision expanding their investment in single-family homes to about $1B in the next two years.  A very recent 26-page paper by the Federal Reserve outlined programs for converting the glut in foreclosed homes to rental stock.  Both Fannie Mae and Freddie Mac are expected to announce pilot programs in the weeks ahead.  What’s it mean?  It strongly suggests more decreases in inventory which will result in additional shoring up of the market, and will be supportive of strengthening home prices.

When you check back next time, we’ll finish up with where we think the Lamorinda real estate market is headed for 2012.

 


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Lamorinda Real Estate Market Forecast For 2012

13 12 2011

I’m quietly stirring my healthful cup of green tea this morning as I carefully read the tea leaves and try to carefully craft my predictions for 2012 Lamorinda real estate.  Let’s begin with the broader economy and work our way to greater specificity:

1.  Volatility will persist in the US financial markets:  Volatility is driven by uncertainty, therefore we will continue to see broad swings in the market as we work our way through financial recovery and the winds of change in world markets.  The volatility will impact consumer confidence, potentially in both a negative and positive manner as 2012 unfolds.

2.  The Bay Area economy will significantly outpace overall US economic recovery:  We are most fortunate to be living in such a dynamic area of the US — rich with cultural and business diversity.  The foundation of net job growth in the Bay Area has its origin in entrepreneurship and the creation of new businesses.  According to the Ewing Marion Kauffman Foundation research on this subject,  about 3M jobs are created annually across the US from new businesses.  Within the Bay Area, there are approximately 470 entrepreneurs per 100K in population, with a resulting significant positive impact on job growth all around the bay, including within our world of Lamorinda real estate.  A strong job market bolsters consumer confidence, and in turn, strengthens our housing market.

3.  There are clear signs of improvement ahead in Lamorinda real estate:  For those poised to pounce on my words, don’t misinterpret them to mean that prices are going to start heading up, or that 2012 won’t have its real estate challenges.  I am going out on a moderately strong limb and suggesting that the Lamorinda real estate environment will be better in 2012 than it has been in the last several years.  Let’s take a look at some empirical data that seems to support my conclusion:

Lamorinda Real Estate Through Nov 2011

The chart shows:

A.  A significant drop in inventory from 2010 to 2011.

B.  A historically healthy relationship of 2-4 mos of inventory against pending sales throughout most of 2011

C.  Improved strength in the market during Nov 2011 when the market is normally sluggish.

4.  The strongest market segments will be homes priced under $1.5M:  Once one crosses the threshold into Lamorinda real estate’s “upper” price ranges of about $1.5M+, the market changes dramatically, as vividly shown by the following chart:

The following facts apply to this segment:

A.  The upper market segments were the last to be impacted by the housing downturn, and will be the last to recover.

B.  They are the least affordable homes in the present market, therefore simple supply and demand relationships suggest that it will be softer than more affordable segments.

C.  ”Shadow inventory” held by banks may still impact this segment.  We really don’t know how many homes the banks are holding in various states of foreclosure.  Until this inventory is cleared, the market cannot fully recover.  Fortunately, Lamorinda real estate has been only lightly affected by foreclosure properties.

5.  Investors and home buyers will seek investment in real estate as an asset class.  Real estate is a very attractive asset class given the volatility of the stock market, it’s seemingly unpredictable behavior, and our extraordinarily low interest rates.  As we saw happen in late 2001 and 2002, investment money flowed into real estate following the extreme volatility of the financial markets.  While I don’t expect a repeat of that volume of activity, I do foresee that confidence in real estate will increase in 2012, which will result in more people investing in the asset class for both cash flow, capital appreciation, and for home ownership.

6.  The imbalance of “power” will still reside with the buyer.   Just to be clear, sellers who have been “waiting out the market” hoping to get “their price” will be disappointed.  This is no time to be “testing the market” or looking for “that one right buyer” who will pay an over-market price.  We’ll be in a recovery mode in 2012, but that does not mean that prices will move up.  For buyers, interest rates will likely stay close to the present ultra-low levels throughout 2012, so your timing may never be better to jump into the market.

Let me know what YOU think!


