Despite moderately strong sales and median home prices continuing to rise, San Francisco Bay Area Residential Real Estate Inventory rose for the 4^th straight month in April and has now seen a cumulative increase of 75% since the beginning of the year.

A total of 7,263 new and resale houses and condos sold in the 9-county San Francisco Bay Area in March. That was up 34.4% from 5,404 the previous month, but “down” 6% from 7,723 in March/2012.  It’s normal for sales to jump between February and March, with that gain averaging 39.5% since 1988. March sales have ranged from a low of 4,898 in 2008 to a high of 12,645 in 2004. This past March’s sales were actually 17.1%  “lower” than the March average of 8,758.

In March, the median price paid for a San Francisco Bay Area home was $436,000, which was up 7.7% from February and up 21.8% from March of 2012.  The median price has risen on a year-over-year basis for 12 consecutive months, with double-digit year-over-year gains the last 10 months and increases above 20% for the past five months.  Still, the March avg. price was 34.4% lower than the $665,000 peak in June and July of 2007. In March/2009 the median hit its post-peak low of $290,000. That dip was an extremely low level for the San Francisco Bay Area, reflecting both widespread price declines as well as robust sales of heavily discounted inland foreclosures at a time when high-end sales were all but dormant.

Well over half of the 21.8% year-over-year increase in March’s median sale price reflects rising home prices. As most people know, prices have risen as a result of record-low interest rates and growing demand meeting an exceptionally low supply of homes for sale. However, a portion of the March/2013 median’s year-over-year gain has also been due to a change in market mix. Sales of low-cost distress homes have fallen sharply, while sales of pricier move-up homes have shot up.

Higher sales in the middle and top of the housing market reflect improved consumer confidence, ultra-low mortgage rates, and the unleashing of more pent-up demand than many anticipated. There’s been a shift in psychology, where more people worry that prices will rise and fewer fear a decline. This has drawn a lot of folks off the fence following a long stretch of sub-par sales (in the late 2000’s), especially in the higher price ranges. In the more affordable markets, there has been a big drop in foreclosures, which limits the supply of homes for sale.

Foreclosure resales accounted for just 10.7% of San Francisco Bay Area resales in March, down from 14% in February, and down from 25.5% a year ago. March’s level was the lowest since foreclosure resales were 10.1% of the resale market in November/2007. Foreclosure resales peaked at 52% in February 2009. The monthly average over the past 18 years is 10.2% .  Even short sales are now on the decline. Short sales made up an estimated 19% of San Francisco Bay Area resales in March. That was down from an estimated 20.5% in February and down from 23.8% a year earlier.

Some San Francisco Bay Area homeowners are still under water with their homes. As prices rise, more homeowners are likely to put their homes on the market.  This pent-up demand among potential sellers will motivate many to move as soon as it makes sense.  Inventory is already on the rise.  A 75% jump in inventory since the beginning of this year has put us back to the inventory level we were at in October, although that is still a relatively (very) low level of inventory.  We will need a more substantial jump in inventory to moderate the currently surging San Francisco Bay Area home price growth, especially with the prevailing record-low interest rates that we have.  However, if inventory does continue to rise and mortgage rates also begin to rise, the upswing in San Francisco Bay Area home values is likely to slow down significantly.

Mortgage refinancing has been a major factor in the Real Estate recovery these past 2 years.  Most homeowners have taken advantage of historically low-interest rates through a rate and term refinance.  Some have even shortened the length/term of their mortgage while maintaining a lower monthly payment.

When mortgage rates collapsed from the 5% level in early 2011 to the low of 3.25% last year, it created a series of serial refinances and Harp 2 borrowers who jumped on this historical economic event.  Rates have moved back higher so far this year and many wonder if we have already seen the bottom (last year).

We hit the low point in the 10-year Treasury note yield last year after the Euro zone crisis spurred the 10-year note to break slightly under 1.4%.   Unless we have another major financial catastrophe in the world some time soon, we have probably seen the low point in the yield of the 10-year treasury note. Thus, rates should be rising from now on.   There will likely be some pull backs since the Fed is stilling buying mortgage-backed securities for 2013.  There is some concern that we might get a spike in the 10-year treasury note. However, there seems to be just a “slight” possibility of a “spike” in rates. We are unlikely to be punished for our government debt load in 2013. Those consequences will more likely be coming a few years down the road.

Thus, the Mortgage Refinance boom appears to be over.  Origination volume in 2012 was very high due to the historically low rates.   We probably won’t see that type of mortgage loan volume again unless rates break under 3%.  Even with the Fed promising to buy mortgage-backed securities, that lower break is unlikely to happen. If conventional conforming Mortgage rates get to 3.75% and stay above that range, the pool of available refinance candidates will be small from here on out.

