The real estate market as a whole is still in its first stage of grievingâ€”denial. Most are aware of the five stages of grieving; denial, anger, bargaining, depression and acceptance. Denial set in as sellers refused to comprehend that the market that they so came to enjoyâ€”a seller’s marketâ€”vanished. Some are coming to grips with their anger knowing they should have sold a year earlier, and only a minority of sellers are to the point of bargaining (as depressed as they are about it) with buyers and accepting lower prices for their homes. These are the homes buyers should be seeking out.
Why aren’t more sellers to the point of acceptance?
It’s simple human nature to not acknowledge you timed a market wrong. Each real estate market cycle is different. In an attempt to predict the market’s outcome we rely on past experience and historical records. But understanding the similarities is as important as examining the differences. One has to look to 1990 to find home sales as low as today. Are these two cycles similar? Let’s examine the differences.
In 1990 the recession and the subsequent exodus of Bay Area jobs impacted home values as many sellers were forced to relocate when companies began downsizing. This sharp increase in inventory of available homes coupled with a recession, fewer jobs and decreasing consumer confidence led to a decline in the median home price.
Today’s Bay Area sellers are not in the dire position many homeowners found themselves in the 1990’s. Jobs are plentiful, and sellers would rather wait out the market than sell at a discount.
Then why are homes sales down in the Bay Area?
The perception that home values will soon drop in step with the many other regions has no doubt contributed to the reluctance of buyers committing to purchasing their first home.
But why hasn’t the Bay Area experienced similar price declines that other regions?
There are several reasons that homes values are declining statewide. The main reason being the large number of homes which were financed with sub-prime loans now for sale and the sudden run-up in appreciation levels. This large inventory of first-time buyer homes which are available either through foreclosure or voluntary liquidation, coupled with more stringent lending practices has decreased demand and increased the supply. The sub-prime loan debacle certainly accounts for the majority of the decline in homes salesâ€”statewide. But what about the Bay Area? Unlike many other parts of the state the sub-prime defaults have not impacted our area to the same degree as say the Central Valley. Primarily this is because most Bay Area homes were not purchased using sub-prime loans.
The Bay Area has historically fared better than many other regions due to the large demand for the quality of life it has to offer. It has also seen historically higher cost for housing. Further defining the market, the Peninsula specifically enjoys an attractive quality of life with low crime, excellent schools, shorter commutes to high paying jobs, mild weather and access to the ocean, beaches and three international airports. One need look no further than the commute traffic leading to the east bay and clogging the bridges to understand why people would rather live on the peninsula. It stands to reason that if Peninsula home values were to decline, values would decline in other regions firstâ€”prices quickly being filled buoying Peninsula home values.
What can the Peninsula housing market expect?
If history is any indicator, the Peninsula will ride out the current market adjustments with less impact than other regions. The chart below suggest that although there are certainly small peaks and valleys in the median price of homes, the overall increase in the Bay Area is significant and more isolated from volatile market fluctuations as compared to the state or country as a whole.
Interest rates remain extremely favorable, jobs are on the increase, and though we expect appreciation levels to drop since the first-time home buyer affordability index is so low, we expect to see a relatively flat market through the first quarter of 2008. It appears to be only a matter of time before home values rebound.
Let’s look back.
In 1996 the Bay Area housing market began a steady climb after years of remaining flat. The market decline began in 1990 which coincided with the aforementioned recession, but remained flat well after the recession was over in 1991. From 1993 to 1996 there was no logical reason why buyers should not purchase a home. What kept buyers at bay was the fear of having just seen home values drop off their precipice is 1989. Eventually though, smart buyers gradually returned to the housing market and those who purchased a home when the market was flat, were in an excellent position when the market began its historic climb in 1996.
It’s interesting to note that in after five consecutive years of waning appreciation levels the lowest level was reached in 1995â€”only $6,000 off of the high in 1989.
So when should a first time buyer get into the market? When they can afford to. When they feel their job situation is secure. Smart buyers don’t follow the herdsâ€”they seek opportunities. Playing a game of timing the absolute bottom of any market is pure guess work. When the media reports that home values are on their way up, buyers have already missed an opportunity.
Want to discuss this? Reply, email or call us and we’d be glad to consult with interested buyers or sellers.