September, the new "cruelest month"?

April is the cruelest month, breeding  
Lilacs out of the dead land, mixing  
Memory and desire, stirring  
Dull roots with spring rain.

                                                                            The Waste Land

Despite T.S. Elliot's contention, local real estate is finding September, not April, the cruelest month.

Coming on the heels of the tech crash, 9/11 made September 2001 the toughest month of a very tough year for Silicon Valley agents and sellers.  Although at the time I called September 2005 the "Katrina market", it wasn't a natural disaster that took the life out of local real estate, it was higher oil prices, shaken consumer confidence, rising interest rates and, yes, perhaps even the psychological effect of seeing so many Gulf Coast homes destroyed.  September 2007 saw subprime hit the fan, and the financial markets meltdown of this September is probably fresh enough in your mind to not need reviewing here.  In fact, you'd probably prefer that I didn't.

So how did September 2008, the latest in a string of cruel Septembers best forgotten, treat local real estate?

We'll assess its impact by comparing a few representative cities or neighborhoods in San Mateo and Santa Clara counties to see how they weathered the storms of September 2001, 2005, 2007 and 2008.  Then I'll make a few (anything but) fearless predictions.  Because if I really knew what's going to happen, I'd quit my day job and blog.

Let's start by looking at the following Santa Clara County real estate markets, ranked from ultra-affordable to ultra-expensive:

First, the total inventory of homes available in each of those four Septembers.  Inventory is a fairly reliable indicator of the strength of a real estate market.  Are most homes selling as soon as they hit the market, or are they stacking up?  Turning inventory into a market indicator is more complicated than that, but it'll do for now.

Inventory is dramatically high at the low end, but note that the crisis in those affordable markets started last year.  In fact, while low-end inventories remain bloated, the declining rate of acceleration is one reason for hope that these markets are stabilizing.

Sales is another.

 

Note the sharp rise in sales at the low end, driven largely by the booming market for bank-owned homes at prices heavily discounted from levels of just a year ago.  However, you've also noticed that further up the price range, September 2008 sales are at or near September 2001's numbers, benchmarks with plenty o' baggage. 

Sales isn't always a reliable indicator of the way the winds are blowing in real estate, but absorption (the ratio of inventory sold to total inventory) is darn near fool-proof.

Here absorption backs up sales:  with the exception of entry-level Palo Alto, blazing hot even this year, midrange and top-end performance hovers dangerously close to September 2001 levels.  Sunnyvale south of Central, long a favorite of families seeking nice neighborhoods with highly-regarded schools, has been hit particularly hard.

Now, a quick look at some representative markets in San Mateo County, again ranked by affordability:

Not surprisingly, the same story.  Affordable neighborhoods have lotsa homes for sale, way too many homes for sale, while inventory in more expensive areas has held relatively constant.  As in Santa Clara County, there's no indication that midrange and top-end neighborhoods are now inundated with desperate sellers, or with any kind of sellers.  The headlines seem to be scaring off homeowners who don't have a pressing need to sell, and right now not too many in pricier neighborhoods have a pressing need.

Sales also gives us much the same story as in Santa Clara County.  Sales have zoomed at the low end, while stalling further up the price range.

And, again, absorption shows huge improvements at the low end, and big declines further up.

So what does all this mean, now and in the near future?

I'm going to go way out on a limb and say that this isn't a great time to sell, even for homeowners in affordable neighborhoods where demand has improved dramatically since late last year.  That improvement has come at a price:  declines of anywhere from 35 to 45 percent in home prices, depending on price range and neighborhood.  And in neighborhoods and cities where prices have declined only modestly or, in a few cases, not at all, the amount of uncertainty has reached epochal levels.  This isn't a market for sellers fishing for that one "perfect buyer", because a) that buyer doesn't exist, and b) if he does, right now he's hiding under his bed.

Will midrange and top-end neighborhoods, spared the brunt of the housing market correction, see the price declines that have hammered the low end for the past year?  It's possible, I suppose, if for no other reason than that no one knows how the credit markets, stock market and economy will perform over the short term.  Despite all the media hoopla, buyers in this affluent area still have ready access to loans, and while every step of the process takes longer than it used to, I've heard of very few transactions falling through because loans didn't fund.  The loan agent I sit next to, who follows these things with the obsession of the born numbers cruncher, tells me that the number of sources for loans is still about two-thirds what it was a year ago, with subprime accounting for most of the missing third.

On the other hand, low inventory combined with flight to quality has helped midrange and top-end neighborhoods hold their value while the low end fell apart.  Sinking absorption rates mean rising unsold inventory, which in turn means downward pressure on home prices, sooner or later.  Has absorption already reached the point where prices must come down?  If not, how low will absorption rates have to go, and how long will they have to stay there, before prices decline?  How long can homeowners in these neighborhoods hold out before they have to sell?  Will the recession hit this area hard enough and long enough to force large numbers of homeowners to sell?

All interesting questions for interesting times.  What keeps me relatively sanguine about the outcome is that I've been through this before.  I know that Silicon Valley isn't the Rust Belt.  For the past twenty years I've seen how much people want to live here, and how many want their home here to be their own.

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