There are still “some” people who are yet to refinance, but not nearly in the high numbers we saw last year.  For 2013, refinance origination will clearly be lower but the real trouble could come in 2014.   The Fed will likely call an end to mortgage-backed securities purchases, which will push rates toward the path of normalization, or more toward the 6% level years from now.  The Fed has already expressed concern about their 3 trillion dollar balance sheet.  And that balance sheet will be more than “4” trillion dollars in less than a year.  By the middle of 2014, the Fed is likely to be raising short term rates.

Consider the following potential future effect of all these low mortgage rates captured by American homeowners:  

There are many homeowners who have locked in very low (cheap) money for 30 years.  Down the road, if they want to move by first selling their home, they would lose that inexpensive mortgage and would likely be looking at a much higher interest rate for their next home.   Unless home prices have dropped dramatically, or they are scaling way down in size, their monthly payment will rise, probably substantially. This would have a major affect on their decision to move or not.   Would some decide to hold onto their first house and turn it into a rental, while buying another home?  It’s not easy to rent a home and qualify for another mortgage on top of that, as well as coming up with the liquid assets needed for a down payment without selling your existing home.

So, years out there will be many Americans thinking about this problematic situation. Some may not even qualify for a mortgage when rates normalize to 6% or higher.   In the short run, this recent refinance boom has certainly brought disposable income into the hands of those who could refinance.  This extra disposable income may have helped the consumer economy a bit.  It has also made home buying much more affordable.  However, perhaps the overall state of the housing market has not actually changed.  Perhaps the core problem in housing is still with us.  We don’t have enough qualified home buyers to cause a “natural” rise in prices or expansion of homeowners (excluding cash buyers).  Until we get real/natural positive changes in our economy (more job growth, higher incomes, better liquid asset profiles for first time and traditional home buyers, etc), we may be in the same boat we were in before interest rates started to plunge in 2011.

As the Bay Area’s prime home buying season begins, a wide array of market forces is making this spring one of the toughest times in memory to purchase a home.  Fiercely competitive investors and cash buyers continue to compete against average buyers for a scarcity of homes for sale, bidding wars continue to run up prices, and problematic appraisals are further complicating transactions.  Many homes that would be purchased in a normal market by average buyers are ending up in the hands of cash-paying absentee owners, typically investors.

Despite the continued surge in the San Francisco Bay Area Real Estate market (for the 3rd straight year), there is at least one positive trend for Buyers. Peninsula and South Bay Residential Real Estate Inventory rose 6% in March. This is the 3 straight month that inventory has risen, totaling a cumulative 36% rise in inventory since the beginning of the year.  Sales continue to be hot, but the pace of listings coming on the market has more than “doubled” since the end of 2012.

Meanwhile, indicators of market distress continue to decline. Foreclosure activity is well below peak levels reached in the last few years. Financing with multiple mortgages is low, and down payment sizes are stable. Foreclosure resales accounted for just 13.6% of resales in February, down from a revised 14.1% in January, and down from 26.4% a year ago. February’s foreclosure resales were the lowest since 10.1% in November 2007. Foreclosure resales peaked at 52% in February 2009. The monthly average for foreclosure resales over the past 17 years is about 10%

February distressed property sales – the combination of foreclosure resales and “short sales” – made up about 35% of the resale market. That was down from 36% in January and down from 53.4% a year ago. Short sales made up an estimated 21.4% of San Francisco Bay Area resales last month. That was down from an estimated 21.9% in January and down from 27% a year earlier.

February’s absentee buyers (mostly investors) purchased 28.2% of all San Francisco Bay Area homes, a statistical all-time high (absentee statistics go back to January 2000). Buyers who appear to have paid all cash accounted for a record 31.9% of sales in February. That was up from 28.4% the month before and 31.5% a year earlier. The monthly average going back to 1988 is 12.9%.

Overall, the median price paid for a home in the 9-county San Francisco Bay Area in February was $405,000. That was up  a whopping 24.6% from $325,000 for February a year ago.

Things are trending in the right direction for Buyers right now, but inventory is still (relatively) low and stiff competition and continued low interest rates should keep the market hot through this peak period of the 2013 home buying season that we have now entered.