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A Look at the Lamorinda Real Estate Market YTD 2011 and What Lies Ahead

21 10 2011

Let’s look at our local market as we work our way into the last quarter of the year and near the end of October.  Inventories have decreased significantly from this time last year… running about 25%+ below where they were last year.  In fact, we have been experiencing about 3 months of inventory in the Lamorinda market over the last several months – representing a very sound relationship between supply and demand.  This compares favorably to the 4-5 months of inventory that we were running at this time last year.  Absolute sales volumes have decreased from last year, particularly in August and September where we saw a reduction of about 20 percent from 2010.  This clearly reflects the uncertainty emanating from global financial markets, and the extreme volatility we’ve seen in the US stock markets.

As one would imagine, the most active markets have been those most approachable to buyers.  Approximately 70 percent of all Lamorinda sales this year have been at price points below $1M.  Other trends worth noting include the move toward more central, urbanized locations.  This began on a more macro basis as people began moving back to urban centers such as San Francisco several years ago.  It has been a function of rising gas prices; aging baby boomers selling suburban homes; and general movement favoring locations where one can walk to shopping, entertainment, and restaurants.

This trend has played out within our community, too, as we’ve seen distinct premiums paid for perceived central locations such as Lafayette’s “Trail Neighborhood” and Happy Valley.  In some cases, a 5 minute commute differential can command a 15% premium in the market.  As an example, we had a recent listing near the “Trail Neighborhood” get bid up by $100,000 in the sub-million dollar price range within 3 days of going on-market.   There have been larger properties in this area that were bid up several hundred thousand dollars during the peak of our spring 2011 market.  Other segments have been much slower, such as the $1.5M – $2M range where there wasn’t a single home that went pending in the month of September throughout Lamorinda.  Sales above $2M have been scarce this year, averaging about 1 per month in Lafayette.

So, what lies ahead?  As we enter the wet winter months, we will see normal seasonality seize control of the market, and overall transaction volumes decrease.  Typically, the market lies mostly dormant until mid-February when it seems to slowly come out of hibernation.  Interest rates will remain low for the next couple of years, so job creation and consumer confidence will play the most dominant role in dictating the performance of the housing market as we enter 2012.  Another “wild card” in the equation involves the disposition of bank assets… the properties in some phase of financial distress and not yet in the marketplace.   Recent bank industry announcements have suggested this process will accelerate — a necessary element to cleansing the market and creating more stabilization.  In the short term, it could increase inventories and put additional pressure on prices.

Finally, with immense amounts of cash on their books, we could also see significant hiring increases from corporate America in the months ahead if our elected representatives can find some common ground to provide the needed confidence and incentives to grow their businesses.  Should that happen, we could see better than expected improvement in consumer confidence and the housing market as we move through the coming year.


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Why the time may be right in Lamorinda Real Estate…

7 06 2011

The national media jumped all over last week’s Case-Shiller data announcement that real estate markets had dropped to 2002 pricing levels and that we were entering a “double-dip” period of the housing market decline.  Bad news sells, and the media hounds were all over this one.

It’s important to look at matters like this with a sense of proper perspective.  When the tide goes out, all boats ride lower in the water, but that does not mean that they all sink equally low, nor that that some won’t rise to higher levels when the tide comes back in. The current downturn is being driven by a glut of foreclosures in the broader market, and an employment market that is still weak due to the vastly improved efficiency of America’s private sector employers.  The foreclosures are artificially lowering “the tide” in Lamorinda real estate, even though we have relatively few of them within our immediate market.

According to CoreLogic, national residential prices dropped 7.5% in April over April 2010 levels, yet stripped of the foreclosure sales, prices were only off one half of one percent (0.5%).  In Lamorinda, the April 2011 median price was down just 2.5% from April 2010 — a much healthier performance level than the “national” markets.  Ah… remember, there is NO such thing as a “national” real estate market, yet that is what the media keeps referring to in the myriad of bad news real estate articles.

It’s refreshing to see some balanced perspective in the press, for example in this past weekend’s Wall St. Journal article “Why It’s Time to Buy“.  According to the article, there are numerous reasons to buy now:

  • Mortgage rates at near 50 year lows, dropping to an average of 4.55% last week.
  • Moody’s Analytics reporting that the ratio of home prices to income is now 20.9% lower than the 15-year average through 2010, and 12.5% lower than the 1989-2004 average.
  • Nationally, Moody’s is predicting that the glut of foreclosure homes will subside by 2013, and that prices will begin edging upward then… sooner in areas such as the land of Lamorinda real estate where we have not been severely impacted by distressed properties.
  • Demographic indicators such as “household formation”—the number of new households each year—are on the rise, and will take a sizable “bite” out of housing inventory… helping the “tide” to rise.
So, what does the future hold? Once the foreclosure mess begins to clear up, say housing economists, the traditional drivers of the housing market—demographics, affordability, loan availability, employment and psychology—should take over. According to CoreLogic’s chief economist, Mark Fleming, “The regular housing market is hanging tough.”  With a highly diversified economy surrounding Lamorinda, record low mortgage rates, and foreclosure levels FAR below those found in most parts of the country, it’s hard to imagine a better time to buy for the long term.  Just remember, you’ll never know when the market has bottomed out until its on the way up.

