John M. Lee: Real Estate Market Update

This is a little early to do a real estate market update, but so many people have been feeling uneasy about the marketplace that I thought I'd better chime in this month.

The number of closing sales has been few due to the fact that loans are taking longer to obtain and close. The press has been reporting lower sales numbers in January and they also will report the same for February when they get the data. Escrow takes about 45 - 60 days to close now so these sales actually went into contract in November and December of 2009. At that time, there was not much inventory available during the holiday season so the first quarter closing numbers will be dismal.

Sales are occurring in moderately-priced homes, while luxury properties continue to languish on the market, with sales being completed only after negotiations from the original asking price. Currently, sales at the high-end of the market are dominated by all-cash or large-down payment deals. The sharp decline in household net worth across all income levels and the devaluation of many passive investments as a result of the most recent recession has led to more conservative investing, even among affluent households. This has led to volatile pricing in the luxury home market, disproportionally hampering sales volume in this segment of the market.

As well, tightening condominium market conditions prompted some developers to convert rental units back onto the market as resale units.

A combination of strong sales activity, as well as a reduction in the number of distressed properties returning to the market, have narrowed inventory levels to the lowest in years. At the current sales rate, the supply inventory of single-family homes dropped to 3.5 months, while the supply inventory for condominiums decreased to 4.1 months. These are positive signs in the market.

The soft housing market, weak national and local economies and the credit crunch of 2009 brought construction levels to a relative standstill. Permitting activity fell dramatically in 2009. A total of 300 residential units were permitted last year, which is a considerable decline when compared to the 2,000-plus units permitted annually since 2004. With supply-side pressures in check through the near-term, improvements to the employment picture and federally-sponsored tax credits, as well as the potential return of a state-sponsored $10,000 first-time homebuyer tax credit facilitating housing demand, we expect the low and middle-end of the housing market to maintain this upward trend as 2010 progresses. In addition, the low level of new construction in the medium to longer term bodes well for price appreciation as the market's recovery is underway.

The San Francisco housing market is expected to continue a steady recovery through the first half of 2010. However, a number of risks could potentially delay the market's full recovery. Rising mortgage rates, as well as stricter provisions for FHA mortgages, which have become increasingly popular in recent quarters, could potentially place a damper on the market's current upswing. And, while the employment outlook has improved, as indicated by a moderation in the rate of payroll cuts as well the recent drop in the unemployment rate, a prolonged period of job losses and furloughs could force a growing number of distressed homeowners into foreclosure, further restraining home prices.

The housing recovery will go hand-in-hand with the overall economic recovery. As sales, borrowing and construction pick up, jobs will be created. At the same time, as job losses ebb and new job creation and income growth returns, housing demand will increase. The latest round of stimulus will likely front-load housing demand to the first half of 2010. So, while cautious, we believe momentum will be strongly in favor of house price growth.

John M. Lee is the president of the San Francisco Association of Realtors and specializes in the Richmond and Sunset districts for Pacific Union. For questions, call him at (415) 447-6231 or send an e-mail to johnlee@isellsf.com.