Critical Factors Influencing East Bay Real Estate in 2010

• Rising Interest Rates
• High End Price Correction
• Split Market Continues
• FHA Rule Changes
• High Levels of Foreclosures
• New Breed of Investor
• Tax Credit & Loan Modifications Fail

According to most of the pundits and professionals involved in real estate in California’s East Bay communities, there are 7 critical factors that will influence the local real estate markets in 2010. We have videos from:

• Leslie Appleton-Young, Vice President and Chief Economist for the California Association of REALTORS® (C.A.R.)
• Carole Rodoni is the former President and COO of Alain Pinel Realtors and a Bay Area real estate maven
• A panel discussion with 3 East Bay real estate brokers

Items of Interest

• The California Association of REALTORS is predicting a reduction of over 50,000 licensed real estate agents by the end of 2010.
• Medium “net cash” to sellers in 2005 was $220,640 – in 2009 (October) it is $50,000
• 33% of sellers are reporting a cash loss
• In 2004, 70% of sellers said they were going to repurchase. In 2009 it is less than 40%

A Review of California Real Estate in 2009

Forget about what you think you know about the real restate market. Forget the national data and the big media stories – GET LOCAL Real Estate Data – it’s the only market that matters. According to the professionals above and our peers associated with the local real estate markets here are the critical factors that will influence the East Bay housing market in 2010:

East Bay Split Housing Market Continues

Like many other areas of California and the U.S., the East Bay has a split housing market. On the one hand we have the sector of the market that is dominated by foreclosures and short sales. This is the segment priced under $500K. On the other hand is the market above $500K where more traditional factors are affecting buying and selling.

At the lower end of the market are buyers looking for great deals and investors gobbling up properties that can produce positive cash flow from the get-go. Buyers, especially first time buyers, looking for steals and deals are becoming more and more frustrated as multiple offers continue to dominate the transaction process in this hyper-active segment of the market.

Cash is King in this real estate market sector. Investors with cash have the upper hand. First time buyers trying to get a home with FHA financing and minimum down are finding out the reality of the market, for them, is – make your best offer first – in this multiple offer market, there is no room for counter offers. Over 50% of transactions in the East Bay are seeing multiple offers. Sales price is higher than asking price in this market segment due to multiple offers.

The sweet spot in the market for REALTORS is the market segment between $500K and $900K. This is what you might consider a normal market. Sellers in this market segment are seeing prices stabilize but, the buyer pool is fairly lethargic and the appraisal process is anything but sane. Sellers in this market segment that really want to sell their East Bay home need to have it priced in the bottom third of the price range and in the top third of the “appeal” range.

Value Perception in the Upper End of the Market

This split housing market will continue through 2010.

Link: How to Price a Home – The Home Pricing Issue

Interest Rates Will Rise

Interest rates and inflation are the big concern for real estate in 2010.

Everyone – and I mean everyone – is expecting interest rates to rise. The Fed will stop buying mortgage backed securities in 2010 and mortgage interest rates will rise. Many think we will see this as early as March or April. Others think it will be more toward the 3rd quarter. Yet, they all agree – interest rates will rise.

In 2010, it will take buyers a while to realize that the wonder days of 5% interest rates were a historical anomaly. There will be a smaller buyer pool while we wait for reality to set in – the same situation we saw with sellers in 2007 with home prices. There is no waiting out this market – unless you have 5 to 10 years. If you need to buy or sell in 2010, find a professional that will explain current local market conditions. Our local market reports are updated weekly and break data down by price point and zip code.

Buyers counting on 5% interest rates need to get serious sooner than later. Sellers thinking of waiting until Spring to put their homes on the market, should rethink their strategy. Higher interest rates and a smaller buyer pool will mean more time on the market for most home sellers.

FHA Rule Changes

The FHA, Freddie Mac and Fannie Mae are in trouble. Increased foreclosure levels, the economy and the extended recovery time are taking their toll. Consequently, these agencies continue to change their lending rules and guidelines to deal with the reality of insufficient cash reserves and debt-to-equity ratio. Often, the initial rule changes do not seem to be well thought out as they have a significant negative impact on the home buying process and market activity – something that needs support not undermining.

Over 75% of first time buyers use FHA loans. 2010 will see continued reworking and tuning of FHA guidelines

High-end Price Correction

3 Problems for High-End Market

• Shrinking Buyer Pool
• Foreclosures & Short Sales
• Buyer Value Perception

Foreclosures, higher interest rates, a smaller buyer pool, buyers willing to lease and unemployment will be big factors in the upper end of the housing market in 2010.

Continued Elevated Levels of Foreclosures

52% of homes that closed escrow in 2008 were REOs – foreclosures.

According to a recent C.A.R. poll – 21% of buyers did not understand the terms of their loans. That is a sad statement, but how many people read the fine print in anything. Even if we did, can we really understand it? Are we meant to? All the more reason to work with experienced, professional real estate agents that have established reputations.

Many first time buyers are looking for turn key foreclosures – move-in ready, no sweat equity required. At the lower end of the market? Get real – talk to a few REALTORS and go look at a few foreclosures. People losing their homes are angry and many are taking it out on the home as a way of “getting even” with the bank.

Elevated levels of foreclosures will continue through 2010 in the East Bay. Don’t expect a tsunami – rather a continuous flow. New to the mix will be more foreclosures in the upper end of the market. Look for rising a price point on foreclosures in the lower end of the market.

New Breed of Real Estate Investor in 2010

Real estate investor activity is up 50% over 2008 levels and cash is king.

While we deal with the continued cleanup of the subprime melt down, the economy continues to struggle and banks are under more and more pressure to clean up their balance sheets. All of this is helping to create the perfect conditions for a new breed of real estate investor in 2010 – the $100 million plus investment pool. These funds are not going to deal with REALTORS, they are going to deal directly with the big banks and asset managers. They’re going to buy hundreds of properties at a time and they will be more concerned about the note than the condition of the property.

This will lead to “buyer shock” for many. The data will continue to show elevated levels of foreclosures, but many REOs will never get to the market as these investment funds gobble them up. This factor helps to increase buyer frustration in the lower end of the market.

Homebuyer Tax Credit Fails

Rising interest rates will take the shine off the extended tax credit in 2010. Interest rates are a much more significant factor in purchasing a home than a one-time tax incentive. Homebuyers need to get serious sooner than later with purchasing a home so their tax credit has the maximum impact on their home purchase situation.

Loan Modifications

Over 80% of loan modifications will fail. This is according to the professionals that are actually doing loan modifications. See this post about an email exchange between an asset manager at one of the big 4 banks and a mortgage broker friend.

Why are banks and the Federal Government pushing loan modifications that they know will ultimately fail. Could they be trying to milk homeowners of all the money they can get out of them before the inevitable foreclosure? Is this just a delay tactic to spread the foreclosure process out to give the economic recovery a little more breathing room?

The U.S. Treasury is reporting that 25% of loan modifications made by the Federal government programs are now in trouble. This in spite of the fact that the loan modification, on average, reduced mortgage payments by 40%. (12/5/09)

Whatever the answer is, homeowners in trouble need to talk with their attorney, real estate professional and CPA to decide on the correct course of action. If the house can’t be saved, why should anyone give a homeowner false hope – better to deal with realty and move life through the mess and into better possibilities in the future.

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Our FREE In-Depth East Bay Real Estate Market Reports updated weekly, break real estate data down by zip code and price point. These are the best “real time” sources of data you can get for your local market.

Email John if you would like to know more about buying or selling a home or condo in Dublin California or call (925) 895-2694