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Will the Changing Loan Guidelines Impact the Lamorinda Real Estate Market?

12 05 2011

The subject for today’s post has its origin in a comment posted by one of our readers, asking whether the changing guidelines for federally backed mortgages (FannieMae and FreddieMac) will impact our Lamorinda real estate market.   The person posting the comment believes our market is due for another downward leg.  For those unfamiliar with this subject, via Fannie and Freddie, the federal government backs loans below the current “high value area” limit of $729,750 .  These are referred to as “conforming” loans, whereas loans above this amount are privately backed as “Jumbo” loans.  Many politicians and voters believe that the government should get out of the mortgage business and should not be, in effect, subsidizing the purchase of “high value” homes that exceed the national median price.

It is not my intent to enter into a debate about whether Lamorinda real estate owners should get more federal loan support than someone buying in Witchita, Kansas or Detroit, Michigan.  Due to the desirability of this area and the richness of the economy, this is a MUCH more expensive area to live in than most places in the US.  The basic market force of supply and demand has pushed housing prices and almost every other necessity of life to higher price points in the overall Bay Area, than what is commonly found elsewhere.  Take gasoline as an example, it costs considerably more in Lafayette, less than 10 miles from the refineries, than it does when trucked down into the central valley.  Companies will charge what the market will bear, and that’s just the way it is in a free market system.  Housing is no different.

The person who raised this issue referenced a very recent article in the NY Times “Federal Retreat on Loans Rattles Housing.”  The article is definitely worth reading, but the question is whether a September 30, 2011 reduction in the conforming loan limit from $729,750 to $605,000 will cause further decline in our market.  My initial gut reaction is that although this is certainly not a positive for our market, I don’t believe that it will have a significant impact on it.  Let me explain.

The average home buyer in Lamorinda is purchasing a home for just under $1M.  With the requisite 20% down, the current $729K conforming loan doesn’t quite get them to where they need to be, so they either dive deeper into savings or borrow more money via a second mortgage.  We saw numerous cases of the latter in 2009 and 2010 where the lender packaged a conforming first with a variable rate line of credit that gave the buyer an extremely low blended rate.  Obviously, they had to qualify for the total debt servicing.

For more expensive homes, reachng north of the million dollar mark, we saw a number of lenders carefully working their way back into the jumbo loan market.  Some even went out of their way to market their jumbo loans to the real estate community and consumers.  In a recent conversation with a direct lender from a major bank, I was told that the bank was packaging up and selling off its first large portfolio of jumbo loans.  If it went well, as he expected it would, he felt that they would be even more aggressive in seeking jumbo loan originations.

Although loan origination fees may increase as more private lenders step in, that may not be a foregone conclusion.  I will be the first to admit that I don’t know the answer, and can’t predict how financial markets will react.  With private lenders, I will welcome a departure from the regid, often ridiculous underwriting guidelines of the Fannie/Freddie loans — many of them have been the subject of my posts over the last couple of years.  What we all want is fiscal sanity, with banks making good business decisions about offering credit, employing rational decision making criteria and not just intractible guidelines hoping to make one size/flavor fit all.  Life and business simply aren’t like that.  What we may find is that loans are just as accessible following the reduction in the conforming loan amount, and that any increase in cost doesn’t significantly impact home affordabiity.  I guess only time will tell.  In the meantime, we just need to cognizant of the possible headwind we may face in the housing market’s recovery.


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The Jury May Still Be Out on the Lamorinda 2011 Spring Real Estate Market

29 03 2011

Whereas my last post was quite optimistic about the performance of our market based upon the February stats, it may be too early to predict a robust return to a “normal” Lamorinda real estate market.  The national press continues to be rather pessimistic, and inevitably that can wear off on consumers.  According to today’s Wall St. Journal, prices nationally slid from August of 2010 through January of this year, hitting lows not seen since 2003.  March was also not a good month for consumer confidence based upon a report released today that showed gloomier expectations about the economy and labor market.  Escalating petroleum product prices and the world-wide impact of Japan’s tragedy aren’t helping matters.

