Buyer's market? Yes and no. Maybe no.
What's your definition of a buyer's market? Probably something like this:
Are we there yet? Headlines like "Slowest July since 1996" and "Slowest August since 1997" have understandably convinced Silicon Valley homebuyers that we are. Now the long years of wistful waiting are over. Now, finally, buyers can buy homes on their own terms.
Let the hard bargaining begin.
Yes and no. And often no, at least in this area. Aren't the headlines true? Yes, they're true of much of the Bay Area in general, and of many other parts of California and the country as well. But I'll show that they're not true of every micro-market in the Bay Area.
And even where the market does match the headlines, I'll caution buyers that they may still have hard work ahead of them.
Why? In any market, most buyers gravitate to the top 20 percent of homes available. In a seller's market, buyers who've been muscled out of contention for the top 20 percent settle for the next 20 percent, or the 20 percent below that, or even the 20 percent below that. In a seller's market, huge buyer demand is spread over a wide range of homes.
But in a buyer's market, the top 20 percent—the "dream homes"—are the only homes that sell. The relative handful of astute buyers still active know that less competition means they can hold out for the home they really want. But when you've got every buyer thinking this, and 95 percent of them use the same checklist to tick off their dream home—and they're the focused, motivated buyers who are the only kind of buyer buying in a buyer's market—you can still have competition for the best homes.
And it's not just the best homes that get cherry-picked in a buyer's market. The best cities, neighborhoods and school districts do too. The cream rises to the top.
This "flight to quality" has created a buyer's market here that doesn't always act like one. And several popular cities on the mid-Peninsula are still very much seller's markets. Mixed signals? You bet, and they're frustrating buyers.
Ever hear the expression "data don't lie"? While this sounds comfortingly obvious (after all, only humans can have ulterior motives), the life lesson my statistics professor taught me is that data are like ventriloquist's dummies: they can't speak for themselves. But data can lie through their teeth, depending on whose lap they're sitting on. More often, data are limited to speaking just one side of the truth. The whole truth, with all its bewildering time- and space-consuming complexities, is rarely reported. It's not a media conspiracy, just the flawed output of busy reporters assigned to the topic du jour, a topic they apparently know little and care less about. The other side of the coin is that, as Tom Brokaw says, reporting is only as good as you want it to be. If media consumers are willing to accept as news the sound bite, the half-truth headline and the warmed-over urban legend, then that's the news they'll get.
Let's look past the headlines to the whole story. "Slowest July since 1996"? I have no problem with that. Sure, real estate slowed late in 2005, and that's our market today, with one or two exceptions. And sure, 1996 was a slow year, as real estate gradually climbed out of the deep hole recession dug for it in the early 1990s.
"Slowest August since 1997"? That I have a problem with. 1997 was a decent year, even a good year, around here. Whose market are they talking about?
If you want proof that real estate is local, very local, then return with me to the dark days of 2001. The tech bubble has burst and life as we know it has ended. Jobs leave for Denver and Portland and homeowners follow. Homes flood the market just as panicked buyers flee it. Sales slump, inventory piles up, prices plunge. Multiple offers are about as common as hen's teeth and new IPOs. And what should land in my mailbox in the midst of this slow-motion train wreck but a California Association of Realtors magazine with this cover story: "How To Deal With Multiple Offers". Whose market are they talking about? Not mine, that's for sure. And this is my own state Realtor association, a day late (actually two years late) and a dollar short for Silicon Valley but right on the money for the rest of California.
So whose market are those "Slowest..." headlines talking about? The nine Bay Area counties, and Silicon Valley lies within two of those counties. But remember, real estate is local, very local. So let's zoom in and look at four representative Silicon Valley markets: Mountain View CID (condos and townhouses), and the entry-level single-family homes in Mountain View, Sunnyvale and Palo Alto. And for the kind of context you won't get in the newspaper or on the 6:00 News, let's compare August 2006 not just with August 1997, but also with August of 2000 (a notorious seller's market) and August of 2001 (a bona fide buyer's market).
Right away you can see that three of the four markets we're tracking had more sales in August 1997 than in August 2000, at the height of the tech boom! Like I said, 1997 was a good year. "Slowest August since 1997"? Whose market are they talking about? And if that doesn't make you wonder, sales of Mountain View condo and single-family home in "depressed" August 2006 were virtually identical to August "irrational exuberance" 2000!
