Goldman report

Looking for the light. Currently, it is challenging to find positive input in regards to the economy. Last Thursday seemed promising when the Dow went up 200 points and oil prices appeared to be subsiding. Then on Friday the Dow dropped nearly 400 points on news of oil breaking another record high at $139 a barrel and unemployment hitting 5.5% (highest since 2004---from my view still 94.5% working---guess I am an optimist). The words stagflation (inflation and no growth) and recession are back in the news.

Stories that the percentage of housing price declines are at historic highs pervade the media. One point these stories miss was the historic appreciation over a five year period before the declines. In the Bay Area, prices doubled in most areas over that time, so even if prices are off 30% (which they aren’t in the majority of areas---in fact in SF the average sales price has not dropped over the last two years) that is still a 70% gain. Meaning that over the last 7 years prices appreciated on average 10% a year—pretty good for a leveraged investment. Yes, for those that bought at the peak it is difficult, however in no way does that represent the vast majority of home owners.

Like in past course-correcting markets patience is a virtue. It took some time before prices returned to previous levels. This was particularly true in Southern California during the last down cycle when they were hit by the contracting defense industry. The Bay Area was more fortunate. This time there will be counties in the Bay Area that will take longer because of the over building and the easy access to money during the boom period.

So in light (no pun intended) of the current milieu, let me share some positive news about the Bay Area housing market based on the month of May data. All of my numbers are based on single family and condo sales.

I believe the last national figures for months supply of inventory was about 10 months worth. The Bay Area figures for May vary between 2.9 months in San Francisco to a high of 6.6 months in Napa. A year ago the range was between 2.3 in San Francisco to a high of 14 months in Solano county. Ranging from lowest to highest they are SF 2.9, San Mateo 3.7, Sonoma 4.5 (7.9 months last year), Santa Clara 4.7, Marin 4.7, Solano 5.2 (14 months last year), Contra Costa 5.3 (8.8 months last year), Alameda 5.3 and Napa 6.6 (11.5 months last year). Interesting enough there were dramatic decreases in four of our 9 counties. These occurred in the counties with the lowest average sales prices. Those counties were hardest hit with REO (bank-owned properties) and short sales. Financial institutions are now off-loading these properties. It is by far the most active part of the market in those counties.

Under contract sales (pending sales) were significantly higher this May than last May. The entire Bay Area was up in this category with the exception of Marin. The rankings from highest percentage increases to lowest are as follows: Solano +142%, Contra Costa +65%, Napa +55%, Sonoma +52%, Santa Clara +13%, Alameda +12%, San Mateo +2%, San Francisco .5% and Marin -10%.

Closed sales are still behind last year’s pace. There were only three counties that showed positive improvement. The numbers are as follows: Solano +33%, Contra Costa +7%, Sonoma +.5%, San Francisco -14%, Alameda -17%, Napa -19%, Santa Clara -19%, San Mateo -20% and Marin -34%. June closes, given the positive numbers in pending sales for May, should reflect a more encouraging trend.

Prices have held best in the highest average sales price markets. The largest price decreases May 07 compared with May 08 occurred in those markets with the highest increases in sales year over year. Those markets are the ones being dominated by the highest number of REO and short sales. This will have an effect to skew prices downward. Median and average price drops occurred in those counties because the bulk of sales occurred in the lower price ranges. It doesn’t necessarily reflect that values on all properties dropped in that proportion. It indicates a greater number of sales in the lower end as compared to all price ranges. I will give both the median and average sale gains or decreases May 07 compared with May 08. They are as follows: Marin (+11%/+3.56%), San Francisco (-.5%/+4%), San Mateo (-12%/-3.3%), Santa Clara (-12%/-9%), Alameda (-23%/-19%), Sonoma (-24%/-24%), Napa (-25%/-23%), Solano (-34%/-37%) and Contra Costa (-38%/-30%). Price levels over the last 90 days have been relatively flat. Indicating again that we are bouncing along the bottom of the price continuum.

One of the most significant differences between this May and last May is the increase in average number of days homes are on the market. This May varied from 42 days in San Francisco to 118 days in Napa. Percentage increases varied from last year with a low of 5% in Sonoma to a high of 70% in Alameda county. They are by county as follows: San Francisco 42 days (+50%), San Mateo 53 days (+65%), Alameda 53 days (+70%), Santa Clara 57 days (+65%), Contra Costa 61 days (+65%), Marin 65 days (+15%), Sonoma 82 days (+5%), Solano 86 days (+7%) and Napa 118 days (+25%). Due to these increases sellers should be aware that pricing and presentation are critical to determining marketing time. These numbers only reflect sold properties. Unsold properties could be on the market longer than the ones represented here.

The good news in these numbers is that months supply of inventory have either remained close to last year’s figures or in some cases have significantly decreased and in all cases decreased in last 90 days; that pending sales have increased over last year’s numbers and over the last 90 days the number of pending and sold properties have increased.

Will these trends continue? Only time will tell. One thing we can say is open homes are still well attended and during this week’s reporting period 28% of our sales were involved in multiple offers. The vast majority of them were over list price. I believe sellers are becoming more realistic and buyers who are very aggressive in their offers (meaning that in offers where they are not involved in a multiple offer situation they are coming in under asking price) are willing to negotiate.

This could be a time that even for sellers, there are opportunities. This was highlighted in a dinner conversation over the weekend with good friends of ours who have their home on the market. Although they have had interested parties, an offer has not been forthcoming. Inevitably, the discussions lead to should we lower the price to make it more attractive. One of the sellers answered their own question. Even if they had to take less than they expected, the homes where they are going to buy have also dropped in value. The bright side is that we will make up any perceived loss on the new home and that our tax bill will be less than if we bought in an accelerating market. I could not have said it better myself.

Let’s hope it holds, the Dow is up 100 points this morning.