“These data confirm what we have seen with recent housing starts and sales reports,” said David Blitzer, chairman of S&P’s index committee. “The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing.”  Even with the microeconomic uniqueness of the Lamorinda real estate market, and its display of strength, it cannot separate itself entirely from what is happening on a national basis.  As Mr. Blitzer has pointed out, we are clearly not yet at a point of resurgence in the housing market.

With that said, let’s drill down a bit and see where the strengths and weakness lie in our present market.  Based upon the published February 2011 data, the median price of a sold home in Lamorinda was $836,000.  That should tell you a lot about the present market.  After all, it wasn’t that long ago that people used to joke about anything under $1M being sold for lot value alone.  Looking at the market’s leading edge, of the 43 “pending” sales in February;  a whopping 25 were priced at under $1M; 10 were priced between $1M – $1.5M;   only 4 were priced between $1.5M – $2M; and just 4 priced over $2M.  With some quick math… almost 60 percent of the sales were under $1M.

March looks like it’s been a very strong month based upon homes that are presently pending as of today.  In fact, it looks much stronger than the same period in 2010. Since the official stats won’t be released for about another 10 days, we’ll see how they look upon publication.  If you are interested some additional diversity in opinion on the local market, you might want to read the recent feature article in Diablo Magazine, “Boom, Bust, Bargain”.   You’ll see a photo of one of our beautiful, and now “pending” listings on page one, and you’ll find me quoted on pages two and three.   Stay tuned for what lies ahead in the Spring market!


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More Predictions for Lamorinda Real Estate and Beyond for 2011

7 01 2011

If the calls and emails this week are any indication of what 2011 is going to look like, it should be a busy year in real estate.  Having weathered 2009 and 2010 without too many lasting scars, the question in my mind and everyone else’s seems to revolve around what to expect for the year ahead.  Will the market be much of the same… a little stronger or perhaps a little weaker?  One thing for sure, it’s way too early to tell.

With that said, it’s always interesting to hear from the “experts”.  As one of my Cal Berkeley professors once said, “If you line up all of the economists in the world, they’ll all be pointing in different directions.”  Well, the same may be generally true for the so-called real estate “experts”.   Let’s take a look at an article that just appeared in the LA Times, “When Will Housing Come Back In California?  Five Experts Offer Their Views.”

  • Richard Green, director of the USC Lusk Center for Real Estate, predicts home prices will remain flat in 2011. Professor Green suggests drawing a line on the map from El Centro to Sacramento, and then states that all of the areas along that line will unlikely ever see their peak prices again in his lifetime.  Dr. Green’s academic credentials are impressive, but the USC website doesn’t give his age, or the dates of his degrees.  Based solely on his photo, I’m guessing he’s got at least another 20+ good years left, so his prediction for the central valley housing market is a strong statement of its condition.  On the other hand, Dr. Green states that the recovery will be all about “location”.  He goes on to say, ”Now, places like La Jolla, Malibu, Laguna, Huntington Beach, Atherton, Palo Alto, the city of San Francisco, Marin County, those are places where within the next five years I could easily imagine prices returning to their peak.”  He doesn’t mention Lamorinda real estate specifically, but perhaps he might include us in the Bay Area market areas specifically noted.  I think that one of the most important quotes from Dr. Green is the following:  ”The more a property is a commodity that you can easily substitute for something else, the less the chance it will ever come back to its peak. The rarer a property is, the more likely it’s going to come back quickly.”
  • Leslie Appleton-Young, chief economist for the California Assn. of Realtors, predicts home prices will rise 2% in 2011. Well, this may not win me any more friends within the inner circle of the CAR, but I think Ms. Appleton-Young is a bit off-base with her prediction.  I was also one of the many who shook my head on the sidelines as I saw the market begin its dip, yet the CAR and NAR (National Association of Realtors) economist continued to predict relatively strong housing markets.  Both organizations do a lot of good for the industry, but I think their economists are a bit too tightly tied to the trunk of the tree to be objective.
  • Bruce Norris, president of Norris Group in Riverside, expects home prices to fall 5% in 2011. Well, I’ve never heard of this person, and he’s from Riverside where no one with a sane mind would choose to live.  Gosh, I hope that my oldest and best friend who is a physician in Riverside doesn’t read this post!  If I lived in Riverside, I’d be pessimistic, too.  Maybe he’d prefer to buy some Lamorinda real estate. In all seriousness,  ”You’ve had a slew of programs trying to prevent inventory from showing up, and that prevents reality from happening,” Norris said. “It’s definitely standing in the way of the natural process.”
  • Emile Haddad, chief executive of FivePoint Communities Inc., expects home prices to “stabilize” in 2011 but declined to make a specific price prediction. Haddad used to be the Chief Investment Officer for the large developer, Lennar.  In case some of you haven’t followed the tales of Lennar, they went bankrupt principally on betting long on the central valley real estate market… Sacramento, Elk Grove, etc.  I’m sure Haddad has learned a few things since past mistakes.  He states, “We are bumping along the bottom, and that is a good thing, because that is the first thing that you need in order to start seeing a housing recovery.  He goes on to say, ”Affordability is something I look at, and obviously that is a very attractive metric right now…. There is a value proposition out there right now that is very attractive, that we haven’t seen in four decades.”
  • Christopher Thornberg, founding principal of Beacon Economics, predicts home prices will remain flat in 2011. Once a senior economist for the UCLA Anderson Forecast, Thornberg was one of the first to predict the housing crash, pointing to prices that were way out of line with what people earned.  In that vein, he views the plunge in home values as its own recovery of sorts “because that is when prices went from stupid-high levels to levels that made sense again,” Thornberg said. “Now we are in a post-recovery recovery, if you will.”

