So, What's Up with the Market?

The media pundits have had their way with the real estate market, and the strength that we saw in the spring has evolved into a market that is now tipped in the buyer’s favor. The question that we can’t answer is how long the present market will last and how far will the pendulum swing before equilibrium between buyers and sellers is restored.

Although our market presently suffers from the ills that we believe were artificially created by the media through repeated and irresponsible publication of doom and gloom in the housing industry, we are confident that the underlying foundation of our micro-economy and local housing market will prevail. Markets are built upon simple supply and demand. We live in an area where there is no available land to build and the existing inventory of homes is normally in high demand due to quality of life, proximity to commerce, and a superb school system. Furthermore, the speculation and overbuilding that legitimately impacted markets in other parts of the country have not been evident in our area. Although some market pessimists have tried to draw analogies to the recessionary markets of the early 1980s and 1990s, their arguments are fundamentally flawed. Those periods saw underlying weakness in the US economy and interest rates as high as 18 percent. Our economy is presently strong and interest rates are extraordinarily low by historical standards. We believe that the most relevant measure of assessing an area’s market risk is to look at its median mortgage payment relative to median income. This ratio is currently above local historical averages, but is far from the levels seen in the early 1980s. In summary, we do not see the risks in our local real estate market that have been irresponsibly propagated by the media.

In the meantime, unfounded fear drove local housing inventories to record levels during the summer – typically running at double last year’s levels, while unit sales declined about 30 percent. From our personal observations, the inventory is comprised of a mix of sellers who need to sell and those who want to sell because they are fearful of the market. Those needing to sell are being hurt by the inflated inventory and the change in buyer psychology. Those who want to sell are often pricing their homes at last year’s levels, thus inflating the inventory. We believe that the next few months will result in bargain hunters finding deals from sellers who need to sell, and the others will eventually either reduce their asking price to achieve a sale or decide to wait for a better market. As the inventory comes down, we expect to see more normalization through the winter.

Although August was a very challenging month with pending sales running as low as 38% of last year’s levels in Orinda and 50% of the previous year’s level in Alamo, we saw a very encouraging reversal of this trend in September. It is clear that buyers cautiously stepped into the market and bought housing inventory that was perceived to be available at very attractive prices.

Inventory and Sales –September 2006 vs. September 2005

Active Pending Closed

Area Listings Sales Sales

Lafayette 134% 106% 68%

Orinda 145% 114% 50%

Walnut Creek 172% 50% 68%

Alamo 195% 27% 53%

We are particularly encouraged by the overall strength of the Lafayette and Orinda markets where the underlying fundamentals of supply and demand appear to be reestablishing a more balanced relationship between buyers and sellers. Nevertheless, the current market is quite price sensitive as evidenced by a “snapshot” view of the home sales currently “pending” in the Lafayette/Orinda markets:

Price # of Homes

Less than $1M: 17

$1M-$1.5M: 16

$1.5M – 2M: 0

$2M – 3M: 0

$3M+: 1