What happened in 2009 and what might be in store for 2010?

THE PAST

The median price in San Mateo County ended the year at $678,750 which is a dramatic drop from 2008’s year-end median price of $795,000. It continued to drop precipitously throughout the beginning of 2009, though it appears that January of 2009 was its lowest level when the median price reached $553,750—the median price has not been that low since 2000.

It wasn’t until April of 2009 that the median price reached the $600,000’s and the last four month have seen small but steady increases culminating in December’s median price of $750,000. But don’t read too much into these increases. Much of the median price increase is a result of larger homes selling do to the low interest rates and higher conforming limits.

Belmont and much of the mid-peninsula were less affected by the declines. The median price in Belmont dropped from $920,000 in 2008 to $833,725 in 2009 (9.4%). There are several factors which contributed to mid-peninsula cities faring better in declining markets.

THE BACK STORY

Beginning around 2001, many first time buyers entered the market with very little cash and qualified for adjustable teaser rate loans at an artificially low interest rate. Zero down financing meant that that if prices were to drop, they’d be in a negative equity position, making it impossible to refinance out of their adjustable loan. When the banks allowed people to qualify for a loan based at the artificially low teaser rate, when rates adjusted many could no longer make the minimum payment. Without the ability to refinance into a new loan, they were forced into foreclosure.

There are far fewer entry level homes in many of the mid-peninsula communities (Redwood City excepted). Therefore, these cities were spared the bulk of the foreclosures and resulting price declines. Furthermore, many people in these communities have ample equity from previous home sales and were able to refinance, or sit on the sidelines and avoid a distress sale.

THE FUTURE

We won’t pretend to have a crystal ball, so we’re not going out on a limb to try and predict the future. The real estate landscape has changed dramatically in the last several years and how it will shake out is anyone’s guess. But what we imagine could be a probability is that in 2010 will see much more of the same. We expect the record number of foreclosures which have been temporarily withheld from the market to be released and continue to put downward pressure on prices—especially in areas which have yet to be affected. Interest rates are sure to climb above their historical low levels making the cost of home ownership rise. This could easily offset any momentum which could otherwise spur normal home sales. Investors will continue to snap up good deals on distressed properties causing the number of sales to increase, but the median price to decrease, or stay flat. In fact, we wouldn’t be surprised to see a period of flat home prices for many years before any appreciable increase. People will first have to return to the job market before they will consider buying a home. Frustratingly, home sales have a huge effect on creating jobs so it’s easy to see why the government wants so desperately to have people buy a home (and extended the $8,000 tax credit). Once more people are being hired than fired consumer confidence will begin to slowly return. Folks will invariably reenter the housing market but at a less frenetic pace. Lasting memories of the “Great Recession” will haunt many homebuyers; and with higher interest rates and the days of easy money gone, it will be harder for prices to climb at rates seen in the first decade of the new millennium.

Don’t forget you can always check out the stats for a city near you on our web page.