The Latest on the Lafayette Market

• The latest market statistics were published yesterday, painting a picture that is certainly much less dismal most of the country, including over-built areas of California. Nevertheless, the tide has changed, particularly in the upper end of our market. As with any set of statistical data, the more data points, the more information one can extract from it. With that said, the data on the overall Lafayette market contains sufficient data points to see real, statistically valid trends.
  
  Some quick summary points on the overall Lafayette Market:
  
• Inventory levels are holding steady from September into October.
  Pending sales – the market’s leading edge indicator – are down from September. They have significantly dropped as a percentage of total inventory on a year-over-year basis from Sept and Oct of 2006.
  
• The average price per sq. ft. data can be deceptive if there is a small home on a large, valuable piece of land that sells in a given month. It will skew the data significantly. However, looking at the trend for the last 3 months vs. the same time last year, it appears that prices are off about 10 percent on a year-over-year basis for the late summer/fall market.
  
• The days on market data is deceptive because agents have historically taken listings and brought them out as “new” every month or so. This practice was banned by the MLS about 4 months ago. The current data for the last couple of months is probably reliable… anything prior to that would not be. This is also true for data relating to sold vs. list price. Since sales occurred often times after multiple price reductions AND bringing the property out as “new” each time (now banned), this data is only reliable for the last month or so.
  
• The homes that are selling are those that are below the market average price points. In other words, the sales are occurring in Lafayette’s low end of the market.
  The # of months of inventory improved from September, and is in alignment with 2006 levels at this point in the year.
  
  Summary points on the Lafayette Market $2M - $3M range:
  
• Lafayette’s upper end market remains anemic. One property was pending and then closed in this price range, and it was a Hidden Oaks (new construction) property that had been in escrow since about May.
  
• Year-over-year prices appear to be down, but the data is a bit too “thin” to draw significant conclusions. My previous comments about Av Days on Market and Sold vs List Price apply here, as well. In general, the homes that are selling in this range are at the lower end of the $2M – 3M price spectrum.
  
• The number of months of inventory in this price range is up sharply from last year.

There is no question that we’re in a market funk. In frequent conversations with other successful agents, there appears to be a significant number of buyers with “cash on the sidelines”. How long it lasts is anyone’s guess. We can’t change the market, but we can make sure that your home remains well positioned once buyers venture in and make purchases. That is our primary objective at present, as well as keeping you well-informed and providing counsel based upon facts, not speculation. We’re starting to hear about more relocation clients entering the market, but many can’t buy until they sell their homes in other parts of the country. Unlike prior years, many corporations are not offering their relocating execs buy-outs on their homes because they fear being stuck with over-valued assets on their books. Instead, most are now insisting that the home be sold by the relocating employee as part of their move. Once sold, the company reimburses their expense of sale.

Opportunity... or Risk?

It now seems like each day, the media brings forward more concerning news about the housing market. Although, there is clearly merit to the issues facing lenders who disregarded sound lending practices in favor of quick profits, and those who succumbed to either their own ignorance or to the unsavory practices of some lenders, it is important to look at each geographical market on a case-by-case basis. The fundamentals of many of the Bay Area's markets are markedly different from other areas of the country, yet the media fails to make these distinctions in favor of sensationalism. As a result, markets that should not be experiencing the current level of paralysis are now suffering. A quick check of the $2M+ markets in Alamo, Lafayette, and Orinda shows a total of 4 properties presently pending. One of them is a ranch property, which should not even be in the mix... bringing the real total to just 3.

The perception of the market has now become its reality. The issue is how to react to it. A recent column by Jonathan Clements in last week's Wall St. Journal tried to make a compelling case for sellers aggressively cutting their prices in favor of riding the market down and incurring the ongoing costs of ownership. He also pointed out the lost opportunity cost of the proceeds from sale invested in conservative instruments such as bonds should also be factored into the overall economic decision of a price cut. The final gating factor is looking at the months of inventory in the seller's price range. As an example, I suspect that we are going to have over 12 months of inventory in Lafayette in the $2M+ price range with next week's publication of October sales data. That being the case, any seller should be looking at the possible costs of holding their home that long & experiencing further price degradation vs. cutting their price immediately to a point that makes it atttactive enough to sell quickly -- then investing the proceeds in conservative income yielding instruments.