Now that the experts have spoken, I’ll leave the Lamorinda real estate interpretation up to you.  Personally, I’m in the “bumping along the bottom” camp, and agree with Dr. Green that desirable parts of the Bay Area could see their way back up within 5 years, albeit I don’t see us hitting our highs within that time frame.  Let the game begin.


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Watching the Lamorinda Market in 2011

5 01 2011

As an avid and bit compulsive market watcher, I’ll be following a number of elements in the 2011 market in order to gauge its health and provide informed counsel to clients.  One of the most obvious, but often overlooked indicators of market health is the relationship of supply and demand. Ultimately, this relationship reflects the state of a given market, and drives the direction of prices.

Instead of looking at the number of months of inventory there is in a given month, I tend to prefer looking at “absorption rate” — the relationship between total inventory and the number of homes that hasvegone pending.  This provides a true indication of demand in a given month, and may have a carry forward effect to future market performance. The official MLS numbers for December 2010 have not yet been released, however November was a very strong month for Lamorinda. With 50 homes pending against a total Lamorinda real estate inventory of 154 homes for sale, the absorption rate of 32.5% was the best monthly performance of the year!  It surpassed November 2009 by approximately 11%.

A timely Wall St. Journal article discusses “The Four Housing Issues to Watch in 2011“.   Succinctly, they are:

  • Jobs: This is so obvious it barely is worth mentioning.  If people are unemployed or unsure of their employment status, they aren’t going to buy a home.  One of the things not reflected in the employment numbers is the large number of people who have become self-employed — building new businesses, doing consulting, or other revenue generating activities that escape the official reported numbers.  This is much more common in the bay are with our tech innovation, and may be a factor in contributing to improvements in our local economies that are not yet reflected in official government reporting.
  • Foreclosure delays: Some lenders have suspended foreclosures due to possible technical errors in bundling and selling mortgages.  If foreclosures are more difficult and expensive to process, banks and investors could step up bulk sales of loans or foreclosure alternatives such as short sales.  The quantity of homes being held back in “shadow inventory” is important to the health of the market, prices, and ultimately when we see more normalization.
  • Washington: There are lots of variables here.  The administration wants to see Freddie and Fannie, as well as the broader mortgage market remade.  The mortgage interest deduction will certainly see some debate this year, although most feel that it will remain largely in place.  Will policy makers seek to be more aggressive with measures that will put pressure on lenders to rework mortgages to forestall some foreclosures?  Finally, if we really do enter into a double-dip housing downturn on a national level, then we may see some quick action out of Washington to shore up the market via tax credits — similar to what we saw in 2010.
  • Lending standards and rates: Fanny and Freddie are dominating the mortgage market with 9 out of 10 mortgages backed by them.  Policy makers could make room for more private lenders to enter the market by scaling back the expanded “conforming loan” limits in fall of 2011.  If rates rise this year, we’ll see greater pressure on prices.

