Made official on Friday, the tax credit for home purchases was extended through July 1, 2010 and the important details are exactly as they were in my post on Friday the 30th of October, which was summarized as follows:

· Effective on binding real estate contracts from December 1, 2009 through April 30, 2010, The tax credit would be $8,000 for first time home buyers and $6,500 for move-up buyers who have owned their current home for at least five years

· The tax credit expires on April 30, 2010; however, if a binding contract is reached by April 30, 2010, buyers have an additional 60 days to close the deal and still be eligible for the tax credit

· For purchases made in 2010, taxpayers would be able to claim the credit on their 2009 income tax return

· The income limits for both first time home buyers and move-up buyers would be $125,000 for single return and $225,000 joint return.

· Cost of the home may not exceed $800,000 to be eligible.

Remember that a tax credit has about THREE TIMES the impact of a tax deduction, which allows someone earning $125,000 per year to be taxed on about $102,000*. And since other items like interest and property taxes are also deductible*, that same individual may be looking at less than half of their earnings being fully taxable..!*

Add the above news to the fact HUD also extended the conforming loan limit of $729,750 in the Bay Area to December 31, 2010, and you have a “perfect storm” for every qualified first-time buyer in the Bay Area.

S&P Case-Shiller Confirming Further Improvement of Housing Prices

Released last week, the S&P Case-Shiller index confirms that housing prices continue to improve, especially in areas like San Francisco where the index moved another 2.8% in August to 132.47. This marks the seventh straight month of improvement.

Zillow also reported that their index reflected further stabilization for the third quarter, with over 26% of the metropolitan statistical areas showing signs of improvement.

Real Estate as an Ideal Hedge to Both the “W” Concern and Inflation

You may recall from my last post that we are seeing far more application activity for purchases in the $1mm+ range, especially the $1.5mm to $4mm range. These applications have been coming from our more financially-minded clients, as they not only see tremendous opportunity to obtain a more valuable home, but they are very concerned about a “W”-shaped economic recovery and subsequent inflation. As such, obtaining an upgraded home for less, cheap financing and hedging against inflation make buying a larger home an ideal move. All things being relative, the reality is that the S&P 500 currently has a rather high price-to-earnings ratio at about 19.52 versus the historical average of 15.7. As such, if we were in average economic circumstances, it’s arguable that the stock market is overvalued by about 25%. Given the fact that our current economy is FAR from being in average condition, it’s anyone’s guess just how overvalued the stock market is. All I know is that my savviest, financially-minded clients think that the stock market is due a correction and that real estate is a great asset to have as a hedge against both a market correction and inevitable inflation.

Fannie’s New Program: Deed for Lease

Announced on November 5, Fannie Mae is helping those qualified applicants to essentially sell and lease back their current home. This program is also applicable to investment-property owners who are facing foreclosure and wish to deed the property over to the lender and allow the renters to continue renting at market levels.

Rates and Activity

• Rates continue to run as low as 3.75%, depending on a number of different factors, with the conforming 30-year at just under 5% and the jumbo 30-year at about 4.75%
• 71% of our transactions last month were purchases, and the average loan was in the $500k range.
• As mentioned above, we’re seeing a heavy trend in purchase applications for the move-up market, but inventory is turning off a majority of those buyers
• We closed a deal in TWO weeks, but we still recommend a 30-day closing period
• If you or someone you know prefers to pay cash for a purchase, then finance that purchase within 90 days to protect valuable tax advantages, we can help, as we have programs that DO NOT require 6 months seasoning and pricing is based on purchase money, NOT a cash-out refinance

* Does not constitute tax advice.  Please seek any qualified tax professional for proper guidance.

Key to Estimated Peak-Value Period for the Chart Below:
*Peak values estimated to have been reached 1/1/06 – 6/30/06
**Peak values estimated to have been reached 1/1/07 – 6/30/07
***Peak values estimated to have been reached 1/1/08 – 6/30/08

Revised: Peak Values vs. Current SF Prices [SFHomeBlog]
Peak Value vs Current SF Value Feb 2009 [SFHomeBlog]

The Basic Requirements

You qualify for the tax credit if the:

• Home you’re buying will be your primary residence
• Purchase price isn’t more than $800,000

This credit is not a loan; it’s yours, but keep in mind you have to live in your new home for three years. If you sell the home in less than three years, you’ll have to pay back the money.

What’s Changed?

With the new legislation, buyers have more time to find a home and more buyers are eligible for the tax credit:

• New deadline: To qualify, you need to be in contract with a seller by April 30th & close on the home by June 30th (The previous deadline was November 30, 2009).
• Not just for first-time buyers anymore: Home buyers who’ve owned and occupied a home for at least five consecutive years during the past eight years are eligible for a credit up to $6,500.
• Increased income limits: Individuals making less than $125,000 and couples making less than $225,000 are eligible (The limits used to be $75K & $150K).

First-time buyers are eligible for a credit up to $8,000 on homes purchased between January 1, 2009 and June 30, 2010. Qualified homeowners can a credit up to $6,500 on homes purchased between November 7, 2009 and June 30, 2010.

Bonus Link

You can check out the full text of the bill. Scroll about halfway down to sections 11 & 12:

• Sec. 11. Extension and Modification of First-Time Homebuyer Tax Credit.
• Sec. 12. Provisions to Enhance the Administration of the First-Time Homebuyer Tax Credit.

During this time of the year, we generally see a decline in home sales with a dramatic dip as we get closer to the holidays. This year has been different as things actually picked up as the summer ended.