All markets tend to over react to bad news, and I suspect that the current real estate market is no different. With all down markets, there is always opportunity. Timing the market's bottom is impossible. It has clearly softened, and in real terms, is probably down over 10 percent from the height of this year's spring market. We'll clearly see some selective softening as sellers finally bring their prices down to levels that cause buyers to move forward. In some cases, we're beginning to see that happen already. As a buyer with a long-term view, the present market is ripe with opportunity. If you've found your ideal property, don't hesitate awaiting the bottom of the market. You'll never time it correctly and you'll run the risk of compromising the property you are seeking. Over the long term, I'm confident you'll look back and realize that the real estate market treated you well.

A Changing Market

With three-quarters of 2007 now complete, the seasonally most active portion of the year in real estate is now behind us. At best, it has been a challenging year, and for most in this business, it has been extraordinarily difficult. We find ourselves in a distinct minority, having the best year we’ve ever had in real estate. With the market changing dramatically, many people in the business have simply dropped out, and many others are struggling to adapt to the changing landscape. We have always prided ourselves on staying ahead of the tech curve in real estate marketing, and have been rewarded with our clients’ confidence and resultant sales.

So, what has happened to the real estate market both nationally, and more important, locally? On a national basis, the issues relative to the default on sub-prime lending have been well publicized. This has been coupled with a wave of significant “resets” in adjustable rate programs where the borrower qualified at an artificially low rate and now finds themselves in a loan that they can no longer afford. As a result, foreclosure rates have risen dramatically. To further exacerbate the problem, some investors who invested in funds based upon high-yield mortgage-backed securities have found themselves holding portfolios with greatly diminished values. Layered on top of this picture has been the creation of an over-supply of inventory by developers of new subdivisions in formerly high growth suburban areas. Case in point… Contra Costa’s east county and the Sacramento Valley.

Many people have felt that Lafayette and Orinda were substantially insulated from these issues. After all, we don’t live in an area where sub-prime lending practices are really a problem. Although historically 70 percent of the loans written over the last 5 years or so have been on adjustable rate programs, (somewhat astounding when you think about the fact that we hit 40 year low interest rates during this period), most people in this area really could afford the loans… or so we thought. And finally, there is no significant new construction in our area, so we don’t face inventory problems… right?

Well, this year has shown that some of these assumptions simply were not true, or at least weren’t without some further qualification. First of all, we are partially insulated from the rest of the nation by a highly diverse local economy and fundamentally strong demand for housing. While lots of adjustable loans were written for Lafayette/Orinda purchases, we don’t have numerous families being spun out of their homes by interest rate resets… but, we do have an unfortunate minority who are finding an immediate financial need to move. And, we absolutely don’t have an issue with an over-inventory of new construction. So then, what’s the problem?

We see the issues as two-fold… one is the fragile psychological state of buyers and sellers that can be unduly influenced by a media that often exaggerates the state of the problem because it sells. The second has to do with the interruption in the “food chain” of real estate. We’ve beaten the media up over the first issue in the last year or so, since they managed to severely impact last Fall’s market, too. As you recall, real estate “bubble” articles were the news “de jour”. Recently, it’s been hard to pick up a newspaper or flip through the web without running across yet another negative and sensationalized article about the real estate industry. At a certain point, it becomes a self-fulfilling prophecy since residential real estate purchases are often based upon large doses of emotion. Buyers are clearly very tentative, and the data supports this.

OK, so what about the real estate “food chain”? Well, this is the part of the equation that we admittedly didn’t expect to play as big a role in the current market as it clearly does. Let’s look at our broader geographical market to understand this issue. Within eastern Contra Costa County, inventory levels are at record levels and residential real estate is essentially “dead” on a relative basis. So, back in the day of a “normal” market, where did these people go when they could sell their homes? Well, they often moved up to areas like Pleasant Hill and Walnut Creek. And then, those sellers typically moved up to Lafayette and Orinda. The “chain” has now been significantly interrupted and the “move up” market is anemic, even when one considers normal seasonality.

