When you’re tumbling downhill, even a little flat ground seems
like a blessing. At least that’s what those in the South County
real estate industry are hoping for.
When you’re tumbling downhill, even a little flat ground seems like a blessing. At least that’s what those in the South County real estate industry are hoping for. Moving into the third year of a bitter decline in home prices and sales, brokers and agents are looking for any silver lining, and what they are seeing are modest hints that the market could begin to stabilize this year.
But there are some mighty big “ifs” attached to that optimism. The market could stabilize if the California Legislature can begin to address the state’s fiscal crisis.
And the market could improve modestly if more layoffs are abated and the jobless rate falls from its December mark of 12.4 percent – which helped dub the current economy as the “Great Recession.” And the housing industry could get a lift from a deadlocked Congress if it decides to extend key catalysts to the housing market – namely an extension of the first-time homebuyers tax credit and the Fed’s support of so-called mortgage-backed securities, one of the culprits that led to the financial services meltdown during the end of the Bush administration.
People who have been laid off or are in fear of being laid off are not going to venture into home buying. Santa Clara County posted a jobless mark of 11.2 percent in December, slightly better than the state average but dour by any economist’s perspective. Worse, Santa Clara County is not a reflection of South County. Silicon Valley has the benefit of the tech giants and the innumerable venture-backed startups that employ tens of thousands of workers. Gilroy has few higher-paying jobs. Morgan Hill, with its Redevelopment Agency has been able to invest in its infrastructure via site-ready business parks and other incentives, enabling it to secure several large payroll companies, including Comcast, Abbott Laboratories and dozens of high-paying IT and bioscience companies. Gilroy’s political climate has nixed attempts to create an RDA.
But even people who are employed and want to buy a home are feeling pressured. Real wages – paychecks gauged against inflation – fell 12 percent in Silicon Valley during the past nine years, according to the Bureau of Labor Statistics. When the cost of feeding your family increases every year, but real wages remain the same or decline, thoughts of buying a home diminish exponentially.
The further south from San Jose the seemingly worse economic conditions become. San Benito County has jobless rate pushing 19 percent – near the rate the country suffered through during the Great Depression of the early 1930s. Gilroy and Morgan Hill lie somewhere between that 11.2 percent and 18.7 percent – Morgan Hill less so, since many residents are closer to and work for Silicon Valley companies. Gilroy’s economy, with the exception of mass employers such as Gilroy Foods, is a service industry.
These are the realities those in the real-estate industry in South County are facing.
“I just don’t see any change if the unemployment numbers don’t come down,” said Chris Borello, the broker and owner of Borello Mortgage Inc. in Morgan Hill.
At least he’s in Morgan Hill. The disparity between Morgan Hill’s housing market and Gilroy’s belies the mere 10 miles between the two cities. The median price of a home in Morgan Hill stood at $590,000 at the end of December 2009, according to market trends reports based on MLS data, compared to a median price of $375,000 in Gilroy. Why are homes in Morgan Hill fetching so much more than homes in Gilroy – hundreds of thousands of dollars more?
Realtors have several theories.
“Homes in Morgan Hill are larger, newer, nicer, and closer to San Jose,” said Linda Baker, an Intero Real Estate Services agent who has been recently certified by Intero as a distressed sale specialist. The greater the commute distance from a job center like San Jose, the lower the prices that homes can fetch, she said. Morgan Hill’s closer proximity – even 10 miles closer – plays a role in homebuyers’ decisions.
Supply also plays a critical role, noted Borello. Morgan Hill has a growth control ordinance in place, mandating that the city will not grow larger than 48,000 by 2020 – which translates to between 100 and 150 new homes a year, Borello said. Gilroy, in contrast, has no similar growth control and has already released all its allotments through 2013, plus additional units allocated by City Council members for specific projects at their discretion.
