Silicon Valley's 'Inverse' Market Squeezing Buyers, Sellers

by Broderick Perkins from Home101

High median home prices in Silicon Valley's inverted housing market continue to belie soft market conditions, including falling prices, swollen inventories, and tight mortgage money in some areas.

The median price of single-family homes in closed sales in June, $867,500, was only slightly off the record high median $868,406 set back in April, according to the "Bay Area Real Estate Market Newsletter".

The newsletter's data was gathered July 5 by Richard Calhoun, broker of San JoseHigh median home prices in Silicon Valley's inverted housing market continue to belie soft market conditions, including falling prices, swollen inventories, and tight mortgage money in some areas.s Creekside Realty, and is comprised of statistics from the area's multiple listing service.

The current median is nearly $50,000 more than it was a year ago, but that doesn't mean Silicon Valley is enjoying a boom market.

Far from it.

The higher median price has been boosted by home sales this year concentrated in the more expensive housing submarkets where mortgage money remains more readily available. Buyers looking for homes in less expensive areas are getting stung by stiffer controls placed on underwriting, especially riskier subprime and nontraditional home loans.

The controls are fallout from the force of foreclosures sweeping the nation. In May, foreclosures were up 90 percent nationwide, compared to the number in May 2006, according to RealtyTrac.

Along with those losing homes to foreclosure, more are finding it difficult to buy a home today which they perhaps could have found financing for a year ago.

It's not certain how much additional pressure recent federal rules -- effective immediately -- will have on the market but federal monetary regulators' "Statement on Subprime Mortgage Lending" codified what many lenders had already been doing -- tightening the purse strings of risky loans.

Subprime loans didn't take off in California like they did in some other states but within some California regions there are pockets where subprime loans, combined with the also risky "Alt-A" or nontraditional mortgages, were the financial tools of choice for the vast majority of home buyers.

"On the East Side, I would say 80 percent, at least," used riskier mortgages to buy homes said Robert Aldana, a real estate agent with LetsTalkRealEstate.com in San Jose who works the market.

"It's killing the market on the East Side. It's having a worse effect than people think. A home that was worth $625,000 last year, right now you are lucky if you can get $575,000. In three or four months it will be worth $520,000, in some East San Jose, Blossom Valley and downtown San Jose areas," Aldana added.

Calhoun and others say Silicon Valley's housing market is behaving in an "inverse" fashion.

"Outer lying affordable areas are slower. As the price goes up the speed (of sales) of the market goes up. That's a complete inverse of a normal market," Calhoun said.

"The low end of the market is what's really dead," Calhoun added.

For example, as of July 5, the days of unsold inventory (DOI) -- the number of days it would take to sell all the homes available at the current pace of sales -- was 284 days in the East, South and Central San Jose areas and 254 days in South County (the cities of Gilroy, Morgan Hill and San Martin).

In more expensive markets the DOI ranged from only 28 days in Mountain View, Palo Alto and Los Altos to 79 days in Saratoga and Los Gatos.

The DOI was 42 days in Cupertino and Sunnyvale; 67 days in the cities of Santa Clara and Campbell and the San Jose communities of Willow Glen and Rose Garden; and 125 days in the San Jose communities of Santa Teresa and Blossom Valley, the North Valley region and the city of Milpitas, Calhoun said.

By price, more affordable houses were taking longer to sell based on July 5 data. The DOI for homes priced from $450,000 to $600,000 was 188 days; $600,000 to $750,000, 154 days; $750,000 to $2.5 million 83 days; $2.5 million to $5 million, 248 days; more than $5 million 1,330 days, said Calhoun.

Slow sales in large areas pushed inventories up to record levels region wide.

On July 5, the inventory of single-family homes was at 3,972. On June 30 the number had bulged to 4,072, a peak for the year and highest number since the market's record of 4,097 on July 31, 2001.

Last year, June's inventory of single-family homes was at 3,793, according to Calhoun.

Colleen Badagliacco, broker and co-owner of RE/MAX Valley Properties in San Jose says throughout Santa Clara County it's not so much the loss of subprime loans as it is the high cost of housing in Silicon Valley that's put the brakes on the market.

"Tighter qualifying underwriting is slowing things down, but most of our property at the bottom end is unaffordable anyway. I get a little distressed when I look at how difficult it is to get into that first property," said Badagliacco, who is also president of the California Association of Realtors.

She said in recent weeks her listings have been selling more often at list or a little above, but that's likely because sellers have begun to reduce prices.

"I'm cautiously positive. Last month we had more sales proportionate to the listings," Badagliacco said.

Badagliacco said buyers who can find financing are in a much better negotiating position than they've been in years, provided they don't hesitate. Sellers who package their home with the right price, model-home like condition and a concession or two can still get several or more offers.

Buyers can also cash in on the less volatile condo market where inventories were up to 1,604 in June this year, compared to 1,291 a year ago, according to Calhoun. Also, the median condo price in June, $539,500, was well off the record high of $550,000 set in April this year.

Said Tony Sum, broker with Silicon Valley Lofts and Condos, who works Central San Jose's condo market, "Prices have decreased but not significantly. The inventory has gone up because buyers are taking more time to look around now."

"Everyone is sort of in this wait-and-see mode to figure out what's going to happen. People are thinking the market is going to slow down more," Sum added.