What lies ahead? By definition, we are in another “transitional” market where buyers and sellers will eventually sort through their pricing and expectation differences. Real estate values are typically determined on a retrospective basis by looking at “comps” from recent “like” sales. At best, it’s a very subjective process, and it doesn’t work well in a market that is softening. Seller’s naturally have a hard time accepting the fact that their home may not sell for what their neighbor’s “similar” home sold for 6 months earlier, so their home gets over-priced to the current market. Ultimately, the home will either sell for fair market value through price adjustment and negotiation, or it will eventually be withdrawn from inventory.

In spite of predictions that the housing market would “kill” the U.S. economy, few signs exist to support this. Second quarter gross domestic product grew 3.8% and it looks like 3rd and 4th quarters will be reporting gains of about 2.2%. Nevertheless, U.S. financial markets are highly sensitized to concerns about the housing economy, as evidenced by the recent jitters in the stock market. The real driver of the economy is consumer spending, and that continues to grow at a very attractive rate of about 4.0%. As housing prices adjust on a national basis, affordability for the purchase of homes improves. Since the U.S. economy is doing relatively well, and corporations are benefiting from increased exports due to a cheaper dollar, we expect corporate employee/executive relocations to be steady this year. Fortunately, we are entering the time of year where these people usually enter the market and they have both the means and need to buy.

Inventories will decrease through attrition and sales over the coming months, and the market will begin to normalize. We agree with credible local economists that believe that it may be deep into 2008 before we see this process fully unfold. Interest rates are still very attractive for those who can really afford to buy, although the correct risk for marginal buyers is now priced into the credit markets. If you are thinking of waiting until the next real estate boom market, most economists believe it’ll be about 10 more years before the demographics and economic factors align in the same way as we saw them from 2001-2005. It may be a long wait.


We always tell clients that we can’t “make” the market, but understanding it goes a long way towards successfully negotiating the market’s pitfalls. The most significant indicator of the market state is the number of months of inventory. The transition from August to September saw the months of inventory go from 2.3 months in August to 6.4 months in September. On a price segmented basis, the most recent sale in Lafayette/Orinda within the $2M - $3M range was in July, and there are now 24 homes on the market in this range.

If you are a buyer, it’s clearly a great time to buy. The market will firm up again, and today’s prices will seem low on a historical basis. If you must sell now, then you should be emotionally and financially prepared for a much longer sales cycle than you would have experienced in years past, and you need to understand that prices have softened. There are always exceptions where an uninformed or price-insensitive buyer comes along and “over pays” for a home, but don’t expect that. Free markets are pretty logical, and buyers and sellers usually need to find a point of equilibrium called “fair market value”. If you are seeking to trade down in house size and cost, it still is a good time to do that since you’ll benefit from the softening of the market at the lower price points. Although there is insufficient data to support this theory at present, we think that it’s possible that the financial softening at Lafayette/Orinda’s “lower” price ranges may be greater on a percentage basis than what the “upper” market is experiencing. This is due to the abrupt slow down in “move up” buyers.

So, don’t despair. We are fortunate to live in an area of high attraction and demand. Defying Newton’s Law, whatever goes down will eventually go up… and so will this market. In the meantime, knowing what to do is of paramount importance, as well as knowing how to do it. This is where all real estate agents are not created equal.

A View from the "Field"

The past few months have been quite a challenge for those of us who are active professionals in this industry. Even though it is hard for me to intellectually buy into a “housing bubble” within the east bay communities that we specialize in, the market has clearly changed. Even if the underlying quantitative and qualitative factors contributing to a “bubble” don’t apply to this market, the trickle-down affect from other markets has clearly impacted this one. Buyers are much more cautious in their purchase decisions, but once a decision has been made, the media has empowered them to make offers much farther under list price than would have ever been considered acceptable several months ago. As a result, we have found that buyers are often having a difficult time accepting the softened prices of the market, and buyers are sometimes equally unrealistic about what they think they should be paying for a property. The gap between the market perception of buyer and seller becomes the real estate professional’s challenge.

