Sunday, March 13, 2005

Low inventory clouds bright housing picture

By Sharon Simonson

The Silicon Valley housing market is exiting its most frenzied year since the Internet boom and may be entering another year much like it.

Sales volume last year reached a seven-year high, according to REInfoLink, the regional multiple listing service. More than 40,500 existing homes and condos sold in 2004 in the five-county area anchored by Santa Clara. That's more homes than have sold in any of the last six years -- a span that includes the 'dot-com bubble' years of 1999 and 2000. It's also a 14 percent increase over 2003's sales pace, the second most robust sales year in the period.

At the same time, the for-sale inventory of existing homes and condominiums going into 2005 is at its lowest level since 2000 - a recipe for rapidly rising prices amidst continued hell-bent demand.

The number of homes and condominiums offered for sale last year fell to approximately 80,000 units -- a paucity matched only in the boom's 1999 and 2000. By way of comparison, about 116,000 units were offered in the region in 2001, a year in which both home and condo values fell.

The MLS counts for-sale inventory at the close of each month. Properties that sell within a given month would not make the inventory tally and a home that stays on the market for several months would get counted twice.

New home builders also are cashing in, selling nearly 5,000 homes last year or 20 percent more new homes than in 2003 in the five-county region, according to industry bible The Ryness Report. The overwhelming majority of the new stock -- 3,479 homes and condos -- came online in Santa Clara County, with sales in fact falling 26 percent in San Mateo County and flat in the other three. The new supplies, however, do not seem sufficient to dampen prices.

The average home price in Santa Clara, San Mateo, Santa Cruz, Monterey and San Benito counties is now a whopping $911,352, REInfoLink says. The average condo price in the same area is just below $500,000.

The reasons for the buyer frenzy are well-understood, starting with enduring and unpredictably low long-term interest rates. Buyer demand helps drive inventories lower.

But, realty professionals say other factors behind the lower inventories are less apparent. In some cases, ironically, the seemingly unstoppable rise in values is making home owners reticent to sell. Some fear they will miss the next big uptick and sell too low, agents say. Others don't have clear plans about where they will move if they do sell. The home seller reticence also is fueling the market, ratcheting up competition among buyers for the offerings there are.

Meanwhile, some observers predict an agent wash -out as many of the region's new agents fail to land listings and find they can't make a living in the profession. A listing represents a sure commission in this market; a buyer represents only opportunity in a field where 40 or more bidders can compete for a single home.

Thousands of people who lost jobs in the tech sector or who wanted to cash in on the residential real estate gold rush have become agents and brokers in the last several years. The Santa Clara County Association of Realtors is the largest in the valley with 6,772 Realtor members as of March 9. That's more than twice the 3,078 Realtor members as of December, 1999.

"The first thing I ask someone when they come to see me about listing their house is, 'What are you going to do once you sell?'" says Mia Park, an Intero Real Estate Services Realtor at its Cupertino headquarters who has been selling homes for less than two years. If a seller intends to stay in Santa Clara County, she advises deeper thought about the decision.

"Initially people think it's a great time to sell, but in reality they find out they don't want to sell because then they will be on the buyer's end," she says. She finds that fewer and fewer folks say they expect to leave the valley, and choose not to list, and that empty nesters aren't trading down or moving out as much as might be expected.

The low inventories seem almost certain to drive struggling new agents from the industry, Ms. Park says.

Long-time Coldwell Banker agent Sallie Morgan agrees. Ms. Morgan specializes in the Los Altos area housing market. Proposition 13's cap on property taxes and financing vehicles that make it possible for senior home-owners to draw on equity to live without moving are keeping people in place longer, she says.

Add to that the region's recovering but still-wobbly economy, which dampens the move-up market, she says, and, "I think we are in a market that's blocked, and it's an issue valleywide."

Federal tax implications also are driving some home owners to re-think a desire to buy a larger or more expensive home, says Tharan Lanier, managing partner and founder of Saratoga's LMGW Certified Public Accountants. The alternative minimum tax is snagging an increasingly large percentage of the folks who come to him for tax help in the valley, he says. The ratio has risen from something approaching one in 100 clients to one in every five or six, he says, and he expects the ratio to continue to rise.

The AMT, as it is commonly known, is not really an alternative minimum tax but an alternative maximum tax, he says. Folks who are forced into the alternative minimum tax structure are denied the opportunity to deduct on their federal tax return property taxes, state income taxes, and interest on home equity loans when the proceeds have been used for something other than home improvements, he says. If you're worried you might face paying the AMT, you're unlikely to go forward with buying a more expensive home because your new, likely higher property taxes aren't going to be deductible and you will owe more in income taxes.

"The AMT is becoming the de facto tax rate for a large portion of the valley, and it has to do with a lot more than just your base salary. With all of the federal tax cuts, the tax rates have been coming down but alt-min taxes have not. I think it's making people more cautious" about buying up or buying big, Mr. Lanier says.

One solution for many folks, he and others say, is to add on to their existing house.

For Coldwell Banker's Chris Trapani, there's not too much reason to expect conditions will change in the year ahead. It's tough for for-sale inventory to grow when demand remains so strong and levels start the year so low, says Mr. Trapani, president of Coldwell Banker in Silicon Valley.

"Homes are selling at more than their list price and at more than where the comparable sales were in November and December," he says. "A year like this, I expect to see a lot of appreciation in the first three months -- we're already seeing it -- and maybe in the first six months."


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