But things have changed. Do buyers still have input as to the value of properties? Yes, of course they do. Without buyers, there is no sale, and therefore no indication of the value as dictated by the law of supply and demand. But there is a new sheriff in town in this debate. One can make a very strong argument that it is now the Banks that control property values (well okay, banks and mortgage companies). Banks control property values in two ways:

First of all, thanks to recent changes in the appraisal process, properties are now worth what a buyer is willing to pay for it and what a bank is willing to appraise it for. And we are seeing more and more often that banks are appraising properties for less than what the buyer has offered. Is this a conscious decision? Partly. Banks have become much more conservative in property valuations, and want to avoid the aggressive appraisals that helped fuel the dramatic rise in property values earlier this decade. Banks have introduced more stringent guidelines and procedures designed to keep appraisals more conservative, eliminate undo influence between the lender and the appraiser, and protect the lender’s interest. We are seeing an increasing number of sales fall apart because the bank appraisal came in lower than the sales price. So, if a house sells for $800,000, but the bank only appraises it for $750,000, what is the house worth? In most cases it is now worth $750,000, unless you can find a bank that will appraise it for higher or unless the buyer is willing to pay over the appraised value (not something most buyers are willing to do). So can the seller get an appraisal before putting the home on the market? Yes, but the buyer’s bank will get another appraisal, and it may or may not appraise at the same value. So in essence, the value is largely dictated by the opinion of the appraiser, who might be from 100 miles away and largely ignorant of the nuances of the local market. Great.

The second way banks control property values is through foreclosures. As previously discussed, there is currently a glut of foreclosed homes that banks have not put on the market. They clearly control when these homes hit the market, and therefore have some control over the direction of property values, at least in the short term. There is much debate about why banks have not put these homes on the market, but one thing is certain… if banks release a flood of foreclosed homes onto the market, we will likely see downward pressure on the banks. If they release them slowly or delay releasing them, they can keep property values stable. It’s largely up to them.

So next time you get annoyed at the long lines at your bank, or their short (and getting shorter) business hours, you might want to remember who controls property values for the moment… and be extra nice.

For example, when the local housing market saw the extreme run up in prices between 2002 and 2005, the demand for housing was over-heated, and the supply was constricted. A factor that contributed strongly to this run up in prices was affordability. Interest rates were kept low by the Fed, and new mortgage instruments such as interest-only adjustable and option arm products with built-in negative amortization exploded onto the scene. The net result was that mortgage loans became more affordable (artificially so, as it turned out). All of the sudden buyers could purchase (I would say afford, but that might be a poor choice of words) a larger house than their income could justify in years prior. And liquidity was very high, primarily because loans were easy to obtain. Didn’t make enough money? No problem, just do a stated income loan. Need a down payment? No problem, just get an equity line on your current home. No down payment? No problem, just get 100% financing. Liquidity was also high because sellers could free up their equity easily through a sale or a refinance. The result, as we know, was the extreme run up in home prices, peaking in 2005.

So what happened? Why did home prices peak, and the market run out of steam? Again, one of the main factors was affordability. The strength of a real estate market comes from the bottom up. When first time buyers get priced out of the market, the market stalls. If the seller who owns a condo can’t sell because it is hard to find buyers who can afford $600,000 for an entry level condo, that seller will not be able to buy up into a bigger house (say $800,000). This impacts demand for the next price level up, which then impacts the price bracket above that, and so on. In fact, many experts measure the health of a real estate market by its affordability. Indeed, few markets can sustain strong appreciation without strong increases in personal income (or strong drops in interest rates, which is the back door way of increasing affordability). The other factor is liquidity. If potential buyers can’t sell their existing homes, then in effect they are not liquid. And when mortgage loan qualifications become much more stringent, it in effect reduces liquidity as well, as it become difficult to get mortgage financing.