I believe that the rather sudden shift in the market is temporary in the Lafayette and Orinda communities, and expect to see a general flattening of prices following the recent decline. I foresee the market reaching a point of relative equilibrium between buyers and sellers as we get into the prime selling months of 2007, and more normalized local markets being restored. The sales results for September and October seem to suggest that the downturn we experienced in the summer was artificially induced and that normal market forces have begun to restore order in the marketplace.

Within Lafayette and Orinda, approximately one in five homes on the market is finding its way into escrow. On a year-over-year basis, inventories of homes on-market in these communities are up about 50 percent over 2005. Nevertheless, following a dismal August, pending sales in September and October rebounded and were approximately equal to 2005’s levels for the same period. In fact, October’s pending sales for Lafayette hit 129 percent of October 2005’s level. Areas such as Alamo are still substantially under-running last year’s levels due to the abundance of inventory on the market, combined with above-average rates of spec building.

The present market calls for both buyer and seller to hold realistic expectations about what can be achieved in the marketplace. It is no more realistic for a buyer to expect to be able to purchase a home today at 2004 price levels, than it is for a seller to expect to that he/she will sell at the compounded appreciation rate that we saw in ’04. Honest communication with buyer and seller helps set realistic expectations.

So, What's Up with the Market?

The media pundits have had their way with the real estate market, and the strength that we saw in the spring has evolved into a market that is now tipped in the buyer’s favor. The question that we can’t answer is how long the present market will last and how far will the pendulum swing before equilibrium between buyers and sellers is restored.

Although our market presently suffers from the ills that we believe were artificially created by the media through repeated and irresponsible publication of doom and gloom in the housing industry, we are confident that the underlying foundation of our micro-economy and local housing market will prevail. Markets are built upon simple supply and demand. We live in an area where there is no available land to build and the existing inventory of homes is normally in high demand due to quality of life, proximity to commerce, and a superb school system. Furthermore, the speculation and overbuilding that legitimately impacted markets in other parts of the country have not been evident in our area. Although some market pessimists have tried to draw analogies to the recessionary markets of the early 1980s and 1990s, their arguments are fundamentally flawed. Those periods saw underlying weakness in the US economy and interest rates as high as 18 percent. Our economy is presently strong and interest rates are extraordinarily low by historical standards. We believe that the most relevant measure of assessing an area’s market risk is to look at its median mortgage payment relative to median income. This ratio is currently above local historical averages, but is far from the levels seen in the early 1980s. In summary, we do not see the risks in our local real estate market that have been irresponsibly propagated by the media.

In the meantime, unfounded fear drove local housing inventories to record levels during the summer – typically running at double last year’s levels, while unit sales declined about 30 percent. From our personal observations, the inventory is comprised of a mix of sellers who need to sell and those who want to sell because they are fearful of the market. Those needing to sell are being hurt by the inflated inventory and the change in buyer psychology. Those who want to sell are often pricing their homes at last year’s levels, thus inflating the inventory. We believe that the next few months will result in bargain hunters finding deals from sellers who need to sell, and the others will eventually either reduce their asking price to achieve a sale or decide to wait for a better market. As the inventory comes down, we expect to see more normalization through the winter.

Although August was a very challenging month with pending sales running as low as 38% of last year’s levels in Orinda and 50% of the previous year’s level in Alamo, we saw a very encouraging reversal of this trend in September. It is clear that buyers cautiously stepped into the market and bought housing inventory that was perceived to be available at very attractive prices.

Inventory and Sales –September 2006 vs. September 2005

Active Pending Closed

Area Listings Sales Sales

Lafayette 134% 106% 68%

Orinda 145% 114% 50%

Walnut Creek 172% 50% 68%

Alamo 195% 27% 53%

We are particularly encouraged by the overall strength of the Lafayette and Orinda markets where the underlying fundamentals of supply and demand appear to be reestablishing a more balanced relationship between buyers and sellers. Nevertheless, the current market is quite price sensitive as evidenced by a “snapshot” view of the home sales currently “pending” in the Lafayette/Orinda markets:

Price # of Homes

Less than $1M: 17

$1M-$1.5M: 16

$1.5M – 2M: 0

$2M – 3M: 0

$3M+: 1

Real Estate in the Rain

So much for an early Spring! The recent severe weather has certainly dampened the initially enthusiastic early year market. Let's face it, people generally prefer to be shopping for their next home in bright, warm sunshine instead of Contra Costa snow!

