Real Estate Professionals Redding

While prices are likely to continue to decline in the higher price tiers, the most affordable markets all across the state are clearly improving. This is a critical sign that we are at or near bottom.

House prices have a huge range across the state and the country. However, each price tier, whether it is the move-up, affluent or luxury market, depends upon a lower price tier to support it. The move-up market, which prior to the recent correction, was $600,000 to $1 million in the urban San Francisco Bay Area market and $300,000 to $500,000 in the Central Valley market, depends upon a healthy affordable tier. Move-up buyers need equity to trade up to the next tier.

In housing cycle corrections, which occur every ten to fourteen years, it is the affordable tier that typically gets hit first. This price tier is most susceptible to disposable income shocks, whether due to job loss, rising household expenditures or adjustable rate mortgages.

The central valley of California from Sacramento to Bakersfield, comprised mostly of the affordable tier, has been hit hard. But we are pleased to report that the worst appears to be behind us. The most important statistic for forecasting the future direction of prices, Months of Supply, has improved dramatically in the most affordable markets over the last few quarters. You can see our data and slides at www.PropSci.com/Slides.

Not only is supply going down, but sales traffic is increasing dramatically. In the most affordable tiers across the state, it is not unusual to see 50% to 60% of the sales with multiple offers and well above list price. Of course, the majority of these sales are bank owned or short sales reflecting motivated sellers. Foreclosures will continue to dominate these affordable tiers well into next year. However, increasing transaction volume and price stability has returned, which is laying the foundation for a return to health.

While the bottom of the price tier pyramid is stabilizing, the upper price tiers are still adjusting. Months of Supply is improving in the affordable markets, but deteriorating in the more expensive markets. San Francisco, Marin, San Mateo and Santa Clara counties are exhibiting increasing supply. Further price corrections in these higher price tiers can be expected. The good news is that these price tiers are less susceptible (not exempt) to foreclosure due to lower original loan-to-values and stronger borrower liquidity.

It is important to understand that price stabilization in housing does not immediately fix the capital markets problem, but it is the first step. The ability to price mortgage assets becomes much easier now that prices are stabilizing. Unfortunately, the appetite to recognize losses does not get any better, particularly if the recognition of those losses wipes out capital.

We have also been tracking the other western markets we serve in Arizona, Nevada, Washington and Oregon. We see similar stabilization taking place in Arizona and Nevada in the affordable segments ($200,000 to $400,000). Washington and Oregon are lagging these other western markets. That is, they have held up much better than California, Arizona and Nevada over the last few years, but have weakened considerably in the last quarter. This was expected, as the Pacific Northwest lagged the other markets in the last cycle in the early 90’s.