Are those data lying through their teeth again? No, data speak the truth but only a part of it and, truth be told, it's the part least useful to a buyer trying to determine if she's in a buyer's or a seller's market. Welcome to one of those market nuances that's unlikely to be reported by the media: declining sales are often but not always a sign of a buyer's market. Understand this, and you'll understand why even if August 1997 sales exceed August 2000 sales it doesn't mean that 1997 was more of a seller's market than 2000. The big sales numbers in 1997 simply show that the many homeowners who'd put off selling in the dismal recession market of the early 1990s were met in the marketplace by the many buyers brought to this area by the emerging tech boom of the mid-1990s. Pent-up supply almost exactly matched new demand, and neither buyers nor sellers held the advantage. But by 2000, even more buyers (with even more money) were chasing far fewer sellers. Sales declined in 2000 even though the market favored sellers in the extreme (and even though prices were going through the roof).
Why would sellers boycott the seller's market of 2000? Because many sellers are move-up buyers, and by 2000 an extreme seller's market wasn't making it much fun to be any kind of buyer. Better to keep the house you had, remodel and expand. And because the Silicon Valley real estate market isn't the market for widgets where, if there's more demand for widgets, you make more widgets. Because we're almost entirely out of the material—land—needed to make more homes.
So don't be fooled if local sales numbers are up, down or sideways. If fewer homes were sold in August 2006 than in some preceding August, all that tells us for sure is that fewer agents got commission checks in August 2006 than in some preceding August. It doesn't tell us whether August 2006 was a buyer's market or a seller's market.
Here's what will: the absorption rate, the ratio of homes sold to homes available.
Think of the absorption rate as the "seller success rate": the ratio of homes offered for sale that sell in any given period. The chart above shows that two of the four markets we're tracking had higher "seller success rates" in August 2006 than in August 1997. You'll also notice that entry-level Palo Alto's August 2006 seller success rate wasn't just higher than August 1997's, it was higher than dot-boom August 2000's! Affordable Palo Alto was red hot this August, and Mountain View wasn't far behind.
"Slowest market since August 1997"? Whose market are they talking about?
This one. It's obvious that one of the markets we're tracking, Sunnyvale single-family, is slumping badly these days, in some but not all neighborhoods. In fact, Sunnyvale's August 2006 real estate numbers are almost as bad as its August 2001 numbers, and that's about as bad as Silicon Valley real estate gets. That's the headline market. That's the market in many parts of Sunnyvale, and Redwood City, and the East Bay and South Bay and Central Valley, and even just across 101 in East Palo Alto.
I'll give you an example of just how bad this market can be. Recently I sold a home in a small Menlo Park neighborhood east of 101 that in September [2006] had seventeen homes for sale, yet had managed to squeeze out just one sale in the preceding four months until my client's home finally broke the ice and went into contract. That's an absorption rate of 3 percent. That's a market that's clinically dead. Yet at the same time and just a mile away, in Palo Alto, humdrum homes with "potential" were selling quickly and with multiple offers. Never doubt that real estate is local, very local.
So are sales plummeting? Yes and no, depending on the city and even the neighborhood. But the headlines don't make that distinction.
What about that notorious feature of an overheated seller's market, the phrase every buyer dreads, "multiple offers"? A buyer reading the headlines these days would be excused for thinking that multiple offers have disappeared. After all, this is a buyer's market, right? Maybe. There's no completely reliable way to count multiple offers, since the MLS doesn't track them, but tracking the number of sales above list price is an acceptable alternative, because it's a rare buyer who'll pay more than list price without feeling the hot breath of competition on his or her neck.
Only one of the four markets we're following had more sales above list in August 2006 than in August 1997. It was, oddly enough, the only market in a slump, Sunnyvale single-family. But remember what I said about buyers competing even in a buyer's market? It looks like at least 40 per cent of buyers competed in Sunnyvale's buyer's market, and the percentage was probably higher, because when a market is that slow, homes with multiple offers can still sell for less than list. (This is far more common in the South Bay, where overbidding came late and is still considered a dangerous novelty, than on the mid-Peninsula.) In a declining market, fewer homes sell, but those that do are the kind that attract serious buyer interest.
The next chart confirms this. The average bid on homes (at, above, or below list price) tells us the intensity of interest in homes that sell. Remember, only about 20 per cent of Sunnyvale single-family homes for sale sold this August [2006]. Yet the average bid on those homes was higher than in August 1997. Not only that, the average bid was closer to the seller's market of August 2000 than to the buyer's market of August 2001. In fact, an average bid of just under list indicates a market evenly balanced between the only players still active in Sunnyvale, motivated buyers and motivated sellers, with only a slight tilt toward buyers.
So competition hasn't disappeared, even in depressed markets. But it's usually easier for a motivated buyer to prevail in competition these days. Sky high overbids are largely (but not entirely) a thing of the past; sellers are far more open to offers with contingencies, at least in most markets; and no one is having to promise to name their first-born son after the seller.
Now that we know that at least two of the common conceptions about a buyer's market aren't necessarily true of this one, let's look at another, plunging prices. Let's compare August 2005 prices with August 2006 prices.
