June 2020 South Bay / Peninsula Real Estate Market Update

Welcome to our June newsletter. This month, we’ll continue to update you with important information about your local real estate market. First, we will cover new survey data from the California Association of Realtors (CAR) that shows buyers and sellers are operating under differing expectations about the real estate market. Following that, we will review the local market. Although 2020 is proving to be unique, we hope to provide you with an encouraging analysis of May’s housing data as well as an overview of our expectations moving forward as we phase out of the strict stay-at-home orders. 

This month’s topics include:

• Key News and Trends Impacting Your Local Market: The June CAR survey reveals a rift between buyer and seller expectations. Median home prices remain resilient. Sellers are more hesitant to enter or remain in the market, while buyer demand gets a lift and mortgage applications rise.

• May Housing Market Update: Housing inventory plateaus, single-family homes and condos continue to sell close to list price, and homes under contract climb.

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Key News and Trends Impacting Your Local Market

Since most California counties are beginning to lift restrictions, we will start to see the housing market steadily recover. Although an exact end date to quarantine does not exist, on May 20th, Governor Newsom confirmed that more than half of the state’s 58 counties were moving into phase two of the widely adopted “four-pronged approach.”

On June 3rd, the California Association of Realtors (CAR) released survey data sampling California agents and their clients over the last week of May. The results revealed that buyers and sellers are now operating under very different expectations about the real estate market: the majority of buyers expect home prices to be lower while only a small number of sellers are reducing their listing prices.

In the long run, who is right will depend on how long the economic recovery takes. In the short term, however, the data tells us that single-family home buyers, at least, appear to have wishful thinking.

Silicon Valley median home prices did not decline enough for sellers to cut the listing price. In May, single-family home prices in San Mateo and Santa Cruz were only down slightly compared to the previous year while prices were higher in Santa Clara.

Compared monthly, prices did decline, most notably for Santa Cruz homes and San Mateo condos. However, monthly price movements, which are more volatile and often don’t capture as accurate a picture as year-over-year comparisons, will require sustained declines before homeowners should start pricing their homes materially below comparables.

Weighing in on the subject in his June 3rd market update, Jordan Levine, Deputy Chief Economist at CAR, said:

“We [now] expect some price impacts eventually as a result of some of the negative economic impact. . . . The price impacts will be in the modest category of the low single digits for 2020.”

Evidence supports the idea that price declines will only be in the low single digits for the 2020 calendar year. The market continues to see a larger sell-side impact, meaning that housing supply has declined more than buyer demand. The survey data below shows that far more sellers withdrew listings than buyers withdrew offers.

While sellers continue to grapple with the state of the market, California is again facing a major housing shortage, which prevents prices from dropping. The CAR survey also provided the most recent mortgage application data for both California and the United States. In May, California mortgage applications for home purchases (as opposed to refinances) rose significantly from April and are only down 1.7% from this time last year. Mortgage applications correlate with buyer intent to purchase a property and indicate the number of homes under contract and home sold.

All of this is welcome news. The May data assures homeowners that their home equity is still intact as restrictions begin to lift. It should also encourage buyers who may have been delaying a home purchase to enter the market.

A fourth CAR survey result illustrates the degree to which both supply and demand is currently stagnating. Over half of the California realtors surveyed indicated that they had at least one client that was delaying buying or selling until conditions changed. We assume that this pent-up demand will give way in the coming months to more participation and market activity from both sides.

Alongside pent-up demand, there are the changes to daily living which may impact home purchasing decisions in the future. In order to ensure employee safety, companies have massively shifted toward a remote workforce, which creates new space requirements for potentially millions of Americans. As a result, millions of Americans may need to consider purchasing a new home that better accommodates work from home. Remote work also means employees can live almost anywhere. Without physical restrictions, employees may look elsewhere for places to live such as locations with lower costs of living. Between new housing requirements, low rates, and pent-up activity, there is potential for a busy summer buying season that is similar to what we usually see in the spring.

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May Housing Market Update for Silicon Valley

Over the last three months, the housing market has changed so rapidly that we began to look at the data on a weekly basis rather than a month monthly basis (as is typical) to illustrate how significantly the market has changed over a shorter timeline. 

In the month of May, the weekly Silicon Valley housing data for single-family homes supported the survey data from CAR. First, housing inventory has hit a plateau after a steady climb from the March trough as sellers continue to hesitate entering the market.

The plateau in inventory is also due to an increase in buyer demand; homes under contract have increased steadily since the phased reopening of the economy began. They have risen well past pre-pandemic levels in early March. 

The sale-to-list ratio reflects the change in the original list price and the final sale price of a home. For example, a ratio of 100% means that a home sold for the price at which it was most recently listed. In the Silicon Valley, sale-to-list prices have been consistent; buyers and sellers are negotiating the final sale price in line with the list price.

