May 24, 2009

May 24, 2009, Market Commentary  

What a difference confidence makes!  Since the last report we had a large increase in homes pending and sold.  Sold homes are taking longer than in 2008 and back to close.  Lender requirements have increased.  The process takes 45 days or more to close.  The number of reviews has increased and appraisals will require two and at times serious reviews.  The appraisals now have declining markets noted.  This requires larger down payments and more documentation regarding income.  I have heard of one situation that lenders, Wall Street Funding, are back to the no documents and stated income situation.  I have not had a buyer use that firm.

 Review the statistics below and I will give you my comments afterwards.

 Past 21 Days:   Pending     increase 5/3/09      sold (180 days)     

 Palo Alto             59                 +9                                   111                        

Woodside             7                                                            12

Portola Valley      6                   -2                                   18

La Honda Area                                                                   2                          

Menlo Park         42                   +1                                  66                         

Redwood City    29                    +9                                46

Atherton              8                     +4                                  16

 The high end homes remain to be minimal in sales.  Woodside had 3 over $5 million, Atherton 5, Portola Valley 4, Menlo Park none and only 3 over $3 million.  The majority of the sales have been $2.5 million and below, increasing as the prices declines.  I am not counting any foreclosures or REO’s in the sales or pending sales.

 The attitude of buyers is changing.  No longer are they looking for the large homes with large square feet of covered area.  As I speak to buyers they are looking at the smaller homes of less than 3000 square feet, more in the 2400 or less area.  They are seeking family connection with smaller homes and less maintenance.  Large acreages are not being sought.

 The most notable change this year has been in the cost per square foot of sales.  They are declining. The largest decline has been in the 3000 plus square foot home.  Last year the value of $1000 per square foot for a fully remodeled new home was the norm. The large newly built or remodeled home will go for $600 to $700 per square foot.  The average sale price in West Menlo Park and Allied Arts has dropped to $713 and $727.00 per square foot, respectively.

 Cost of construction versus buy existing homes have changed.  Builders in the Palo Alto Menlo Park area tell me they are still busy and their prices have not softened.  This makes it a value play of Warren Buffet thinking when looking at buying a tear down or remodeling your existing home.  The cost of construction, the misery of remodel is better suited in finding a home that fits your needs that already has been remodeled or updated. 

 The premium of a new home or a remodeled home no longer exists.  The market has changed.  The cost of money, mortgage rates, has never been lower.  It takes longer to close and qualify; but the savings are substantial.  If you are 55 and older you can benefit by keeping your property taxes on your old home with your new home; as long as, you purchase a home equal to or greater than the sale of your old home.

 Sorry to the length of time between comments.  I had an arthroscopic surgery on my left knee.  I spent a week with leg raised and the knee on ice.  No pain, but tender; what a miracle modern medicine has become.

May 3, 2009 Commentary

May 3, 2009 Market Commentary

Lets look at the real estate market in the area we are most interested in, Palo Alto, Menlo Park, Woodside, Atherton, Portola Valley, parts of Redwood City and the Skyline/La Honda area. Sales are increasing, pending homes sales continue to expand rapidly in both Palo Alto and menlo Park in the mid-range home prices. High end homes continue to lag with very few over $3 million selling and nothing over $5 million. What does that mean?
pending increase from last report sold increase from last report
Palo Alto 50 +13 2 +2
Woodside 7 +2 0
Portola Valley 8 -3 0
La Honda Area 2 -1 1 +1
Menlo Park 41 +14 2 +1
Redwood City 20 +3 0
Atherton 4 -2 0

Looking at the break down of pending homes sales there is one common trend. The majority of homes went from $1 million to $2.5 million. The exceptions were Portola Valley with two sales in the estate range. One sale at $6.9 million and another at $4.9 million; Woodside had one sale at $3.5 million. The remainder of the homes in Portola Valley and Woodside ranged between $1.5 between $2.5 million. Other had no sales in central Atherton; the sales were in Lloyden Park from $1.7 to $1.995 million.