In the Bay Area, sales of existing homes in September rose 8.4% from September 2008. The Peninsula and South Bay led the way with the largest increases in homes sold from last year:

• 35% increase in San Mateo County
• 19% in Santa Clara County
• 19% in Alameda County

Reasons for the Increase in Home-Buyer Activity

There are a few reasons why the real estate market has remained strong well into the fall:

• Amazingly low interest rates. Most the buyers that I’m working with cite this as the #1 reason (followed by lower homes price) why they’re looking to buy now. Although we’ve seen a 2-week spike in mortgage rates, they are still near all time lows. You can find great info on mortgage rates at freddiemac.com.
• Lower home prices. While many of the lower end sales tend to be driven by short sales and REOs, we’re seeing a lot of well priced normal sales as well. Believe it or not, there are actually a lot of sellers that have lived in their home for 10, 20 or even 30+ years and are now cashing out their equity and buying in areas that they probably couldn’t have afforded a few years ago.
• The Fed’s $8,000 first-time home buyer tax credit. Although Congress has extended the credit, I think this is less of a driving force in the Bay Area where many home buyers do not qualify for the credit since income levels here tend to be higher than the limits imposed by the program.
• Strong local economy. Yes, I know companies are still laying people off, the country is in two wars and California has a major budget crisis. But, people are spending money in stores and on homes. Multiple offers are not just on bank owned homes, but we’re seeing that across the board for homes in San Jose, Mountain View, Palo Alto and all over the Bay Area. And have you seen Google’s and Apple’s recent earnings reports?

I expect things to slow down a bit as we approach the winter holidays, but based on the latest numbers, it will definitely be a busier holiday home-buying season this year compared to last year’s.

Tips for Home Buyers

If you’re in the market right now, here are some things to keep in mind:

• Get your lender lined up before writing an offer. I’ve had to request a lot of loan contingency extensions because the appraisers and lenders are so busy right now. By shopping for a lender before writing an offer instead, you’ll make the closing process smoother and more efficient. Ideally, your lender will have the purchase contract in their hands as soon as the offer is accepted.
• Review any disclosures upfront and have them signed with the offer. Sellers are looking for top dollar, but they also want a buyer who knows what they’re getting into by researching the home.
• Close in 30 days. In most situations, the norm for any offer is 14 days for the contingencies (property contingency can be 10) and a 30-day close. Try not to deviate from this too much unless it’s absolutely necessary.
• Write a cover letter with your offer. It personalizes the offer and can help seal the deal! I recommend this even if it’s not a multiple offer situation.

Do you have any tips for buyers?

San Francisco County

• 535 homes sold in September
• The median sales price was $662,000, down from $700,000 in September 2008

San Mateo County

• 499 homes sold in September
• The median sales price was $570,000, down from $639,500 in September 2008

Santa Clara County

• 1,693 homes sold in September
• The median sales price was $450,000, down from $521,250 in September 2008

Alameda County

• 1,555 homes sold in  September
• The median sales price was $357,000, down from $385,000 in September 2008

Contra Costa County

• 1,525 homes sold in September
• The median sales price was $259,500, down from $300,000 in September 2008

Marin County

• 208 homes sold in September
• The median sales price was $635,500, down from $692,000 in September 2008

We got these numbers from DQNews.

Dig Deeper Into the Trends

These numbers are for county-level trends in the Bay Area. To see what’s happening in your neighborhood, check out our stats & trends pages.

What trends did you see in August?

Here are the basic Case-Shiller stats for the Bay Area* as of August:

Sixteen of the twenty metro areas tracked by Case-Shiller saw an increase in their respective seasonally-adjusted HPIs between July and August. Only Cleveland, Las Vegas, Charlotte, and Seattle marked seasonally-adjusted drops month-to-month.

Here’s a look at the Bay Area’s latest tiered data, back through 2000:

The Bay Area’s high tier has risen the most in this sudden summer surge (+6.3% in four months). In many other markets the low tier is seeing a more pronounced advantage, my theory as to why this is not the case in San Francisco is that prices across all tiers here had already fallen quite a bit further than they had in the markets outside California before this summer’s government intervention.

It is also interesting to note that the aggregrate index for the Bay Area has increased considerably more than any of the three tiers individually (9.4% in four months). This would seem to indicate a rather strong shift on the sales mix, with many more high tier homes being sold in recent months than low or middle tier homes.

Here’s a chart of Case-Shiller HPIs for all the markets that Redfin serves:

Here’s our peak decline chart, in which we line up the peak Case-Shiller HPI value for each of Redfin’s markets, so we can see how long each market has been declining, and how much it has dropped from the peak.

Here’s the flip side of the peak decline chart—a graph of just this year, indexed to January = 100%:

According to a Reuters story from earlier today, Robert Shiller has described the sudden spike seen in many markets this summer as potential “bubble territory.” I agree. As I have discussed on these pages in recent months, the sudden and simultaneous nature of this price uptick does not bear any marks of a return to fundamentals, but instead seems to be driven almost entirely by a mad dash for cheap loans (interest rates in the 5s) and free money ($8k tax credit).

I’m a little bit concerned that by interrupting the natural correction of the housing market, recent government intervention is setting us up for even more pain down the road. I hope I am wrong.

*[Case-Shiller defines the San Francisco Bay Area as the San Francisco-Oakland-Fremont, CA Metropolitan Statistical Area, which includes all of the following counties: Alameda, Contra Costa, Marin, San Francisco, and San Mateo.]