We also look at months supply of inventory, which measures how many months it would take for all current listings on the market (including listings under contract) to sell at the current rate of sales. In May, the months supply for single-family homes rose. This may seem counterintuitive to the weekly data above (which shows less inventory and more homes under contract), but remember that months supply compares inventory to sales. Low sales volumes recorded in May are the result of the low volume of homes under contract in late March and early April; said another way, homes under contract turn into sales around 30 days later. Expect recorded sales volume to increase in June and months supply to decrease. San Mateo stayed relatively flat from April to May because sales and inventory increased at a similar rate.

In May, sales volumes were only slightly down from the previous year in Santa Clara and Santa Cruz, rebounding from April lows. In San Mateo, sales were up by 20%. This shows how rapidly the housing market is recovering.

As we discussed in previous newsletters, the fundamentals of the housing market were strong before the global economy stalled, and they have continued to show stability during the months of quarantine.

Looking ahead to July, we anticipate housing market activity to increase as pent-up demand turns into participation from both sides. We will closely monitor the evolving state of the market to make sure that our clients are pricing and negotiating to get the most value out of their transactions.

Median Home Prices and Sales in the Peninsula

The San Jose Mercury News has a nice breakdown (below) of the median sales price and number of sales for each zip code in the Peninsula (Santa Clara County, San Mateo County, and Santa Cruz County). You can also see the percent change comparing this January to the same period in 2010. In the Silicon Valley (Santa Clara County) the median sales price for all homes was $460,000, a 2% drop from the same period last year. But looking at resale homes, we saw a 1.9% increase to $529,000. Looking at number of home sales in the area, there were 1,424 sales for all homes, a drop of 10.9% from last year; in resales, 987 sold, which was 5.6% less than last year. We'll soon see in the spring and summer months of 2011 if it picks back up, when the majority of sellers and buyers are on the market.

Overall, Los Gatos Los Altos zip code 94024 had the highest median sales price of $1,569,000, but Palo Alto/East Palo Alto zip code 94303 had the highest $/SqFt at $883. On the other side of the scale, San Jose zip code 95133 had the lowest median sales price at $230,000, and Gilroy zip code 95020 had the lowest $/SqFt at $195.

Bay Area Real Estate in the News: Foggy With a Chance of Sun

DataQuick released their December 2010 monthly report for the Bay Area recently hitting the headlines with "Bay Area Housing Ends Year With Many Looking but Not Buying." But amongst the headline there were also bits of sun hinting of more to come for Bay Area real estate.

Here's what John Walsh, DataQuick president, said:

“While the dicey economy and employment concerns are major factors, tight mortgage credit is also a big issue right now, especially for the upper half of the market. There’s a lot of pent-up supply and demand out there, which will start to meet when the lenders re-open their spigots a turn or two,” he said.

What to Expect When Buying or Selling During the Winter Months

winter sales comparison

From the graph above, even though the real estate market has been a mess these few past years, it’s easy to see new listing and buying trends: lots of new listings in March followed by peak selling a couple months later, then a dramatic drop in everything around November. (Check out our prior post going more in-depth on market cycles.) Off hand there’s a couple good reasons for this. Though it may not be as pronounced here in the Silicon Valley, cold and rainy weather play a role in how attractive a property looks and keeping it presentable for potential buyers. Also it’s the holidays, when many people are with families or travelling. Lastly, it’s harder for families to move once school starts for their children.

So what do those remaining buyers and sellers see in the winter months?

As a homebuyer in the spring and summer months, you are approached with a large selection of new listings but an equally large group of competing buyers. These months are to the sellers’ advantage. The market turns in favor to buyers once the temperature drops and competing buyers thin out. During this period, sellers are usually more motivated to sell the house over getting the best price. For the buyer it is a great time to push for a deal, albeit you are looking at 50% less listings than there are in spring and summer.

The main reason against listing a home in the winter time is that the chance to get a high selling price on a home is reduced because buyer competition is reduced -- expect to make some compromises with buyers who already understand the importance of timing. Though this is not the case for every new listing during winter, since a desirable house will always draw attention.

But the tradition of only selling in the summer months is being influenced by the wake of the real estate crisis that started around 2007. With a depreciated housing market and mortgage rates at record lows, many buyers are aware that no matter the season this is an opportunity to buy a house they might not have been able to afford five years ago.

Reasons to sell near the end of year can be tax related, examples include 1031 exchange, which defer capital gain taxes, or inheritance taxes. And there is always personal reasons, including relocation for a job or divorce.

Whatever the reasons for selling in the winter, the biggest worry is having a high days on market (DOM), which makes an otherwise fine property look stale. One way to avoid this is to drop the listing price and excite interest. And if a seller can afford to have patience, they can take the home off the market until an allocated number of days before putting it back on the market with a restarted DOM. And then you are back to the excited spring market.