Monday, August 3, 2009

Real Estate Shift Leaves Buyers In First Gear

Real Estate Shift Leaves Buyers In First Gear.
The Silicon Valley real estate market has kicked it up a notch. As I’ve been reporting for several months now, inventory of homes for sale have been shrinking while sales have been increasing. It’s been challenging for buyers to get the homes they want because there are multiple offers on many homes. For perspective, I thought it would be good to get a quantitative historical perspective for single family homes (see chart below). In June of ’07 is when banks first started to trim automatic loan approvals. This was the beginning of the end for “Liar’s Loans”. By this time, inventory was inflating because prices were overinflated. I would like to interject a little known fact here: Total sales for all of 2007 were 9,022 which was the lowest level in Silicon Valley since 1993.
By June ’08 foreclosures had ensued and were starting to hit the market in a flood, if you will, causing inventory to grow and prices to drop. It’s interesting to note that sales stayed somewhat steady during June ‘08 compared to June ’07, remaining at historical lows.
Along comes June 2009. Inventory is down 33% from 2008 and below the June 2007 levels while sales increased by 28%. This has caught many buyers off guard. We all know that when inventory (supply) decreases and demand (sales) increases, prices rise. Just think if there was only one milkshake left on the planet and you wanted it. If you think about how much you’d be willing to pay for it, you understand supply and demand along with the impact on prices. Along comes July 2009 and things really start getting interesting. Supply drops another 32%. But where did all the homes go? One of the missteps about looking at real estate data is only looking at sales. It’s a good indicator of what has happened, but not such a good indicator as to what is happening right now. For that, I look at pending sales. These are sales where a buyer and seller have agreed in writing to the terms of the sale, but it hasn’t yet closed. The last time I researched it, about 95% of pending sales actually close. The others go back on the market. This figure changes from time to time depending on the intensity of the market. I find that when prices are rising, more buyers close the sale because they have made money while waiting for the home to close and, thus, they’re less reluctant to walk away from a deal and start all over again at a higher price. So let’s look at the magic number today. Pending sales are up 149% from June 2009! This has caught many buyers wondering what happened and why they can’t they get the home they want. It can be frustrating, but hang in there. If you know what you’re dealing with and set appropriate expectations, you can understand the market and keep your sanity. (408) 247-4029

For Sale (Supply)
June '07 - 4,508 homes
June '08 - 6,089 homes
June '09 - 4,154 homes
July '09 - 2,790 homes

Sold (Demand)
June '07 - 982 homes
June '08 - 931 homes
June '09 - 1,191 homes
July '09 - 2,964 homes

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