Consumer confidence continues crumbling

SANDRA Summerfield Kozak, founder and director of International Yoga Studies in Clifton Park, NY wants to move to the Silicon Valley area, but plans to stay only for several years to ply her trade.

She is, however, concerned she could lose money on such a short-term move.

Home prices have been falling this year and they could begin to rise again before the end of her stay, but perhaps not enough to offset her costs to buy now and sell later -- 6 percent for the sales commission alone, not to mention the costs of financing the deal, title insurance, escrow fees and other expenses, which could bring the total to 10 percent or more.

"I am trying to understand when to buy because I cannot afford to lose money on this move and I may only be there two or three years," she said.

Kozak isn't likely to get a guaranteed answer.

No one is sure when increasing appreciation will return to Silicon Valley's housing market. Perhaps only the traditional spring upswing time will tell. That's when most experts say is the earliest likelihood of a move away from the current housing market slump.

Even with near record low mortgage interest rates, confidence among consumers considering home buying in Silicon Valley has fallen victim to a growing economic threat of job loss recently exacerbated by terrorists attacks on the nation.

Silicon Valley is languishing in a solid buyer's market of lower prices and swollen inventories and consumers who buy now should be prepared to stick it out for more than a few years.

"If you are going to have to bail out in the short term, in under three years, I would just look at it realistically," says Michael G. Mullinix, president of the Santa Clara County Association of Realtors.

"Real estate is a long term investment and while people have started treating it like a commodity, there are so many expenses associated with it, if you are looking short term, you are probably going to take a hit," added Mr. Mullinix, also of Mullinix Commercial Real Estate in San Jose.

Reversal of fortunes

A barrage of recent economic analyses of the reciprocal relationship between the economy and the housing sector all say, while real estate remains an economic cornerstone, it has been crumbling under the weight of too much confidence-draining uncertainty -- even before September 11's terrorists attacks on America.

The National Association of Homebuilders' "Housing and the Economy In The Aftermath Of The September 11 Attacks On America" said terrorism's residual effects on the already wounded economy likely will put downward pressure on the housing market for at least the balance of the year. A similar economic analysis by the the National Association of Realtors said the residential real estate resale market downturn will last longer, through the next two quarters before improved consumer confidence spurred more home buying.

The New York-based Conference Board's Consumer Confidence Index, released Sept. 25, had already declined in August, but plummeted further in September at a rate not seen since October 1990. The index (1985=100) slid 16.4 points down to 97.6 in September from 114 in August. In October 1990 the index suffered a 23 point fall.

The board said layoffs, reduced hiring, shrinking incomes and weakening business activities were fueling the erosion in consumer confidence, again, before terrorists attacked.

Also on Sept. 25, Standard & Poor's Structured Finance Group announced that while it does not expect Sept. 11's acts of terrorism to have a direct impact on the residential housing market, residual effects of additional layoffs and general economic softening related to the tragic events will add to the expected decrease in housing starts and an increase in mortgage delinquency rates, spurred by joblessness.

All the studies have particularly dire implications for Silicon Valley, where from 1995 to January 2001 home values skyrocketed by 133 percent. Many homes are still worth twice what they were in 1995, but since the first of the year, they've lost approximately 20 percent of their value -- some more, some less, says San Jose real estate broker and statistician Richard Calhoun.

Silicon Valley's housing market is losing ground largely because of the economy's heavy reliance upon the job-churning technology industry and the now evaporated "wealth effect". A victim of its own success, Silicon Valley generated a boom built on an over-valued technology sector that has plummeted back down to earth, tossing out jobs as it fell.

The San Jose Metropolitan Area lost 24,700 jobs since September 2000 when the unemployment rate was 1.8 percent. The rate was 5.9 percent in September this year, according to the U.S. Bureau of Labor Statistics. In California, the September 2001 rate was 5.4 percent compared to 4.9 percent nationwide.

"San Jose has 25,000 fewer jobs than it had in September last year. The decline in demand for housing in Silicon Valley was not just a supply constraint, but it was brought on by the tanking of the high tech sector, prior to Sept. 11," said Michael Carney, executive director of the Real Estate Research Council at California State Polytechnic University in Pomona.

