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.





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.





Time to Jump In… but, Leave the Irrational Exuberance on the Sideline

25 04 2010

So many of our Lafayette real estate and other Lamorinda real estate clients have asked us over the last year or so whether “the time” has arrived to “jump in”, either as a buyer or seller.  My answer has always been one tempered with caveats about the unknown elements of world events and the economic implications of the recession that could impact my answer, but I also have always told these clients that one never knows if a market has bottomed until we’re looking at it in the “rear view mirror” after it turns up.  Last year, I told clients that I felt we were “bumping along the bottom” of the market and that I couldn’t see more than 5% downside risk as we moved from 2009 to 2010, with most of that risk at the upper end of the market where there had been very little transactional activity in 2009.  In retrospect, it appears to have been a pretty good market call.

As reported recently in the Wall St. Journal, the S&P/Case-Schiller survey results “suggest housing prices bottomed out around April 2009, when its 20-city composite index was down 32.6% from its peak reached in June/July 2006.”  The article goes on to say that, “Since then it has gained 3% through January 2010, with some markets much stronger, especially San Francisco and Minneapolis.”  This is very encouraging, but I would caution clients in their interpretation of local housing statistics that show rising prices, for they can be very misleading.  As an example, I mentioned a week or so ago that there were 7 homes over $2M that had gone pending within the Lafayette. CA real estate market inside of about a 14-day period. Assuming most of those homes close escrow in the May time frame, we’ll see the May statistics report a very significant rise in Lafayette’s median price. If the media picks up on our relatively small Lafayette real estate market, it will undoubtedly report a “sharp jump” in prices that won’t be truly reflective of the market.  Never take statistics at face value… always interpret them within the proper context.

Bottom line, there are lots of positive reasons to believe that the worst of the market is a ways behind us and that the outlook for the future is much more positive.  Other indicators include:

  • Sales of new single family homes jumped 27% last month on a nation-wide basis per the Wall St. Journal.  Sure, most of this is due to the expiring tax credit for first time buyers, but don’t forget the fact that we need to see this segment firm up to underpin the overall housing market.
  • The 30-year fixed-rate mortgage averaged 5.07% for the week ended April 15, down from 5.21% last week.  As reported, this rate is only slightly higher than the 4.82% average for a year ago during the depths of the market.

If you haven’t decided to jump in yet, now is probably the time to do so, but be sure to do it with reasonable expectations.





The Spring Market Has Arrived, In Spite of the Weather

12 04 2010

The latest statistics for the Lamorinda real estate market clearly show that we have entered the heart of the Spring real estate market.

The following chart sheds a bit more light on the market and looks at the sales activity under the $1M price point:

The market segment from $1M to $2M showed signficant improvement in March, primarily at the under $1.5M range.  With the unit sales improvement, we also saw a signficant growth in inventory:

Finally, the upper end market remained challenged in Lamorinda for the month of March.  The following chart shows the sales activity in the $2M+ segment:

Stay tuned for a very encouraging update on sales activity for the first week or so of April!





More Thoughts on What’s Ahead for Lamorinda Real Estate

31 03 2010

According to a recent Wall St. Journal article, California housing prices have been on the rise, and the Bay Area has experienced a 20% rise in the median price of homes since February 2009 — now standing at $354,000.  Naturally, this price level bears no resemblance to Lafayette real estate or home prices found in Orinda or Moraga.  It does, however, align with what we have seen in our market area, where the highest velocity of sales is in the sub-$1M price range.

Counterbalancing this is the fact that default notices rose almost 20% in February and roughly 11% of all California homeowners with mortgages are 90 days or more delinquent on their payments.  With an “official” unemployment rate standing at around 12.5% for the state, we’ve still got a rough road ahead.  The market and consumer confidence are improving, but we have not yet shed the remnants of the enormous financial fire pit from which we are slowly climbing out.

More thoughts on trends/issues to contemplate over the coming months:

  • An increasing number of “down-sizers” who will be selling their larger Lamorinda real estate holdings and buying smaller single level homes within Lamorinda, but also taking advantage better value propositions in areas such as Alamo, Walnut Creek and Pleasant Hill.
  • As reported in the Wall St. Journal, “The Fed confirmed that it’s ending its $1.25 trillion purchases of agency mortgage-backed securities, which enabled Fannie Mae and Freddie Mac to help keep mortgage rates low by buying mortgages.”  This means that there will be increasing upward pressure on interest rates… not substantial by historical comparison, but nevertheless significant enough to potentially impact demand and prices.
  • At the upper end of the market, we are observing and hearing from other agents about Lamorinda real estate owners who are not yet delinquent on their mortgage payments, but their combined first and second deeds of trust exceed the market value of their property.  The new loan modification programs being introduced will hopefully help these people stay in their homes long enough to make the necessary adjustments to their personal finances.  Absent modifications helping them, these properties could find their way to short-sale or foreclosure.  This is something to watch closely as the 2010 market unfolds.
  • This will be the “year of the move-up buyer”.  With the greatest pressure found on higher priced homes, significant demand for lower priced homes, and historically low interest rates, most won’t find a better time to make the move up.
  • It may also be the best time to make the move out of Lamorinda real estate.  For empty-nesters considering retirement in out-of-state communities, California foothill communities, or other California secondary markets, the timing may never be better than right now.  Markets in “second home” communities have been pummeled over the last couple of years, selling at incredible discounts to where they were just a short time ago.  In the end analysis, its the delta between the equity netted from your present home sale and the cost of buying the replacement home that counts.




