Have banks, realtors, sellers, buyers and regulators learned their lessons and made the changes necessary to avoid another real estate market crash?
With housing prices in the North Bay rising as much as 25 percent in 2013, some people have again started uttering the “B” word. Is there cause for concern? Have banks, realtors, sellers, buyers and regulators learned their lessons and made the changes necessary to avoid another crash? And if you could see it coming, what would it look like?
First, picture the familiar gum balloon as it begins to grow and grow until the bubble cannot sustain the inflated air. You know the rest: a precipitous, messy collapse. This happened in June and July 2007, when housing prices became so inflated the market couldn’t sustain them, and the collapse was cataclysmic. So, in light of the rapid 2013 price rise, how should we assess the Bay Area real estate market’s health?
To get an educated prognosis from professionals, who each have a finger on the pulse of their respective areas, we asked realtors in Marin, Sonoma and Napa counties, as well as a Santa Rosa mortgage broker, to give us their thoughts. Depending on where you stand in the overall picture, you may be excited, relieved, resigned or cautiously optimistic. But you should not, our experts agree, be alarmed. Here’s what they see.
Marin: They’re not making more of it
“In Marin,” says Andy Gellepis, managing broker with Coldwell Banker Residential Brokerage, “there wasn’t really a crash until 2008, coinciding with the meltdown on Wall Street and bankruptcy of Lehman Brothers. Then the market in Marin County dropped 25 to 40 percent.” Higher decline was felt in the lower price ranges, he adds, citing condos in San Rafael that dropped 40 to 50 percent as an example. Then came the foreclosures and the market flooded with short sales. “For us, the real estate recession happened after the crash of 2008 and lasted through 2011.” In 2012, things began to pick up and, in 2013, Marin County saw an astronomical 24 percent rise. “That’s huge,” says Gellepis, who has more than 10 years in the industry. “A 24 percent increase in prices isn’t a normal market.” What’s causing it is the shortage of inventory—few houses on the market and competition among buyers—bringing multiple, qualified offers on each house. “Too much money chasing two few properties,” he summarizes.
“Marin County, surrounded by the Pacific Ocean and San Francisco Bay, and just minutes from San Francisco, is 85 percent open space,” says Gellepsis. “So it’s only 15 percent developed, and that’s all there’s ever going to be.” Which isn’t to say there aren’t opportunities for houses to become available—but the timing is tricky. He describes many homeowners—baby boomers, “empty nesters”—who, now that the market is recovering, would like to “buy down,” trade in their five-bedroom house for a more modest two-bedroom home on one level or a well-located condo. But the mid-range options just aren’t there.
Well, they are there, he qualifies, but for every one house, there may be a pack of buyers who not only can qualify, but who have fists full of cash. As of this writing, he says, he had 12 offers on one property for the asking price of $995,000. “But that may go as high as $1.4 million, because 12 people can afford it. And half of those can afford to pay over the asking price—and half of that half have all cash!” Recently, he adds, typical winning bids have been all cash, five-day close of escrow and no contingencies.
Can this continue? Gellepis says he’s expecting that, when the average, working, middle/upper-middle class people can’t buy in because they can’t compete with the “1 percent,” the market will become unsustainable and the inflation will stop. Once that happens, the prices will level off. We’re not there yet, he says. “An upper management executive, working for a Fortune 500 company, can still afford to buya nice house in Mill Valley and Tiburon,” he says, “because interest rates are still attractive and people have built up equity in other properties. But once we pass that, then we’re going to see…not a crash, but a leveling off. And then you’re going to get what’s fair for that house.” So it may be fair at $1 million, because a lot of people can pay that, but it probably won’t get pushed up to $1.4 anymore by multiple offers. He’s looking for that leveling off to happen around 2015 or 2016.