Affordability is the key here and the lack of IPO’s the other. Home buyers looking for schools and affordability in strong and resilient markets focused buyers on Palo Alto and Menlo Park. Historically, those markets are the strongest markets. When we had the October plunge in the stock and bond markets, all sales stopped! They did not pick up until interest or people went back to touring homes for sale. That started after Obama’s move into the White House. Those that bought or at least made offers obtained great prices. They bought at less than replacement cost, in my opinion.

Onto IPO’s, they are the only single force that makes Atherton, Woodside and Portola Valley active in the estate properties. When you see that market pick up, you will see Atherton, Woodside and Portola Valley estate properties jump.

WHERE TO INTEREST RATES?

Remember in my past commentary I recommended that you refinance or fix your mortgages to 30 year term mortgages? If not go to Blog’s history and review the comments. Interest rates are rising. The massive Government action to provide assets to the banking system will sooner or later lead to inflation and higher interest rates. To give you some reasons look at the chart below.
Table 10: US Treasury Yields
US Treasury Bonds Maturity Yield Yesterday Last Week Last Month
3 Month 0.12 0.10 0.08 0.18
6 Month 0.27 0.26 0.28 0.38
2 Year 0.86 0.85 0.95 0.81
3 Year 1.35 1.36 1.36 1.13
5 Year 2.01 2.01 1.93 1.64
10 Year 3.15 3.12 2.99 2.65
30 Year 4.07 4.03 3.88 3.50
Municipal Bonds Maturity Yield Yesterday Last Week Last Month
2yr AA 1.29 1.17 1.36 1.42
2yr AAA 1.31 0.94 1.24 1.14
2yr A 1.81 1.64 1.60 1.55
5yr AAA 1.95 1.93 1.85 2.14
5yr AA 2.07 2.09 2.07 2.28
5yr A 1.96 1.91 2.28 2.72
10yr AAA 3.11 3.17 2.83 3.32
10yr AA 3.31 3.27 2.97 3.46
10yr A 3.39 3.60 3.36 3.64
20yr AAA 4.96 4.43 4.53 4.95
20yr AA 4.78 4.59 4.61 4.90
20yr A 4.74 4.77 4.71 5.10
Corporate Bonds Maturity Yield Yesterday Last Week Last Month
2yr AA 2.52 2.51 2.78 3.85
2yr A 4.80 4.74 4.37 5.93
5yr AAA 2.82 2.86 2.98 3.10
5yr AA 4.34 3.59 3.64 3.99
5yr A 4.91 5.03 5.00 5.17
10yr AAA 4.72 4.76 5.10 4.96
10yr AA 4.88 4.62 4.64 4.68
10yr A 5.43 5.36 5.56 5.66
20yr AAA 8.39 6.82 6.58 6.81
20yr AA 7.88 6.31 6.07 6.30
20yr A 8.57 7.00 6.75 6.98

Mortgages are becoming available, but more importantly investors are taking on risk again. It was never the case that our financial system lacked liquidity. It lacked TRUST. Trust is coming back and investors are now willing to move from the safest of safe, US Bonds to other investments. IPO’s are slowly coming back as the POP in Rosetta Stone and the over subscription of Sun Power’s secondary offering of over 10 million shares. Junk Bonds have had a great run in appreciation; the stock market alone was up over 30% in April. All this says trust has returned. What greater proof is there than the dramatic increase in pending sales from the prior section?

April 16, 2009 Commentary

April 16, 2009:Market Update

• Once bitten by Bears, Twice Shy of Bulls?
• FED Bond Buying piddles out the first day
• Outlook on Economy is Brightening, Poll Finds
• SURPRIZE! They made $$$$$$, more than they said they would!
• Intel says we passed the bottom
• Economist react, Housing may finally be near a bottom
• Is Silicon Valley’s housing market leveling off?
• Homes Sales and Homes Pending
• 10 Things Every Remodeling Contract Should Include.