Scroll forward to March of this year. Most markets saw a 20% to 30% or more reduction in home prices since 2005. This had to happen. Home prices had basically outpaced affordability. When this occurs, there are only 3 scenarios for the market to stabilize. Either income has to rise (not easy during a recession), interest rates have to drop, and/or home prices have to decline. Interest rates did in fact drop, reaching historic lows. But this was offset as mortgage loans became extremely hard to obtain, with banks and mortgage companies enacting much more stringent underwriting to curb the abuses of 2002 - 2005. That left home prices as the main adjustment mechanism to bring the market back into balance. And adjust they did.

The good news is that every down tick in home prices made homes affordable to more buyers. See this graph, which shows the California Association of Realtors Affordability Index, which represents the percentage of the population that can afford the median priced home in the specific county.

It is the law of supply and demand. Home prices adjust until demand increases, and the market hits equilibrium or stabilization. By March of this year, many of the entry level condos in Dublin, for example, had dropped from the $600,000 price range at the peak to the mid-$300,000’s, making these homes much more affordable and attractive. Combined with low interest rates and the first time buyer tax credit, many buyers have jumped into the market. As the low end of the market has improved, the strength has started to percolate up to higher price ranges, helped along by the Fed raising the Conforming loan limits to $729,750. This helped the liquidity in the market, as now it was much easier to get loans (at least up to $729,750), and there was equity being freed up because sellers were able to sell their homes more easily. And now some of the sellers (those who were not under water) have become buyers, able to buy a home in the next price segment up. This has created the current situation where the market is improving, and the improvement is moving up the price brackets as the activity on the low end improves.

At the moment, the market starts to slow once you start to get much over $1 million. Again, it is wise to think in terms of affordability and liquidity. In a recession (which we are still in by the way) buyers naturally become more cautious and conservative. So they are much more sensitive to the affordability question, and not as inclined to push the envelope on increasing their debt load. And mortgage rates in the jumbo loan arena have been very high, especially fixed rates. Most buyers in this price bracket are opting for shorter term loans (5 to 7 year fixed loans) because the rates are much better, and thus the house is more affordable. There is also the question of liquidity. Lenders have tightened the criteria for jumbo loans as they have become more difficult to sell in the secondary market. Now it seems buyers must wear flowing robes and walk on water to qualify for a jumbo loan. And if a buyer currently owns a home, it is much more difficult to finance the new home unless the current home is sold. In effect, there is less liquidity in the market. Add to this the fact that most of the buyers in the upper price ranges are equity buyers who come in with large down payments, and most buyers have seen a good deal of their net worth erode over the last 7 or 8 months. So in effect buyers are not quite as “liquid” as they were before the stock market crash in October.

It will be interesting to see where this market heads. Are we truly at the bottom? Only time will tell…

In the under $1 million market, sales continue their upward trend, with 71 pending sales of single family homes in May, up from 63 in April and 45 in March. Low rates, a first time buyer tax credit, the increase in conforming loan limits, and renewed optimism seemed to have ignited activity on the low end. Many of the lower priced homes are seeing multiple offers, especially homes that are newer. Inventory dropped in this price range, with 108 single family homes on the market at the end of May, down from 118 at the end of April. So… less inventory and more sales means a stronger market. Indeed, there is under a 2 month supply of homes in this price bracket. Things are looking good.

In the $1 million to $2 million market segment, sales were up slightly and inventory declined. There were 72 homes on the market at the end of May in this price bracket, down from 81 at the end of April. Activity was steady, with 11 pending sales in May. There is a 6 1/2 month supply of homes in this price bracket. This price range is not nearly as hot as the lower price ranges, and buyers are much more value conscious in this price range.

In the luxury home market over $2 million, activity was slow but steady, with 2 pending sales in the month of May. Inventory in this bracket increased to 43 available homes at the end of May, up from 38 at the end of April. This still a sluggish market, with downward pressure and patient buyers who are willing to wait for the right house. Right now, there is over a 20 month supply of homes on the market in this price range.

Average days on market in Pleasanton has dropped, reflecting the increase in activity. It peaked at approx 135 in early March, and has declined to around 122.