In all seriousness, the general market sentiment from both buyers and brokers seems to be quite positive, but still somewhat tentative due to all of the media hype regarding a "housing bubble." If anything, the market seems a bit fickle. We've seen homes that we would have never expected to receive a single offer in the first week on market end up with multiple offers, and we've seen other nice homes that were sensibly priced sit on the market for two or more weeks.

In the last week, I have seen two upper end ($2M+) homes sell off-market in Lamorinda with preemptive offers that the sellers decided to accept rather than gamble that they would receive a better offer on-market. Recently in Lafayette, a buyer walked into the Brokers' Open House, fell in love with the property, and proceeded to offer more than $100,000 over list price on a $2M+ house. So, it would appear that sophisticated buyers of means are certainly not concerned about our real estate market.

Looking at the most recent home statistical data, the Walnut Creek market had a very strong February, and the Lafayette market softened a bit due to increasing inventories. The following index values reflect the relationship between active listings and sold or pending homes. The higher the index value, the fewer homes were sold relative to available inventory:

Alamo 1.12
Lafayette 1.9
Orinda 1.6
Walnut Crk .7

A month's worth of data doesn't make a market, so let's see what happens when the sun comes out.

So...Where's the Market?

The question that invariably gets asked by both clients and other real estate agents these days is "What's the market like?" After a full-on assualt by the media over the last 6 months with predictions of a massive market slide and bubbles bursting, everyone associated with the real estate industry has been a bit tentative as we've entered 2006.

In January, we saw agents tip-toe into the market with listings, unsure of pricing and marketing strategy. Some of their clients were still valuing their homes based upon the highs of the 2005 market, while others seemed to be realistically recognizing the tentative nature of the early 2006 market with more modest list prices for their homes.

I always try to apply objective "science" to market analysis and the development of an appropriate marketing strategy for our clients. Although it is too early in the year to draw any major conclusions about the market, there are some early indications about the sort of market that may lie ahead.

I use an index of "market strength" based upon the relationship of sold and pending sales to available inventory. Although a snap shot of a given month won't tell the whole story, it will give us an indication of market strength. Here are the Janurary index values for the following market areas including a comparison to January of 2005:

"Ron's Market Strength Index"

Jan 2005

Alamo 2.07

Lafayette 1.19

Orinda .70 .29

Walnut Creek 3.18

Jan 2006

Alamo .74

Lafayette 1.08

Orinda .29

Walnut Creek 1.01

My conclusion based upon objective, January data... we've got a more rational market than last year with generally less sales activity in relationship to available inventory. The exception is the Lafayette market where early year activity seems to be approximately the same as in 2005.

The intangible factors sometimes are more difficult to capture. What's the "mood" of the market among buyers, sellers, and those that represent them? How many buyers are in the market looking for the "right" home at the "right" price? Are buyers generally optimistic about the future of the housing market, or are they tentative and unsure? Albeit intangible factors, the answers to these questions really get to the heart of the market. This is one of the reasons that I have been so critical of irresponsible journalistic policies that have so widely published dire market predictions that don't reflect the realities of our local real estate or business economies.

In general, I am very optimistic about the market based upon observations of recent sales activity. In the last few weeks, I've observed homes in the $1.5M-2.5M range sell with multiple offers, albeit not with the same energy or quantity that we saw last year. The best homes that are priced fairly, where the market perceives sound relative value, are still selling rather quickly and some with multiple offers.

Based upon our own pool of clients and after talking with numerous other agents in the area, there is clearly a "wave" of housing inventory getting ready for market. I fully expect inventories of available homes to increase dramatically over the next 30 days. Fortunately, there also appears to be a large number of buyers with needs that have not been satisfied by the present inventory... across all price points. This is very encouraging, and bodes well for the 2006 real estate market. I fully expect a strong, but much more rational market in the coming months where homes sell for their fair market value in a reasonable amount of time. I anticipate this will occur without the frenetic activity levels of prior years where valuations sometimes got pushed to irrational levels. I believe this will be healthy for our market, regardless of whether you are a buyer or seller.