Investors Playing Major Role in Bay Area Housing Market
By Rick Turley
While the Bay Area housing market has had its ups and downs much of this year, a couple of segments of the market remained resilient through much of 2011. In previous columns, I’ve talked about the strong rebound in the luxury market from Silicon Valley up through Marin. But one other sector has also played an important role in keeping the overall real estate market going: the investment segment.
According to DataQuick, the La Jolla-based real estate information service, absentee buyers – real estate investors for the most part – bought one out of every five single-family homes and condos in August. Buyers paying cash accounted for more than a quarter of sales. And short sales – those transactions where a home sells for less than the homeowner owes on the mortgage – added up to another 20 percent of sales.
The trend has caught the attention of the local news media with the San Francisco Chronicle and San Jose Mercury both running long articles on the topic in recent weeks.
In her article, Chronicle reporter Carolyn Said noted that, “Real-estate investors have become a potent force in a moribund housing market…” She went on to say that, “despite record low interest rates, many consumers simply don't have enough confidence in their economic outlook to buy houses. Investors have kept prices from falling further…”
Today’s market is extremely attractive to investors. Record low mortgage interest rates, coupled with very favorable asking prices for distressed properties and other entry level homes, mean that rental income can easily cover the expenses for a new landlord owner. And given the volatility in the stock market and with other investments, real estate is looking like a better and better alternative.
While not everyone would agree, I think real estate investors are playing an important role in our market. When they buy, they’re often upgrading properties that in many cases are badly in need of maintenance. They’re helping to clear out the supply of vacant, bank-owned properties that can be a blight on neighborhoods. And in general, they’re reducing the huge inventory of distressed properties that serve to keep all home prices down.
"The market would be quite a bit sicker were it not for investors snapping up a lot of the properties," Andrew LePage, an analyst at DataQuick, told the Chronicle. "They account for a meaningful portion of the demand. To the extent to which there's at least a temporary floor under this market, they've helped to build it."
However, real estate investors – many of whom are paying all cash for entry-level properties – are making it hard for some first-time buyers and others to compete for those homes. Given the choice, it’s understandable that a seller would opt for a cash offer that’s likely to close quickly rather than take their chance that a buyer can secure mortgage financing.
Unlike past investors, today’s new landlords are generally not expecting to quickly flip a home for a profit, according to the Chronicle story. Instead, they see are seeking reasonable returns by simply owning and managing a rental property.
Realtors who work with these buyers say that many are first-time investors who like the long-term potential of investing in real estate over other investment vehicles. With prices and interest rates this low, they reason, there may never be a better time to jump in.
It’s also important to remember that most housing recoveries are preceded by a rise in rental housing rates. This has two effects, both positive for our housing recovery. The rise in rents attracts more investors as purchasers. As we noted earlier, they also unfortunately cause stiff competition among first-time buyers; but in some areas these investors are necessary to help stabilize hard-hit foreclosure areas and thus stabilize pricing. The other effect of rising rental rates? It causes more renters who qualify for homeownership to consider a purchase, especially with today’s interest rates.
As we approach a New Year, we are expecting more and more ofboth types of buyers in 2012 to come to the same conclusion.
Below is a market-by-market report from our local offices:
North Bay – Our Greenbrae office just reduced the price of a home in Kentfield in the $2.2 range and received multiple offers. Buyers are out there and perhaps coming out a little more aggressive in the search now. The Chronicle article on investors buying local homes has been encouraging for buyers to get into the market. In Northern Marin, agents are reporting a definite increase in open house traffic. We are seeing more multiple offers on well-priced properties. There has also been an increase in floor calls and walk-ins of interested buyers. In Petaluma, the competition is fierce for buyers in the under-$500,000 price range. The inventory is dwindling and well-priced properties are snatched up as they come on the market. With Sonoma County featured as one of the top 20 destinations by National Geographic, many buyers are trolling the open houses. First-time customers are becoming more and more common. The Santa Rosa market remains steady with some increase in REO inventory and a number of new escrows. Finally in Sebastopol, the majority of activity is in the lower end of the market with emphasis under $400k. One new listing in the country, priced at $399k, attracted over 22 groups. We are seeing a little activity in the move up range of $600-$800. Low appraisals continue to be problematic.
San Francisco– Our Lakeside office manager declares “outstanding lenders or cash” - that is what it takes to buy a home in this market. In spite of the dramatically low interest rates, deals are being held up by the lender’s increasingly high hurdles for property qualification. Buyers are being weighed down by poor lender choice. Still, we are finding a large number of cash buyers who can sail through transactions without the underwriting obstacles. Meanwhile, the Market Street office says sales activity is increasing and they finished a strong October with new transactions. The strategy seems to be price to sell or even price to induce multiple offers. The average list-to-contract time frame is less than three weeks, and on average they are selling at or slightly above asking price with 64% of the transactions seeing multiple offers. The Sunset office reports decreasing inventory but steady sales while the Van Ness office says inventory and sales activity have been steady in recent weeks.