"The major economic item taking place more generally was a big decline in business investments. Spending up until the year 2000 increased by 15 percent per year. All of a sudden it reverses and falls by 15 percent," he said.

Without the wealth effect of stock options, discounted stock purchase plans, stock market returns and other income boosters, with fewer jobs and with increased job insecurity, consumers became less likely to venture into what could be the largest single purchase they'll ever complete.

Both Mr. Carney and Mr. Calhoun, say the terrorists attacks exacerbated economic conditions that have continued to affect Silicon Valley's housing market longer than most believe.

"Before the (Sept. 11 event) event we were getting back up to 275 sales a week. Then we hit Sept. 11 and it was down to 165 a week. It stayed there until Oct. 3, so I think we stayed down longer than most people think," said Mr. Calhoun, who is also broker/owner of San Jose-based Creekside Realty.

"Since Oct. 3 we've been at 185 to 190 homes a week. When you do the 10-year average, 240 sales a week is probably a normal week as opposed to 185. This (lower sales) is due to everything, the World Trade Center, which had a huge impact, and it's the economy. It's not just seasonal," said Mr. Calhoun.

New homes, resales, rentals suffering

In the past year, closed sales of single family homes tumbled 35 percent to 797 in September 2001, compared to the 1,231 sales in September 2000. The median price has also returned to the half million dollar mark. In September of 2000, the median price was only slightly higher, at $505,000. During the nation's longest economic expansion on record, home prices in Silicon Valley peaked at $577,500 in January this year, according to Mr. Calhoun's monthly Bay Area Real Estate Market Newsletter, a statistical analysis of Campbell, based R.E. InfoLink's multiple listing service data.

"We are seeing some multiple offers, but they are all below list price, which is a complete reversal of the last years. If a seller gets a contract in and it's below list price, some sellers just reject it and don't answer them, which is foolish," said Carl San Miguel, broker/owner of Highland Properties in Campbell.

A comparison of the third quarter 2000 market with the third quarter 2001 market shows Silicon Valley's new home market has been hit hard too.

Weekly sales per community are down 68 percent, weekly home shopping traffic is down 31 percent, and while the weekly canceled sales rate per community is only 0.27 percent, that's up 108 percent from the third quarter 2000, according to the Danville-based Ryness Co., a new home marketing and consulting firm.

Resale condo and townhome sales have plummeted by 45 percent from 451 in September 2000 to 247 in September this year. The median price of condos and townhomes moved from $320,000 last September to $330,000 September this year, after peaking at $370,000 in February this year, according to Calhoun's monthly market newsletter.

"I went into a contract on a town home and the last sale was $495,000 in January or February. Now it's in the $410,000 range," said Mr. San Miguel, also a director with the Santa Clara County Association of Realtors.

What's helping hold up the condo market are relatively high rents tenants are discarding in exchange for monthly mortgage payments that are often less then monthly rents. A condo is a natural first home for them.

The average September rent of $1,689 was down from a high of $1,951 at the beginning of the year and rents have now rolled back to the level of June 2000, completely erasing the big run-up in the second half of 2000, according to San Francisco-based Real Facts, a rental market research firm.

"The rental market is worse. I have some condos and a three-bedroom duplex that are sitting empty. They are taking two or three months to fill them. We will probably stay in this kind of market through the year 2001 and possibly 2002 and 2003," Mr. San Miguel said.

Often because of vacancies created by renters moving to homes as homes became more affordable, the hardest hit rental unit types were town house units; three-bedroom town houses declined by $236, two-bedroom town houses lost $135, and one-bedroom town houses' rents went down by $301.

"The occupancy rate has just fallen to its lowest point in the past decade: 93.3 percent. That drop suggests that the San Jose MSA is likely to show further rent declines," said Caroline S. Latham, RealFacts' CEO.

Renters who recently become buyers cashed in on record low mortgage rates in the 6.25 percent to 6.5 percent range, according to Bankrate.com.

