Fall Real Estate 2009

Publication Date: Friday, October 9, 2009

Homebuyers, investors seek East Palo Alto properties
Low prices driving interest to own, rent out single-family homes

In this buyer's market, East Palo Alto's inventory of single-family residences is quickly disappearing. With many of the available houses priced under $300,000, investors and potential homeowners alike view the properties as ideal and secure purchases.

As of mid-August, the median price of a single-family residence in East Palo Alto sank to $264,038, according to Altos Research statistics. The median home price previously dropped from just over $600,000 in 2007 to under $400,000 in 2008, a 44 percent decrease, according to a draft of the "City of East Palo Alto Housing Element" released in August.

Low prices in East Palo Alto are the localized result of the national housing collapse, which has forced many to foreclose or short-sell their homes. As of Dec. 31, 2008, 751 homes (about 10 percent) in East Palo Alto were in some stage of foreclosure, compared to 379 in 2007, according to the "Housing Element" draft.

Realtors are on the frontlines of the housing market, observing transactions and inventory. "About a year ago we had over 100 listings in East Palo Alto, (many) being short sales or foreclosures. It was very rare to see a regular transaction," said Noemi Ruelas, a Realtor with Coldwell Banker's Los Altos office. "Now there are only 30-something homes for sale," she said in mid-August.

The active time on the market for a $200,000-range home in the city is now typically seven to 10 days, according to Lydia Kou, a Realtor with Alain Pinel's Palo Alto office.

"If they're priced correctly and the house is in livable condition, they sell right away," Ruelas said. In addition, most properties receive multiple offers, Kou said.

A recently listed 870-square-foot, 3-bedroom, 2-bath "fixer upper" in East Palo Alto priced at $166,320 received numerous offers in a matter of days, said Menlo Park Coldwell Banker Realtor Barry Willbanks. "I had five offers, several over asking price, and all cash," he said.

Realtors are seeing substantial interest from investors as well as those looking to purchase their first home. "It's favorable for both," Kou said. "The homeowners are seeing that this is their one and only opportunity to get into the home because prices are so low. As for investors, they're looking at it and finding that this is something that keeps their money safe."

Bay Area investors appear confident that low-priced real estate, such as that in East Palo Alto, is a profitable investment opportunity, according to Realtors such as Willbanks. "Since the stock market started up in March there's been a huge rally in investor income and portfolios," he said. "There's great confidence in investing in real estate."

Rather than "flipping," buying a house to fix up and sell, investors are primarily purchasing properties with the intention of renting, according to Realtors. "I don't think the market supports flipping at this time. People are buying and holding on to it," Ruelas said. "Investors know it's a good time to buy and rent it."

The properties appear so attractive to some that investors are making multiple purchases.

"Many of them are repeat buyers, just jumping into a black hole with lots of confidence since the market is so far down," Willbanks said. "I know some people are buying with all cash and then refinancing to pull out all their money and go do it again."

However, investors are not the only ones looking to buy, as Realtors are seeing potential homeowners shopping around.

"Last year I was seeing a lot more investors and now I'm seeing a lot more first-time homebuyers," Ruelas said. "There are definitely a lot of young families (looking to buy), mostly children of people who live in East Palo Alto."

Although many East Palo Alto residents are selling their homes, they are not necessarily leaving the area, instead seeking more affordable accommodations in the community. "Rather than have to pay $400,000 to $500,000 in mortgage on a house that has devalued so much, it makes more sense for sellers to do a short sale and then rent something," Ruelas said.

Realtors and home-sellers consider short sales, which involve sellers arranging a loan-forgiveness deal with a bank, more desirable than foreclosures.

"In a foreclosure, the seller can't pay (off the debt) and the bank takes the property. In a short sale, the seller pays as much as possible by selling the house, and the bank goes from there," Ruelas said.

In order to aid "underwater" homeowners, short-sale lenders negotiate with sellers to forgive a portion of the remaining unpaid mortgage after receiving payment from the sale of a home, whereas in a foreclosure homeowners have few or no options for negotiation. The majority of homeowners seeking short sales have attempted unsuccessfully to modify their loans, Ruelas said.

Those seeking East Palo Alto homes have also made substantial use of the U.S. Department of Housing and Urban Development's Federal Housing Administration-approved (FHA) loans, a source of mortgage insurance. FHA-approved loans often carry additional considerations and restrictions that affect the selling process.

"FHA lenders are more strict many times," Willbanks said. "In one house where the (detached) garage had a second bath, the (FHA-approved) lender would not lend until that was torn out and the plumbing was capped." The FHA requires appraisals of properties seeking FHA-approved loans for valuation and safety purposes, according to a HUD website. The inspection process can delay sales, according to Ruelas.

Regardless of such restrictions, East Palo Alto homes have continued to sell quickly, so much so that the high interest level has begun to increase prices.

"Now that our inventory is so extremely low (prices have) actually come up a little bit," Kou said. She predicts that by the end of the year prices will have risen as much as 10 percent.

"It feels like we've fallen a lot from the first of the year and are bouncing back," Willbanks said.

While others are less certain of the trajectory, cautious optimism is creeping back into the housing market for some.

"We've probably hit bottom," Ruelas said. "If not we're very close to that."

"I don't think the market supports flipping at this time. People are buying and holding on to it."
-- Noemi Ruelas, Realtor, Coldwell Banker, Los Altos