There was a great article in Friday’s Wall Street Journal of April 10th, on the attitude of investors after a Bear Market. For all those of you, who thought shares prices only went up, SURPRIZE! , even the best Bull’s die. Welcome to the new Bear Market. Of course the big question is, have we hit a bottom? Is the rally just a Bear Market Rally and a Bull Trap? What do I do with my 401K and my savings? Back to the article, do investors shun stocks or do they flock back into the in search of reward? A study found that from 1964 to 2004 those who suffered a loss in bear markets were less likely to return quickly. Of course quickly was dependent on age and past experience. You would think that Depression Babies would shun the market, right? But would you believe it that young people with experience in the past 10 years were the most pessimistic! That pessimistic attitude would last 10 to 20 years. History tells me that. I remember the 1974 recession and the enormous losses taken by investors in that bear market. It took until 1983 for the Dow Jones Industrial to break out of the old high! That was 9 years. So this market should have the same effect, a picket fence of highs and lows and no long term trend.

What do you invest in, what did the investors of 1974 invest in? Would you be surprised if I said REAL ESTATE? See is Silicon Valley leveling off below for details. I saw the frustration of investors in 1974. From then on real estate was the chosen medium. Second homes, rentals, condos were all part of the chosen medium. Of course it all went too far as real estate was then bought with negative income, rather than positive income. The rationale was higher prices will pay off. Sooner or later those bull market beliefs all have a lesson to be learned, trees do not grow to the sky!

The FED is buying $300 billion of Treasuries over the next six months. TIPs, or Treasury Inflation Protect securities was the first buy yesterday. $1.5 Billion were purchase by the FED from dealers and $15 Billion tendered….OOPPS! It was not surprise to see US Treasuries sell off today!

Another great paper I have read since my college days was is the New York Times. It is now my favorite in electronic form. April 7, 2009 it was sated that Americans have grown more optimistic about the economy and the direction of the country in the 11 weeks since President Obama was inaugurated. GOSH, I knew that, my phone and in box was turning red form all the requests to see homes. The same people who told me in December that it is getting worst were now looking to buy. It is all about confidence. Bush did not have it, Obama has it. It is not the case that people do not have money. Wrong, there is a great deal of money around, especially here in Silicon Valley. I am sorry for those in the “Rust Belt” or the East Coast who are suffering, but we here have suffered the ups and downs of the technology cycle. It is fast and one day a new technology has workers looking for a new employee. That makes saving very important. They also know that the high flyer of yesterday is not the high flyer of today. Do you know that the Hoover Vacuum Tube was once in the Dow Jones? It is confidence that creates bottoms. I don’t care if it is housing, stocks, bonds, pork Bellies or Gold. If you have confidence you will buy, support and trust. That is where we are today and that is why foreclosures and REO’s are being bought in record numbers and multiple offers.

Banks and financials are making money, more than the experts forecasted. I don’t want to be a party pooper, but let’s face it. If you can borrow money free or almost free and lend it out at 29% on a credit card would you make money? This is Tony Soprano’s game. Steal the money and lend it to someone at usurious rates. Oh, I forgot the law lets the bank do so. Wasn’t that our tax dollars that we gave them at almost no interest? There has to be something done about this game of high interest rates to people who cannot afford them or are not smart enough to understand. I am beginning to think that the KORAN is right, interest is sinful

Otelini of Intel has declared the bottom of our economy, hurray! But more important is that the San Jose Mercury News has the housing market leveling off. More homes changed hands last month than in March of 2008. Is that a sign of lack of confidence? A number of readers and clients have asked me is it a bottom, will it go lower. If that was the case would people be buying in record numbers? Bottoms and recovery are characterized by mixed news, good and bad. The comment is “climbing a wall of worry”

Market Action since April 4, 2009

1. Palo Alto: zero closed escrow and 37 pending + 6
2. La Honda zero closed escrow and 3 pending + 2
3. Portola Valley, zero closed escrow and 11 pending + 1
4. Woodside zero closed escrow and 5 pending
5. Atherton zero closed escrow and 6 pending + 2
6. Menlo Park (east of 101 not included) 1 closed escrow and 27 pending + 4
7. Redwood City (over $800,000) zero closed escrow and 17 pending. – 1

The + and or the – represents the change since April 4, 2009.