Sonoma: Anatomy of a bubble
Ed Rau, a broker associate with RE/MAX Central Santa Rosa, has been in the business since 1988. He says he’s never seen anything like what happened starting in 2005, in spite of observing several costly recessions during his working life. The inflated prices presented a problem for both buyers and sellers, as well as for him, personally. “As a reputable real estate broker, I have a hard time selling property if I know good and well that next year, it’s going to be worth considerably less,” he says. “So I told people, ‘Just wait.’” The impact of this advice on his business, on top of a nearly 50 percent drop in prices and nearly 50 percent drop in sales, was acute.
But he hung in. And by late 2011, the market started back up. “In 2012, the median price, depending on who you talked to, rose somewhere between 8 and 12 percent,” he says. “Then in 2013, the median price rose by somewhere between 19 and 24 percent.”
The result has been a shortage of inventory, with the major activity being in the $500,000 range, where there are still multiple offers (including multiple cash offers) on many properties. “The competition is stiff, and cash almost always trumps financing, even for those buyers who are fully qualified.”
Still, he doesn’t see a bubble on the horizon based on the Sonoma County market—or even the San Francisco Bay Area market. “More often, bubbles are caused by state or national economic and fiscal policy,” he says. “In 2003 and 2004, the feds made it very easy for banks to make bad loans—and a lot of people lost their homes because of those policies just a few years later.
"Today, a couple of things are working to stabilize the market. The Dodd Frank Bill put back a quantity of restrictions on savings banks. Earlier, in 1999, Congress repealed the Glass-Steagall Act, which had been in place since the 1930s and separated investment banks from savings banks. Suddenly, the savings banks were released to do all kinds of weird and speculative activity. That repeal, and the actions by the big banks and some of the larger Wall Street firms, was a major factor in crashing our economy in 2008.”
Rau would like to see Glass-Steagall reinstated, but the improvements that have been made through Dodd-Frank are helping. Lines of credit and mortgages are now harder to get unless the borrower is truly qualified, and the discipline is much better now. He says, “I think the recent near-leveling of home prices is a good thing.”
What have we learned?
For the view from behind the mortgage broker’s desk, we turn to Kathleen Hoare, residential loan agent with First Priority Financial, who’s been practicing in Santa Rosa for 10 years. We ask: If a bubble caused by excess demand for a limited supply results in inflated prices, which is what we seem to have in the North Bay now, what will keep prices from going through the roof and eventually collapsing like before?
First, a review: “It’s really the deregulation of the lending industry and the resulting lax loan guidelines that led to this housing bubble,” she says. “Back in the mid 2000s, anyone could get a loan. There were even 105 percent [of home value] loans!” And it was so easy to qualify—as the saying goes, all it took to get a loan was breath on a mirror.
“We all wonder, in retrospect, ‘What were people thinking?’” Hoare says. “The Federal Reserve had influenced the rates so you could borrow money and buy for the same price you could rent, without having to put any money down.” So there was a buying frenzy…then came the foreclosures, then the crash.
She describes the rest this way: By 2010, home values fell to almost half their 2007 highs and borrowing slowed down. In reaction to the defaults, rules became so tight it was hard to get any kind of loan, and it was a challenge to stay in the mortgage business. The lending process became more expensive for borrowers to accommodate new legal and compliance departments in the lending banks. Previously common loan programs like construction loans, home equity lines, bridge loans and combination first and second mortgages had all but disappeared in 2010, though they are slowly returning today. Rates were still very low in 2010, below 4 percent for a 30-year fixed mortgage, but with all the economic, employment and housing uncertainty, very few buyers who needed a mortgage were willing or able to get a loan.
What’s different now is that the criteria to borrow is much more conservative. “Conservative loan guidelines really do restrict the number of home buyers and reduces demand,” she says. “To get a loan now, you need a down payment, good credit and a stable job. So there aren’t as many people out there who are able to borrow. Supply and demand are now more in balance than before the housing crash. Now the supply is weak but the demand isn’t as strong as it was in 2006. Though both situations increased housing prices, what we’re seeing now isn’t a bubble.”
Napa Valley: same thing?
