Housing Market Feeling Cooler, But Not Chilly

By Mark Calvey and Ryan Tate
San Francisco Business Times

The Bay Area housing market is showing signs of cooling alongside more significant slowing in once-hot markets like Phoenix.

Housing appreciation in the Bay Area dropped below double-digit figures for the first time in more than two-years in February, according to DataQuick Information Systems.

The median-home price rose 9.6 percent to $763,000, the research firm said.

“We’re in a definite market cycle. The market is adjusting right now,” said Ed Krafchow, president and co-owner of Prudential California, Nevada and Texas Realty. “We’re not in a buyer’s market. We’re in a buyer’s sympathetic market.”

But any sympathy cards might have to be directed to sellers who have enjoyed rapid appreciation in recent years.

“We expect the pace of price appreciation to slow from the 13 to 17 percent range of 2005 to 10 percent this year as rising inventory levels mitigate some of the upward pressure on home prices,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. “Unsold inventory rose again in February to a 6.7-month supply, one of the highest inventory levels in several years.”

That means it would take 6.7 months to sell all homes on the market at today’s sales pace, and it has some worried the housing slowdown could be more painful that expected.

Plus, the CAR’s forecast for 10 percent appreciation this year is a statewide average, with appreciation in the mid-single-digits for coastal regions like the Bay Area and greater than 10 percent appreciation in inland areas.

“This is a spotty market,” said Prudential’s Krafchow, who says he’s weathered three or four real estate cycles over the course of his career. “There are pockets of real active areas, pockets with little activity and some with no activity at all.”

He points to Oakland’s popular Montclair neighborhood as an area where home sellers are still receiving multiple offers. But he cites Marin County as an area of concern — despite anecdotal evidence suggesting that Marin is still doing well.

“A $4 million house is a discretionary purchase,” Krafchow said.

That point is echoed by others.

“The activity where there’s more discretion in the buying decision seems to be much more slower,” said Paul Zeger, president of San Francisco-based Pacific Marketing Associates.

Real estate agents also are seeing more buyers sit on their hands as long-term interest rates have begun to move higher in recent weeks.

Home builders are moving aggressively to unload inventory since they have to pay carrying costs for unsold properties.

Centex Homes sparked a buzz in January with its advertisements touting price reductions of up to $100,000 for new homes in San Ramon and other Northern California cities. Now price reductions on new construction are a common feature of the Sunday real estate ads.

Outright price reductions — rather than help with closing costs or throwing in free upgrades — raises the concern that comparable sales will begin to fall, making it difficult for other buyers in the market to secure financing especially in a rising-rate environment.

“The attitude has changed,” Zeger said of sellers. “It has turned very much to, ‘What can I do to help you?’

“Everyone is offering an incentive,” Zeger said, noting some condo sellers are offering a $10,000 credit that can be used for closing costs or other purposes to get a buyer into a new condo.

While San Francisco appears to be an epicenter of condo conversions, Zeger sees the East Bay at greater risk.

“The place that’s probably the biggest risk right now is the San Ramon Valley, which has about 4,000 units that have been put into the conversion pipeline,” Zeger said.

But Wells Fargo CEO Dick Kovacevich told shareholders at the bank’s annual meeting April 25 that he’s not worried about a national housing bubble because of the local nature of housing sales.

“There hasn’t been a ‘national’ housing market since the Great Depression,” Kovacevich said.

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