As we forge through the first week of our new year, it seems like we are seeing a healthy balance of buyers and sellers in the market, and the couple of lenders we’ve talked to say they are getting lots of calls from people wanting to get pre-qualified for loans.  All-in-all, a good start to the year for Lamorinda real estate!


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Lamorinda Real Estate… When Market Statistics Don’t Fit.

27 06 2010

In recent months, I’ve talked a lot about the performance of Lafayette real estate and the surrounding areas, often drawing upon objective sales statistics to underscore and substantiate the points I’ve made in the post.  With that said, statistics work best when there’s a large pool of data available.  So, in the case of Lamorinda real estate, we have seen a lot of transactions at the lower end of the market, and fewer at the upper end.  In terms of reaching conclusions about pricing, it’s easier to rely upon the segments of the market where there have been lots of transactions than it is at the upper end where there have been fewer.  In other words, drawing conclusions about the average price of 200 transactions is a lot more meaningful than if there were hypothetically only 10.

Another related consideration is what I’ll refer to as the “Zillow Problem”.  This popular website simply doesn’t work in 95+% of Lamorinda because of the non-conformity of the properties.  Our communities aren’t built as homogeneous subdivisions with similar homes.  One of the reasons that we cherish this community is because of the unique characteristics and beauty of the land, and also because that uniqueness is reflected in the homes.  It’s not uncommon for a $3M home to be next door to a $2M home, and around the corner from a $1M home.  It’s what makes this community special and it’s what also causes the use of simple price/sq. ft. mathematical algorithms to be inherently problematic.  In simple terms, that’s why Zillow doesn’t work in this community.  It is also why it is very difficult to use statistics on a “thin” market to draw conclusions on price trends.  This is where statistical analysis doesn’t “fit”.

Let’s look at the upper end of the market where there have been the fewest transactions and the homes arguably have the highest level of differences in style, construction quality, aesthetics, amenities, etc.  Using $/sq. ft. analysis to determine pricing of one home vis a vis another is almost impossible.  Ultimately, it comes down to a MUCH more subjective analysis driven from one’s interpretation of the relative merits of the factors noted above.  Just because one of the rare upper end foreclosure properties closes escrow at a hypothetical $2.5M for 6500 sq. ft. doesn’t mean that suddenly a 5000 sq. ft. home may only be worth about $2M.  You MUST look at the relative characteristics of each home, and ultimately ask yourself whether YOU would have bought that “other” property for $2.5M.   In more cases than not, the answer will probably be “NO”, since you place a higher inherent value on the home that you are considering for purchase.  You have to ask yourself, over the long term, which property will be the better investment… the foreclosure property with a suboptimal location that a spec builder never finished, or the one with a coveted location, high quality finishes and emotionally compelling aesthetics?

Will a small number of financially-driven sales put pressure on the upper end market for about another 18 months?  The national trends suggest this will be the case, however that doesn’t mean that any given upper end property is over-priced because it hasn’t sold in a month or even two months.  That’s more reflective of the nature of a segment with fewer buyers than in lower price ranges.

Simple supply and demand relationships have had their impact all across the Lafayette real estate market and the surrounding communities of Lamorinda… just as they have across the US.  Unlike most other markets, the supply of NEW inventory is constrained in our geography.  Over the long term, almost no new inventory can be built due to lack of land availability, and it is for this reason that we have not been impacted as substantially in the market downturn as other areas.  Once the overall economy improves, that supply/demand relationship will work in our favor and our area will see a faster, steeper rebound.  Additionally, our local economy is “fed” by a very diverse set of industries… from technology, to healthcare, to biotech and financial services.  The diversity of our economy should help us to continue to outperform most other areas of the country.  Lastly, Lamorinda real estate is still undervalued relative to comparable areas in the SF peninsula and in Marin County.  Over time, I expect to see these price differentials tighten to the benefit of our Lafayette real estate and surrounding area valuations.


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Categories : Lafayette CA Real Estate Forecast, Lafayette Real Estate Forecast, Lamorinda Real Estate, Lamorinda Real Estate Market Statistics

The Sun Has Emerged, But Not In Lamorinda’s Upper End Real Estate Market

28 05 2010

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.


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Categories : Lafayette CA Real Estate Forecast, Lafayette Real Estate Forecast, Lafayette, CA Real Estate, Lamorinda Housing Market, Lamorinda Real Estate Market Statistics, Orinda Real Estate Forecast, Orinda, CA Real Estate

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