Home sales are slowly climbing back, thanks to investor demand, improving consumer confidence in housing, and the surprising return of former homeowners who once walked away from their commitments. These so-called, “strategic defaulters,” some of them investors and some owner-occupants, are coming back to the market, despite damaged credit, and the market seems to be welcoming them back.                                              

A new survey of past clients by youwalkaway.com (a website that assists borrowers in the legal pitfalls of strategic default) found that nearly 80% expressed a desire to buy a home again within the next 12 months. It also cites data by Moody’s analytics, showing that the number of eligible home buyers who have had a previous foreclosure will be 1.5 million by the first quarter of 2014.

Crashing home prices and sketchy mortgage products caused millions of Americans to default on their loans and eventually lose their homes. For some, it was a tragic fight to the end to keep their single largest investment; for others it was a conscious decision to walk away from their mortgage commitments, given the real fact that they would likely not see home equity again for many years to come. Some saw this as morally reprehensible, others as a sensible business decision.

While home ownership has fallen dramatically since the recent housing boom, from a high of 69.2% in 2004 to 65.4% at the end of 2012, the desire to own a home is still strong. 70% of Americans surveyed by Trulia.com said that home ownership was still a part of the “American Dream.” 65% of those surveyed by Fannie Mae in January of 2013 said that if they had to move, they would buy a home, rather than rent.

Coming back to home ownership may not be as difficult as some think. According to a 2011 study by TransUnion, Consumers who only defaulted on their mortgage during the recent recession were far better risks than those who went delinquent on multiple credit accounts, like credit cards and auto loans. According to that same study, there appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession. This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.

Not surprisingly, given this potential, youwalkaway.com is launching the “AfterForeclosure.com Pass/Fail App,” which claims to tell potential borrowers in just one minute if they have a shot at home ownership.

It “is” possible, but mortgage underwriting is far more strict today than during the housing boom, and there are varying waiting periods before former homeowners who went through foreclosure can qualify for a new loan. The FHA (Federal Housing Administration)  requires a 3-year wait, while Fannie Mae and Freddie Mac (which own or guarantee the bulk of the remaining new loan originations) require 2 years after a short sale (if the Buyer will put at least 20% down payment) and 4 years after a foreclosure (if at least 20% down payment)

For the 2nd straight month, Bay Area housing inventory increased (for the month of February).

January saw a slight (~10%) increase in inventory, while February saw another ~20% increase above January. This brings our inventory level back up to where it was around the middle of November of last year (before it had proceeded to drop to it’s lowest level in recorded history by the end of 2012). This should come as a relief to the many buyers who have been experiencing the full force of a Bay Area seller’s market with demand far exceeding supply.

Meanwhile, the Bay Area housing market turnaround trend continued its torrid pace with the strongest January sales in 6 years and the 10th straight year-over-year increase in the median sale price (adding up to a 27.3% year-over-year gain for the Bay Area as a whole).
The Bay Area January Sales Volume was down 28.4% from December, but up 3.2% from January/2012. Sales “do” typically drop from December to January and January’s sales count was actually the strongest January since 2007. At least half of the (27.3%) year-over-year increase in the January median is the result of changes in market mix, with sales shifting away from low-cost distress homes toward more mid-market and move-up homes. The number of homes sold for less than $500,000 in January fell 17.9% year-over-year, while the number sold for more than $500,000 increased 45.4%

While some read recent home price gains as a sign of an improving market, others warn that the recent gains are “unsustainable” and may actually be dampening market recovery. Radar Logic (a housing research and analytics company) attributes recent home price gains to anomalous factors that it considers temporary, including low interest rates and elevated investor demand. None of these drivers are likely to last, particularly as housing prices increase They anticipate that prices will decline again as rising prices begin to repel investors while simultaneously leading to bursts in supply as homeowners and financial institutions feel encouraged to list properties for sale. Home builders have already begun to add to supply with a 23.6% rise in single-family housing starts year-over-year in January. However, when prices start to decline again, the market may once again attract speculative demand and chill starts and sales. Prices could follow such a saw-tooth pattern for a number of years. A true recovery in home prices is contingent on rising employment and a return of consumer confidence, neither of which are much evident at the moment.

The median price paid for a home in the 9-county Bay Area was $415,000 in January. That was down 6.3% from $442,750 in December, but “up” 27.3% from $326,000 in January a year ago. The median reached a high of $665,000 in June/July 2007 and then fell to a low of $290,000 in March 2009. On a year-over-year basis, the median dropped more than 30% each month from August 2008 through May 2009. At the median’s current rate of increase, it will recover about half of its peak-to-trough loss sometime this spring.

In the mean time, the recent upward trend in inventory should relieve “some” the upward pressure on home prices and start to make it easier for Bay Area home buyers in the coming months.