Gilroy’s General Plan addresses growth in terms of ensuring buildout doesn’t exceed the city’s ability to provide infrastructure such as water and sewer, and stays within a 20-year city boundary. But with weak demand, many projects in Gilroy that have been allocated permits have yet to turn a shovel.
With a smaller inventory of homes – supply – and a greater demand than Gilroy, free-market economics pushes up prices in Morgan Hill. “Morgan Hill’s growth control creates an artificial market by keeping inventory low,” Borello said.
“It’s more desirable to be in an area that’s controlled,” Baker added, either by growth control or natural limitations. She cited Eagle Ridge in Gilroy that is next to open space and mountains that block expansion and create a desirable environment for homebuyers.
As if the housing market needed any more wrenches tossed in its spokes, banks are generally behaving in a way that is frustrating Realtors and homebuyers, agents and mortgage brokers say. The vast majority of homes being sold in South County are distressed sales, mostly short sales and bank-owned sales, where the loan-to-value ratio is below zero. In other words, the value of the home, what it can sell for, is less than the outstanding loan amount. With prices depressed, homeowners are reluctant to put their homes on the market, leaving an inventory of mostly distressed properties.
One of Baker’s clients sold their home in San Jose last year and bought a bigger house in Gilroy. “But the only thing in the Gilroy market were short sales,” she said. The bank is dragging out the closing to the point where Baker’s clients bought in 2009 and are still renting in 2010, waiting on the bank. Yet foreclosed homes are primarily the only market. Trends reports based on countywide MLS listings lists 586 homes in Gilroy going through foreclosure, compared with 374 in Morgan Hill. RealtyTrac places the number of foreclosed Gilroy homes even higher, at 611.
As it is, short sales nationwide are only receiving a 10 percent to 20 percent success rate, Baker said. Banks are choosing to retain ownership of foreclosed and short-sell houses apparently waiting for a strong market that will enable them to cut their losses.
“With banks like Wells Fargo and Bank of America, I’m waiting six to 10 months for a sale to close,” Morgan Hill’s Borello said. “Wachovia has a system in place where we can close in about a month, but with many banks you fax them things and they lose it or can’t find it. It’s frustrating for me and its frustrating for my clients.”
An extremely low inventory of available homes is also frustrating Realtors. At the end of December, there were 1,558 homes for sale in Santa Clara County. “In 2008, that number was closer to 6,000,” Baker said. Depending on banks’ willingness to conduct a short sale, more inventory should be coming on the market. California, already with the dubious distinction of having the highest foreclosure rate in the nation, saw foreclosures jump 9 percent in December from the prior month, according to RealtyTrac, an online marketplace for foreclosure properties.
That should translate into more supply, in theory. But those in the real estate industry all know and speak candidly about the banks’ so-called “shadow inventory.”
“In 2008 banks began to realize they contributed to their own demise by flooding the market with foreclosed homes,” Baker explained. Prices plummeted and forced banks to take bigger losses in their real-estate portfolios. They aren’t likely to repeat that mistake, releasing homes in a highly measured manner in an attempt to control supply.
Area Realtors and the California Association of Realtors are optimistic that 2010 will be a better year for the market. The market will see a sales rebound this year, “resulting from the continued pace of distressed properties coming to market,” said CAR President James Liptak. “We expect sales to moderate to a more sustainable pace.”
Statewide, Liptak predicts sales will decrease 2.3 percent this year. While low prices continue to attract first-time buyers, sales of high-end homes will continue to face difficulty as sellers “continue to be challenged by their ability to secure financing.”
It will all depend on the “ifs” that have local Realtors fretting. Baker noted that if the Fed stops its support of the mortgage-backed securities held by Freddie Mac and Fannie Mae, as it says it will on March 31, interest rates will begin to climb and will force sellers, either banks or families, to lower prices.
But that’s just half the problem. The catalyst behind the buying of distressed homes now is due to flame out April 30 when the first-time home buyer tax credit is due to expire.
“Consequently, the consensus in the industry is that half of all sales in 2010 will happen in the first four months,” Baker said.
