Bay Area Housing market cool-down expected to continue next year

Housing market cool-down expected to continue next year

By Eve Mitchell I Business Writer

Article Last Updated: 12/31/2006 06:23:54 AM PST


AN IRON WORKER slides down from the metal structure at the corner of Broadway and Grand Avenue in Oakland where condos are under construction. (Staff file)

THE CHILL is not gone.

That's the outlook this year for the Bay Area's residential real estate market, which moved into what real estate types like to call "balanced territory" in 2006. The slowdown follows a red-hot market over the last few years that set new sales records and favored sellers, who saw record prices and double-digit appreciation.

Observers expect a continued cooling in 2007 with a lot more homes on the market, along with longer selling times than those inventory-challenged days of just two years ago. Some homeowners could see a slight gain in home values, some might see a slight drop while other places will see values stay flat. Sales will continue to be off from previous records highs, but just how much is a matter of debate.

Still, the cooling market that started to surface in spring 2005 is not likely to get really,

really cold, observers say. They point to predictions calling for interest rates to hold steady in 2007 along with a healthy job market and economy. In addition, demand for housing remains strong in the Bay Area, which has little available land to build on.

"I think (2007) is still going to be a balanced market," said Scott Kucirek, Northern California general sales manager for Prudential California Realty. "I don't think it's going to tilt to a buyer's market. ... We've hit the stability point where things are leveling off. ... I don't think we'll see a giant 20 percent price correction. All the macroeconomic factors are still good. Interest rates are low, the economy is doing well and jobs are picking up."

Depending on a home's location, home prices are likely to increase by up to 5 percent or stay level in the Bay Area this year compared with 2006, Kucirek said. Some places such as Solano County could see prices decline by up to 5 percent compared with last year, he said.

But other areas, such as Berkeley, Piedmont and the Montclair district of Oakland, could see prices rise in the 3 to 5 percent range, he said.

"I think the Peninsula, from what I can see, holds steady," said Kucirek, adding the same could be said for Fremont, Hayward and Castro Valley.

Kucirek expects sales volume in the Bay Area will be in the same range as last year.

From January to October of 2006, sales of existing single-family houses decreased 19 percent compared with the same period in 2005, according to the California Association of Realtors. In October, the Bay Area's median single-family home price was $734,970, up 2 percent from a year earlier, but sales declined by 14 percent.

California is expected to see a 2 percent drop in home prices and a 7 percent drop in home sales next year, according to an association forecast. However, the shortage of housing stock in the Bay Area market, along with the region's strong economy, will likely help the region fare better than the state as a whole, according to Robert Kleinhenz, the association's deputy chief economist.

A recent report by mortgage giant Freddie Mac said that interest rates for a 30-year fixed-rate mortgage are expected to hold steady at 6.5 percent in 2007. There was a time last year when there was talk that interest rates could rise above that level, which would have created a further drag on the housing market.

If interest rates stay around 6.5 percent, that should help stabilize the housing market, said Ross DeVol, director of regional economics at the Milken Institute

Leona Quarry in the Oakland Hills near I-580 is shown under development. (Staff file)

in Santa Monica.

"In some sense, people have been very concerned about high interest rates and that home mortgages might go up. I think for the most part we can take that off the table as a big concern for 2007," said DeVol, who believes the worst of the housing downturn has already occurred.

As far as price declines occurring this year, DeVol thinks there will be more likelihood of that happening in San Joaquin County than the Bay Area.

"If you look at the share of home sales that are new construction versus existing homes, the Central Valley has a much greater share of the total housing market being new construction," he said.

That translates into higher inventory levels, a factor that could drive prices down by as much as 5 percent in San Joaquin County, he said.

DeVol expects home sales to be 10 to 15 percent lower in the Bay Area compared with 2006, while home prices will on average be flat or decline an average of 2 to 3 percent.

"We don't think home sales are going to decline much further from where they are today ... unless you have significant job losses," DeVol said. "That clearly could change that. That doesn't appear to be on the horizon for next year. It's hard for me to envision that the bottom is going to fall out in terms of prices."

Sellers are starting to come to grips with the fact that the market is slowing, said Patrick Lashinsky, an executive with ZipRealty Inc., an Emeryville-based online real estate firm.

"People who have homes on the market for a longer period of time — three to four months — they are taking their prices down or they are taking their homes off the market, both of which helps to put the market in a better position (due to less inventory). There are still buyers, but they don't want to pay top dollar," he said.

The last time there was a big cool off in the market in the Bay Area was in the early 1990s. Back then, the median price for all homes peaked at $225,000 in January 1990 before dipping to $205,000 in January 1991, or almost a 9 percent decline, according to DataQuick Information Systems. The median rose to $226,000 in June 1994, then dropped to as low $208,000 in February 1995, before reaching $226,000 in April 1996, after which homes prices continued to rise steadily.

Chris Thornberg, an economist with Bay Area-based Beacon Economics, expects homes prices to drop an average of 3 to 4 percent this year in the Bay Area while sales will continue to cool.

Thornberg said the economy is better than it was when the 1990s housing bubble burst, which will help soften any price declines in the current market, he said.

Still, it's likely that sales will continue to be slow this year.

"There has never been a bubble this big. It's going to be a very frosty market for a number of years, with lower turnover of home sales," he said. "We've already seen a huge decline (in 2006)."