“Last year saw a 25 percent jump [in housing prices] in Napa County,” says Karen Cherniss, a realtor with Pacific Union and Christie’s International Real Estate. “We don’t like to see them rise that much so quickly, but the values had dropped rapidly, too.” And, she adds, prices still aren’t as high as they were back in 2006. The result, as in other counties, is a tightening of inventory, as many homeowners may still be underwater, mortgage-wise.
“Last year, many listed properties, if they were priced correctly, would have three offers minimum and as many as 17,” she says. “At the first of the year, we were seeing properties sitting on the market a little bit longer and some selling for less than the asking price. That had changed by the middle of March; more inventory has come on and more buyers are entering the market. We’re once again experiencing multiple offers in the below $550,000 price range.”
She predicts this year’s going to be very good for both sellers and buyers, since interest rates are still at historic lows with only a few blips in rising rates. “Also, there are a lot more financial products and programs available to buyers,” she says.
Like Sonoma and Marin counties, midrange homes are hard to find, and the market for those properties is highly competitive. There are a lot of fixer-uppers, she adds, but that’s not what today’s buyers are looking for.
Despite 2013 figures, she doubts that another bubble is on the way, mainly because of the safeguards put in place that make the process of buying a house different from what it was in 2005. “Now, we always have to have our buyers prequalified to even get them in the door to make an offer,” she says, emphatically.
What have we learned? “We learned you really have to pay attention to what’s going on, not only in town, but nationally and globally,” says Cherniss. “Buyers today are very sophisticated. If markets start crashing in Europe or elsewhere, they may say, “Well, that could happen here.’”
World famous Napa Valley isn’t a place that looks like a crash is inevitable unless there’s some unimaginable catastrophe. “We have a very specialized market here,” she says. “It’s always going to be desirable—we think. We’re not too worried about anything, unless we see another crash start elsewhere. That’s why we don’t like seeing a 25 percent increase so rapidly; it’s unnatural. It should be more gradual. So hopefully, this year will be more of a stable market.
The Inflating Market
The shape of the bubble, and the relationships that formed it, in Sonoma County:
• In 2000 to 2003, inventory was plentiful in comparison to sales, with a ratio of about 1,500 houses offered each month to 400 sales per month.
• In 2004, inventory became very tight—as it is now—with multiple offers and a lot of investors.
• In mid to late 2005, prices peaked and many buyers stopped buying because of the high prices and the still-intense bidding wars.
• In 2006, there were approximately 100 foreclosures in Sonoma County.
• In 2007, there were approximately 750 foreclosures.
• By the end of 2008, there were more than 2,800 foreclosures for the year.
• During the years 2006 to mid-2011, inventory skyrocketed, averaging about 2,000 units available each month versus about 300 sales.
• In 2009 and 2010, the foreclosures receded to just more that 2,000 per year until, in 2011, there were fewer than 2,000 foreclosures and prices appeared to have flattened out. In 2013, there were just fewer than 500 foreclosures.
• At the end of 2011, buyer confidence began to stabilize and, by early 2012, the activity in the real estate market pushed the supply/demand ration out of balance. Today, there are many more buyers than there are properties for sale.
Source: Ed Rau, Re/Max Central Santa Rosa
The Realtor Knows Best
Karen Cherniss of Pacific Union and Christie’s International Real Estate offers the following advice.
To buyers: “Forget the ‘good deal.’ You and every other buyer are looking for the same thing: a little house on an acre in Napa Valley for $500,000. But there isn’t much more of that. If you find something that fits your needs in a location you like, buy it! You can change the house but not the location.”
To sellers: “Listen to your realtor when he or she talks about improving the looks of the property. Have a professional stager come in and help spruce things up and rearrange the furniture so your property can shine above the competition. Buyers are looking for a place they where they can picture themselves living and that they can move right into.”
Last word: “We predict the economies of all North Bay counties are pretty stable, so the risk of buying is definitely minimal compared to other areas in California.”