A Finger on the Pulse… A Current Look at the Anatomy of the Lamorinda Real Estate Market

30 03 2010

The year is shaping up to be a relatively strong one for Lamorinda real estate. With  a few 2010 transactions closed and behind us, several properties on the market, more on the way, and several active buyers as clients… I feel like we’ve got a pretty good gauge of the market’s “pulse”.  Naturally, time will tell, but here are the current early stage observations:

  • Corporate America has greatly increased the flow of employees  into the Bay Area with paid relocation plans  – a very expensive endeavor, but a sure sign that big business is feeling more confident about the economy and their profitability.  We are aware of many agents with clients obtained through relocation company affiliations — more than we’ve observed in at least a couple of years.
  • Consumer confidence appears to be much stronger than it has been in a long time.  People are out looking at homes and seriously evaluating making decisions to purchase across a broad range of Lamorinda’s home inventory.  We have found this to be true among our own clients , observed it to be the case based upon numerous conversations with people coming through Open Houses this year, as well as noted it based upon discussions with agents who have showed our listings.
  • Price sensitivity is still keen, but buyers are acting upon what they believe are fair market value acquisitions.  No one is willing to pay 2006 prices, however if priced in a manner that buyers perceive as  a “good value”, homes are selling.  The greatest market velocity is at the lower end of the market.
  • It’s a more normalized, rationale market… Except in extraordinary situations, there is a relatively low sense of urgency to buy.  People are taking their time making decisions, and as a result, homes are taking longer to sell.  The exception to this generalization is in the sub-$1M market of Lamorinda noted above.
  • Even with excellent, below market pricing, we are not seeing “irrational exuberance”.   I recently represented a client who wrote an offer on a Lamorinda property priced at least 10% below market, perhaps more.  There were only3 offers on the property.
  • The latest Fannie Mae underwriting guidelines have slowed the market.  A multitude of 2010 changes to underwriting standards have made it extremely difficult for a buyer to purchase a replacement home PRIOR to selling their existing home.  There are obvious exceptions for people with well above-average wealth, however there are many who could have qualified for the purchase of a replacement home or bridge loan even a year ago, and now they can’t.  As a result, I believe the peak period of activity in this year’s market will shift out a couple of months.  Also… expect to see more offers being made contingent upon the sale of another property, particularly in the $1.5M+ market segments.

That’s it for your Monday market observations and predictions!  Hopefully, I’ve shed provided some degree of incremental clarity to what has clearly been a confusing, muddy period in the world of real estate… even in Lamorinda!





The Lamorinda Real Estate Market and Buffett’s Housing Predictions…

2 03 2010

The “Oracle of Omaha”, Berkshire Hathaway’s Chairman Warren Buffett, went on record Saturday in his annual letter to shareholders stating that residential real estate market problems will be substanitally behind us within the next 12 months:

  • “[Within] a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”

 

 

 

Even though Buffett didn’t specifically mention the Lamorinda real estate market, this a reassuring prediction for those who have have been sitting on the sidelines waiting for the market to bottom.  As I have said before, one will never know the market has bottomed until it heads up and we are looking back.  Although there are dire predictions of a “double dip” in the market due to forthcoming foreclosures, it appears thus far that those predictions have been over-stated and we are presently bumping along the market’s bottom… with relatively normal seasonality.  If Buffett is right… and he usually is… 2010 will be a very good time to be a buyer of real estate.

The “official” market stats have not been published yet by the various MLS boards, however that doesn’t mean we can’t take an early peek at the Lamorinda market for the month of February:

  • 162 homes “Active” on the market compared to 172 homes in 2009.
  • 78 “Pending” in escrow compared to just 21 in 2009!!
  • 28 “Sold” with closed escrows compared to just 12 in 2009!!

These aren’t the “official” stats, however I don’t expect that there will be much variation from what the Contra Costa Association of Realtors publishes in the coming week.  Clearly, 2010 will be a MUCH better real estate year than 2009.  It is also clear that we could begin to see some firming up of prices, and perhaps some price increases in certain segments of the market.  More about this in subsequent posts…








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