Spring Real Estate 2006

Publication Date: Friday, April 28, 2006

A more balanced market
Prices and mortgage rates stable, inventory low in early spring

by Carol Blitzer

Terri Kerwin can't quite get her mind around the bursting real-estate bubble image. For the Peninsula market, it just doesn't work.

"When you blow (a) bubble, when it pops, nothing is there. I cannot imagine there would be no buyers and sellers," said the longtime Menlo Park Realtor.

"There is always a reason why people buy and sell," she added, pointing to changes in people's lives - death of a spouse, pregnancy, job changes.

While there are no indications that the local real estate market is imploding, there are signs that things are finally slowing down. According to the Silicon Valley Association of Realtors (from REInfoLink), there were 49 home sales in the first two months of 2006 in Palo Alto, the same as last year, down slightly from 2004. But it's taking twice as long to make the same sales: 37 days in February, compared to 20 days in February 2005.

Likewise sales in Mountain View were 35 rather than last year's 45, and average days on the market were 43 vs. last year's 16. It appears there's a little more time to think before buying in 2006. But homes are still going for more than 100 percent of list price.

Vince Malta, president of the California Association of Realtors, recently addressed members of the Silicon Valley Association of Realtors at its regular Friday morning pre-tour pep rally in Palo Alto. Malta pointed to strong economic indicators trumping the burst-bubble image: "The numbers show inflation in check, mortgage rates are low," he said. Statewide, there's still a housing shortage.

"We are still going to experience a market - albeit more balanced - with no bubble," he added.

Instead of double-digit rises in median home prices, he forecasts single-digit increases. Even with that slowdown, he predicts 2006 will be the No. 2 year of all time as far as sales in the state.

Malta acknowledged that local Realtors have the greatest challenges in the state: getting people into their first homes and trading up.

Advice for first-time homebuyers

"I've had to advise a lot of first-time homebuyers who are frustrated that prices are where they are. They don't seem to be settling down. The general opinion is we're pretty stable; the prices established are holding up," said longtime Realtor John King, with Alhouse King Realty in Palo Alto.

"If you're going to be here a minimum of five years, you must beg, borrow or steal enough to make a down payment on the Peninsula," said Tom Foy, of Midtown Realty in Palo Alto. "I've gone through this so often where there's been an adjustment in the marketplace - it does go down, may stay down for two to three years, bottoms out, then rises again, surpassing everything we've seen.

Occasionally, homeowners don't reap big rewards from home ownership, mainly when they must sell after a short period of time. But, for those who can hang on for at least five years, "it's better to purchase," he said.

Although the market seems calmer than a year ago, real-estate agents uniformly advise their first-time buyers to have their finances lined up so they're poised to make an offer quickly.

Bob Kamangar, who runs Kaman Properties, a boutique real-estate agency in Los Altos, recently advised his clients to walk away from a deal in unincorporated Menlo Park where there were seven offers on an entry-level property. "Chances are not very high to be the winning offer," he said, adding "Should they keep trying? Sure. Should they have patience? Yes."

"Entry levels, good school districts, good cities are very much in demand. There appears to be no slowdown in it. For those buyers, my best advice is to be patient, be prepared to look for four months to a year - unless they're willing to overpay," he said.

Even 25 years ago it seemed like it was tough to get into the market, said Gloria Darke of Alain Pinel Realtors, Menlo Park. "It's not that different today. ...Get in the market," she said, even if it means borrowing from your parents or getting an interest-only or a 90 percent loan.

Trading up

While the entry-level market appears warm, it's harder to assess the middle rung of the housing ladder "The market hasn't established itself," Foy said in March.

Terri Kerwin sees move-up buyers as people who probably are trading up in equity and may not be taking on a whole lot more debt. "They've emotionally been through 'my mortgage is going to be x' and are more emotionally prepared."

Because the lower-level homes are priced so high, King sees this as an excellent time to move up. "This is a good time to sell your home at a very good price. You could trade up and get onto a faster horse - better neighborhood, better home - because you can bring a lot more of new equity into a home," he said.

"The next level is not that much higher," he added. If you started five years ago with an entry-level, two bedroom, one-bath for $600,000, it's probably worth $800,000 today. "You can take the equity and jump into an Eichler at $1.3 million that's twice the size," he said - or you could add on to your existing home, which might not be located in the neighborhood you want or be in a configuration easy to add onto.

"I think it's a great time to trade up. The lower end of the market is probably getting the highest price ever. Whatever they're leaving behind is probably run up, has seen as much appreciation as one could hope for. It's a good time to sell," Kamangar added.

Foy is seeing fewer "multiple, multiple offers" but knows there are always exceptions. To be best prepared, Foy suggests getting an equity loan to facilitate making a down payment on the higher property.

"Trying to find the pattern has not been easy this year so far," agreed Deniece Watkins, a Los Altos Coldwell Banker agent. But she finds both the entry-level and $2 million markets "on fire."

She likes to keep an eye on the super high end, to check out who's buying. When she sees the people in control of companies buying, she knows the next level (buyers) are taking their cues from the CEOs.

"I see the market having some stability, because it continues to move. That perks up my ears: What do these people know that the general public doesn't?"

Trading down

For people owning higher-end properties who are thinking of paring down, real estate agents don't seem to agree on the best path to take.

Some say take the money and run. Others say be prepared for a major change of lifestyle - even in the same or nearby community.

King sees multiple options at the higher end: Find a nice condo or townhouse in town, at half the price; move into the pricey Classic community; or don't buy at all, but find a nice high-end rental, such as Oak Creek in Palo Alto or Avalon Towers in Mountain View.

Of course, that "doesn't make sense long term," he added, pointing to the specter of rising rents versus an assured monthly mortgage cost.

"We're starting to see a lot of people, not trading down, but trading out - retiring and moving out of the area because they can cash out at such high levels now," King said.

Those who try to stay in the area may face stiff competition for housing.

"They end up making big sacrifices. ...They're competing with first-time buyers, who will buy as is and are willing to invest another $100,000 in it," Kamangar said. He pointed to a Los Altos Hills homeowner who was looking to buy in Los Altos. "That's in high demand, competing with the dual-income next generation. I am seeing them sell and buying multiple acres in Auburn and buying a dream house," he added.

For people paring down, often there is emotional pain associated with the move, noted Kerwin. "A home you've had so many memories in ... Although moving out of the area, pain comes more from leaving what you have."

Gloria Darke's advice takes a practical turn: Find something that you want before you sell your home. She's often encountered ambivalence in clients who've lived in a large home for a long time. Looking for a smaller home - or one closer to downtown - can be a real values-clarification exercise.

"It's interesting with people who want to trade down. They say, 'oh, there's not an office' (in the new place). It might be better to close off some of the rooms of the house now" and stay put, she said.

No matter the segment of the market, Dan Lorimer, co-founder of Movoto.com (formerly iGenHome.com) in Palo Alto, strongly suggests that buyers and sellers do their homework. "If people are thinking of trading up or down, they need to know that different segments have different volatilities," he said. "The market hasn't shown its colors yet."

King advises his clients to think philosophically. "They worry about what if we buy for $1.2 million today and in six months it's worth $900,000? Where do you think the stock market will be? No one can predict what will happen in any accurate form over the next six to 12 months.

"But, over the next five to 10 years, what do you think will happen? Almost everyone says prices will be much higher 10 years from now. That's what historically shows. You hang on to them long term."

Assistant Editor Carol Blitzer can be reached at cblitzer@paweekly.com.