Even Sunnyvale's sales-price-per-square-foot is up, year over year. Calculating average sales price is a tricky business and, like sales, a less-than-foolproof market indicator. Sometimes the slight increase in price-per-square-foot you see here is due to a decline in the average size of homes sold, since smaller homes sell for more per square foot. But that's not what's happened this time. The average size of Sunnyvale homes sold went up almost 6 percent from August 2005 (1578 sq.ft.) to August 2006 (1670 sq.ft.). Bigger homes selling for more per square foot? That's unusual, and it's more evidence that buyers are cherry-picking. What's selling these days in a depressed Sunnyvale market is bigger and nicer than what was selling a year ago. What's selling in Sunnyvale is the cream of the crop. No wonder buyers are competing for it.
Let's look at one more chart.
If real estate has a "seller success rate" (the absorption rate) then it also has a "seller failure rate": the percentage of homes for sale that are taken off the market unsold. It's a little-known fact that, even in a red hot market, some listings don't sell, at least as they're initially presented. Sometimes these expired, cancelled or withdrawn listings return to the market quickly, but at a lower price, or with a different agent, or with a few enhancements, or all three.
But in a buyer's market, these unsold homes are sometimes withdrawn from the market indefinitely, until things look more favorable to sellers. Of course, in a genuinely distressed market, many sellers don't have that luxury. They're hurting, and their strong motivation to sell is why home prices decline: sellers who must sell always lose the stand-off to buyers who don't have to buy. But the fact that prices have been remarkably stable throughout this softer market, now entering its second year [2006] suggests that most of today's sellers aren't hurting, while the economic forecast for this area suggests that most may never, at least in areas where conventional financing was common.
"Seller failure rate" sounds negative (and it certainly is for listing agents who spend time and money on houses that don't sell) but it also plays an essential role in the market as a self-regulating mechanism. Properties that exit the market unsold help to stabilize prices by reducing seller competition for buyers. Let's flip for a moment from the real estate channel to The Nature Channel. When famine stalks the veldt, every wildebeest pulled down by a predator increases every other wildebeest's chance of survival by decreasing demand for that dwindling resource, food. Back here in Silicon Valley, instead of wildebeests it's sellers, and instead of food, the dwindling resource is buyers.
As for the last common conception of a buyer's market, agents jumping out windows, I haven't heard of any reports. Perhaps it's because most of us work in single-story offices. But if sales stay down, attrition will undoubtedly thin the herd by August 2007. And that's not a bad thing.
So why isn't this buyer's market acting like everyone's idea of a buyer's market? Should buyers feel cheated?
Let's look at what's caused buyer's markets here over the past twenty-five years: 18 percent interest rates; recession; the "Asian flu" banking crisis; the tech bust; another recession; terrorist attacks; and the paralyzing uncertainty caused by the impending invasion of Iraq. None of these market movers is moving this market.
What is moving this market is, on the one hand, a minority of buyers who haven't been freaked out by bursting bubble talk because a) money is still cheap, b) prices have stopped skyrocketing, c) smart buyers don't buy just so they can sell next year at a huge profit, and d) owning is better than renting. These buyers recognize that buying is never easy, and that this is the best time to buy in several years. In fact, it's as close to a flashing neon BUY NOW sign as buyers get.
Yes, there's uncertainty in this market, but there was equal uncertainty in the post-Iraq invasion market of August 2003, just before home prices took off. Yes, the common wisdom today is that now is a bad time to buy, but that was also the common wisdom of August 2001, when prices were about two-thirds what they are now. Buyers buying now accept uncertainty because they know that uncertainty is a constant in the real estate market, even and perhaps especially when uncertainty seems to have been eliminated. Buyers buying now know that there is no perfect time to buy, just shifting markets with shifting combinations of reward and risk.
And on the other side of the table are sellers who, for the most part, and in the most sought-after areas, don't seem to have a pressing need to sell. Why should they? The jobs aren't leaving, they're coming. Yes, foreclosures are up, from nil to well below average, and I'm starting to see the occasional "short sale" in the MLS, in less-expensive areas where 100 percent financing was common. And I know that supposedly we're slouching our way toward an Armageddon when adjustable-rate loans adjust upward.
But I also know that many homeowners with adjustables aren't waiting for Armageddon. They're refinancing into fixed-rate loans, even if they have to pay a point or two to get the rate down. And I also know, or strongly suspect, that the Federal Open Market Committee now has ample evidence of what an ailing housing market does to the economy.
Buyer's market? Yes and no. Perhaps this buyer's market is more proof that, in real estate, everything is relative. Especially when it's a buyer's market in an area where so many want to buy.