The lower rates and cheaper home prices contributed to an increasing number of home owners able to afford a home in the still high-priced housing market. One in four Santa Clara County households could afford the median priced home in the area in August, up from less than one in five a year ago, according to the California Association of Realtors.

Nevertheless, instead of buying real estate, most housing consumers are cashing in on their home equity while they still can to consolidate bills and to pull out cash that will allow them to continue the lifestyle they've come to know through the stock market's "wealth effect".

"It's as busy as the peak in 1998 and I may be a little busier. Less than 10 percent of my business is sales. It is helping a lot of people and it is putting more money in the economy," says Stephanie Noryko, mortgage broker with Cupertino-based Granite Financial.

The value of home ownership both to the economy and individuals, especially in terms of the equity it creates over time, is likely to be the saving grace for many workers who face the prospect of joblessness right now, says Noryko.

Many can tap equity now for the cash to see them through a job loss.

Others agree and say the value of a home makes it a good buy anytime and right now, with lowered prices, with some sellers willing to make concessions and with other favorable buying conditions, it's a relative good time to buy.

"You have some very creative financing, some sellers are willing to listen and rates are going down," said Mr. San Miguel.

"I think lenders are keeping rates artificially high because they can't handle the applications for the refis as it is and they are trying to temper it. I think the rates will last into next year," he added.

Published Monday, Oct. 22, 2001, 9:00 AM for

Up down south, down up north

SAN DIEGO, CA -- Don't count out California's resilient real estate market just yet.

Statewide, the market likely will lose sales for a second consecutive year in 2002, but prices should continue to rise in the Golden State.

The Silicon Valley and surrounding areas, however, are on the ropes and a come back isn't expected before the end of 2002, according to experts who attended the California Association of Realtors' annual convention last week.

That's not surprising, say local real estate experts.

"It wasn't very long ago when sellers could ask what they wanted and get multiple offers," said Calla Bertao, a real estate agent with Hollister-based RE/MAX Platinum Properties.

"Sellers who are motivated are bringing property list prices down to where they are moving. If the seller is not real motivated they should not put their home on the market right now. It doesn't do any good to test the waters, because we don't have that kind of market any longer," Bertao added.

Statewide, the median price of a single-family home will hit a record $279,920 in 2002 while sales will decrease by 2.0 percent, compared to 2001, according to the California Association of Realtors "California Real Estate Market Forecast: 2002" released last week during the association's annual convention.

California's expected 6 percent increase in home prices for 2002, follows a projected 8.5 percent increase in home prices this year and the projected sales decline follows a projected 5.9 percent decline for this year, according to the forecast.

"The California real estate market stalled immediately following the Sept. 11 terrorist attacks but has begun to rebound," said Gary Thomas, CAR's president.

"While home sales will decline next year, 2002 looks like it will shape up as the fifth strongest year on record. Southern California will lead the state in sales of existing single-family homes, as the availability of entry level jobs and continued job growth fuels housing demand there," he said.

On the other hand, the San Francisco Bay Area has returned to what is considered "normal" market conditions -- fewer multiple offers, over-bidding and skyrocketing prices, Thomas said.

"We are seeing some multiple offers, but they are all below list price, which is a complete reversal of the last years," said Carl San Miguel, broker/owner of Highland Properties in Campbell and a director with the Santa Clara County Association of Realtors.

Extended slump expected in SV

"We will probably stay in this kind of market through the year 2001 and possibly 2002 and 2003," he added.

The Silicon Valley are housing market is losing ground largely because of the economy's heavy reliance upon the job-churning technology industry and the now evaporated "wealth effect". A victim of its own success, Silicon Valley generated a boom built on an over-valued technology sector that has plummeted back down to earth, tossing out jobs as it fell.

The San Jose Metropolitan Area lost 24,700 jobs since September 2000 when the unemployment rate was 1.8 percent. The rate was 5.9 percent in September this year, according to the U.S. Bureau of Labor Statistics. In California, the September 2001 rate was 5.4 percent compared to 4.9 percent nationwide.

Without the wealth effect of stock options, discounted stock purchase plans, stock market returns and other income boosters, with fewer jobs and with increased job insecurity, consumers have become less likely to venture into what could be the largest single purchase they'll ever complete.