SF Peninsula— Our Burlingame offices report that light inventory is fueling multiple offers for well-prepared and priced homes. There are waiting buyers out there. One home had over 200 attendees at open house and sold on the spot to a well-prepared buyer who had lost out in other recent multiple offers. The home had been carefully prepared and staged by the agent down to the last detail. In the Previews market, inventory is beginning to come off for the holidays if it has been on the market for a while, with sellers anticipating a better, more optimistic spring. At the same time there are some fabulous buys in Hillsborough at this time. Nov. Dec. could be the best time to negotiate with little competition. Across the hill in Half Moon Bay, the market has for $750k to $1m homes has been slow. However, homes in the $550k range move quickly, as do second homes over the $1.5m, sometimes for all cash. Our Menlo Park offices say inventory continues to be scarce. Open houses have been busy and the office is getting a lot of calls and walk-ins from interested buyers. In Palo Alto, the market changes on a weekly basis. In general, there’s very short inventory – including Palo Alto and surrounding communities, Mt. View particularly, compared to last year. The move-up market is slow and as a result we are slow to see new inventory. There also has been a serious lack of inventory, according to our Redwood City office, with most sales activity in the lower-price ranges. Sales activity has slow in the San Mateo market, possibly due to a lack of inventory, the uncertain economy or the upcoming holidays. Finally in Woodside, both inventory and sales activity are down in a fairly quiet market.
East Bay– Berkeley agents are busy working with buyers, getting price adjustments from sellers who want to move their properties, and telling renewed horror stories of appraisers creating obstacles by reading online disclosure packets and demanding repairs/clearances. Our Castro Valley office reports increasing inventory and steady sales activity. Inventory continues to decline in the Danville area while the buyers are becoming more active. Inventory stands at about 2 ¼ months in the San Ramon Valley - San Ramon and Danville are very active, while Alamo and Blackhawk are very slow. Our Livermore office reports inventory is increasing while sales are steady. In Fremont, both sales and listings are increasing. Our Oakland-Piedmont office says listings have picked up with clients making the decision to get their house sold before year-end. Open house activity was steady even at properties that have been held open for several weeks. Buyers are still being very discerning and don’t exhibit any urgency in writing an offer quickly. Our Orinda manager says it’s becoming more difficult to obtain loan docs and loan approval. Extensions of escrows are becoming more common. In Pleasanton, the local market has been steady with buyers still out there looking. Finally in Walnut Creek, our local office says inventory remains low and there are multiple offers on all well-priced properties.
Silicon Valley– Steady sales activity is reported in Cupertino. With inventory declining, open houses are busier than ever. In Los Altos, sales activity is increasing including a small increase in the $2 million and up market. Open houses are well attended at new single-family listings. Our Los Gatos manager says that overall, the high end continues to remain strong. Inventory remains low in most entry-level markets. The San Jose Almaden office says sales activity has been steady. Properties are selling, but buyers wish there was more to choose from. Pending sales in this region are 10% up over last year at this time but listings are down 33%. Low-end buyers are having trouble competing against all-cash or large-down payment buyers. All properly priced listings are getting multiple offers. The San Jose Main office also has seen a continued drop in inventory but activity at open houses is very strong. There are multiple offers on most homes in a variety of price ranges. Low interest rates and low inventory are main factors in the multiple offers we are currently experiencing. And our Willow Glen manager reports that regular sales are taking a little longer to close than expected and banks are slowly approving short sales. The Saratoga market seems like it’s slowing, which is normal this time of year.
South County– The Gilroy and Hollister markets both saw an uptick in REO listings coming onto the market. Open houses have been fairly well attended, but a lot of buyers are sitting on the fence. Sales are slow. Inventory is steady, but low for both markets. Gilroy has 3.3 months of inventory and Hollister has 3.6 months of inventory. Our Morgan Hill manager says that as the year winds down, the number of Morgan Hill listings has increased dramatically, but the ratio of listings to sales has decreased. In January 2011 there were only 138 listings available in Morgan Hill—with 27 closings (20%). October showed 311 listings with 51 closings (16%). While sales are up from the first months of 2011, a lower percentage of listings are actually selling. Prices on the other hand are down. The average sales price of a single-family home in Morgan Hill has dropped from a high of just under $600,000 to about $475,000 (a 25% differential). Morgan Hill remains a buyer’s market—many listings, good prices and great interest rates.
Santa Cruz – As we move into November and toward the end of the year and the holiday season, sales continue to be steady in the Santa Cruz area. There is definitely more activity in the under $600,000 price range, heavily influenced by short sales and REO business. We are finding some of the banks on the short sales are reacting much more quickly and we are seeing a shorter process with some of lenders, Chase being one of them. On “organic deals” financing is the biggest hurdle and agents need to pre-approve and counsel their clients through the buy process. Appraisals are all over the map, and we have had a couple of deals where the property did not appraise and the buyer and seller were able to come to a successful resolution and the sale went through. It is all about perceived value for the buyers. The home has to be a really good deal – and sometimes even then, the property may sit on the market.
Monterey Peninsula –The beat goes on with the steady activity in the Monterey Peninsula marketplace. These low mortgage rates seem to have brought some of those hanging-back buyers into the market, especially in the lower prices ranges. In looking through the lower priced homes in Seaside and Marina, for instance, we see that most of them are pending with very few “actives” on the market. And on the other end, the higher-priced properties, the volatility in the stock market may be contributing to increased sales there, many of them all cash. While we normally would be beginning to slow down about now, we continue to have a pretty consistent number of sales each week.
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