A look at the median price per sq ft for Pleasanton shows continued softness in prices overall (orange line in the following graph). However, when one looks at the low end of the price spectrum (represented by the black line in the following graph) you can see that the prices are leveling off, which is good news. In fact, it is perhaps an early sign that the market is stabilizing.

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With the continued improvement in the equity markets and renewed optimism on the economy, we could be in for an active summer. Here’s hoping…

The under $1 million market continued to show the bulk of the activity in San Ramon, with 74 pending sales in May, down from the spike of 90 pending sales in April, but still above the 65 in March. Inventory was down sharply, with 112 single family homes on the market at the end of May, down from 137 at the end of April and 188 at the end of March. This represents a 1.5 month supply of homes, which is a brisk pace. We are seeing the return of multiple offers on many of the homes here, especially the newer areas.

The over $1 million market saw a slight decline in inventory, with 45 homes on the market at the end of May, down from 53 at the end of April and 60 at the end of March. Pending sales were down slightly in May in this price bracket, with 8 pending sales, down from 10 in April. There is a 5.3 month supply of homes on the market in this bracket, which is not as active as the under $1 million bracket.

Not surprisingly, the long decline in home prices showed signs of leveling out, which is good news. Take a look at this graph showing the median price per sq ft.

All in all, the San Ramon market continues to show improvement, especially in the lower price ranges where multiple offers are now common. Attractive prices, great schools, the fist time buyer incentives, and the increase in the conforming loan limits have all combined to drive sales. Hopefully, this is a sign that the market is stabilizing at last.

The Under $1 million price bracket is a mirror of the city overall. In fact, the vast majority of the activity is in this price range, with 36 available homes at the end of May, down sharply from 60 at the end of April. Pending sales of single family homes in May rose from 48 in April to 52 in May.

The over $1 million market in Dublin showed an increase in inventory, with 7 single family homes on the market at the end of May, up from 3. There were 2 pending sales in this price bracket in May, matching the sales in April.

Not surprisingly, the long slow descent of prices seems to have ended. In fact the median $ per sq ft has stabilized, and actually rose slightly for the first time in many months. (click on graph to enlarge)

All in all, a strong showing from Dublin, and an indication that the real estate market is stabilizing in the lower price brackets, which is good news for everyone.

Danville May Home Sales

To be sure, banks have been very slow in starting the foreclosure process on homes in general. Loans can often be 3 to 9 months in arrears before a bank will file a Notice of Default, which is the first step in the foreclosure process. And even when a bank files a NOD, it is up to their discretion as to when they actually file the Notice of Trustee’s Sale, the final step in the foreclosure process that sets the date for the foreclosure sale. And banks can and often do postpone the sale depending on many factors, including efforts by the owner of the property to do a short sale to avoid foreclosure. In general, banks have just not been in a hurry to take back properties, and according to many industry insiders, once they take back a home they have not been in a hurry to put them on the market. According to this article in the Chronicle, there are several reasons for this condition:

– The “pig in the python”: Digesting all those foreclosures takes awhile. It’s time-consuming to get a home vacant, clean and ready for sale. “The system is overwhelmed by the volume,” Sharga said. “In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month.”

– Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. “With banks in the stress they’re in, I don’t think they’re anxious to show losses in assets on their balance sheets,” O’Toole said.

– Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don’t fall as fast. “They want to be careful about not releasing them too quickly so they don’t drive prices down and hurt the values,” O’Toole said.

And foreclosures are still occurring in large numbers. In fact, we are starting to see foreclosure activity in Alt-A and adjustable rate loans made to prime credit worthy borrowers that are seeing an erosion in their property values and huge increases in their payments as their low interest-only payments reset to fully amortized payments, with sometimes devastating results. Many in the industry are concerned that the upper end of the market is going to see continued downward pressure as more distressed properties hit the market.

This leads to the real question… Is any uptick in demand for homes going to be met by more inventory of distressed properties, thereby keeping prices down for a few years until we burn through the inventory of unsold bank owned homes? Only the shadow knows…

Pleasanton Home Sales in May

San Ramon May Home Sales

Dublin May Home Sales