"The decline in demand for housing in Silicon Valley was not just a supply constraint, but it was brought on by the tanking of the high tech sector, prior to Sept. 11," said Michael Carney, executive director of the Real Estate Research Council at California State Polytechnic University in Pomona.

Terrorists' attacks have exacerbated matters, effectively producing fewer than the typical number sales as recently as last week, according to Richard Calhoun, statistician, broker and author of the Bay Area Real Estate Market Newsletter.

The research council's Carney agrees.

"All this uncertainty and all this fear is going to cause people to simply stay put. They aren't going to go out. They are going to stay home and have sex. 'I'm nervous, I'm stressed out. I need some donuts and I need some sex,' they say, but I'm more pessimistic than people I'm reading about," said Carney.

In the Silicon Valley area, virtually all housing indicators are down.

By the numbers

Closed sales of single family homes tumbled 35 percent to 797 in September 2001, compared to the 1,231 sales in September 2000. The median price in September 2001 was $500,000, compared to $505,000 a year ago. During the recent run up in prices, prices peaked at $577,500 in January this year, according to Calhoun's newsletter, a statistical analysis of Campbell, based R.E. InfoLink's multiple listing service data.

In San Benito County, sales were down from 66 in September 2000 to only 38 this September and homes are taking much longer to sell -- an average of 77 days this September, compared to only 43 days in September 2000, according to Calhoun's newsletter.

The newsletter also reveals San Benito County's September 2001 median price for single family homes was $350,250, up from $321,500 a year ago, but Calhoun warned the relatively small number of sales in San Benito County skews the median price.

"Prices are down five percent in value (in Hollister). Purchases in Hollister slowed down quite a bit. We have about 500 listings in Hollister. That's like triple what it was last year at this time," according to Larry Silvas, owner of Hollister-based South Valley Mortgage.

In Santa Clara County, during the third quarter, weekly new home sales per community were down 68 percent, weekly home shopping traffic was down 31 percent, and while the weekly canceled sales rate per community was only 0.27 percent, the statistic was up 108 percent from the third quarter 2000, according to the Danville-based Ryness Co., a new home marketing and consulting firm.

In San Benito County, new home sales are so flat, developers are taking referrals from real estate agents.

"What's kind of funny, is normally they won't cooperate. You can always tell when there's a swing. In this market they will cooperate with a full three-percent referral. That's because they are sitting on inventory," says Bertao.

As for resale condo and townhome sales in Silicon Valley, they have plummeted by 45 percent from 451 in September 2000 to 247 in September this year. The median price of condos and townhomes moved from $320,000 last September to $330,000 September this year, after peaking at $370,000 in February this year, according to Calhoun's newsletter.

Calhoun said there were too few condo sales in San Benito County to tabulate an accurate median price.

Condos, mortgages offer relief

What's helping hold up the condo market in Silicon Valley are relatively high rents tenants are discarding in exchange for monthly mortgage payments that are often less then monthly rents. A condo is a natural first home for such buyers.

The average September rent of $1,689 was down from a high of $1,951 at the beginning of the year and rents have now rolled back to the level of June 2000, completely erasing the big run-up in the second half of 2000, according to San Francisco-based Real Facts, a rental market research firm.

"Losing the wealth effect has had a dramatic impact in Silicon Valley and we may be walking around in doom and gloom but a bad market here is better than most region's normal years," said Michael G. Mullinix, president of the Santa Clara County Association of Realtors.

Luckily, for buyers who venture into the housing market and owners looking to cash in on their equity before values fall more, mortgage rates are favorable hovering around the 6.5 percent mark.

"One guiding light has been mortgage rates," says Silvas.

"It's been very busy and it seems people are looking for cash out refinances right now to clean up what they've done in the last year. Now they want to consolidate equity loans. It's overwhelming," he added.

Silvas warned home buyers not to gamble on lower rates.

"I always recommend they jump when they think rates are good for them. I don't want to tell anyone to wait and then have the rates go up," Silvas said.

Published Monday, Oct. 22, 2001, 9 AM for

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