Silicon Valley's swampy real estate market is beginning to take on more water as low-risk, prime mortgage borrowers, following borrowers with riskier credit profiles, have begun to find it more difficult to float financing.
The leading indicator? The median price of homes.
The Silicon Valley median had been skewed upwards all year because of the increase in the share of high-end sales.
While the foreclosure fallout had forced lenders to tighten underwriting standards on risky mortgages, prime loan standards survived relatively unscathed.
With more expensive home buyers able to find financing, the higher end homes constituted a greater share of the market, so the median price continued skyward -- statistically -- even as the nation and Silicon Valley's market was gripped in a tightening mortgage money supply.
Silicon Valley's record setting median price for single family homes, $868,406, was set back in April this year. By July that had slipped to $856,500, according to Richard Calhoun, real estate broker with Creekside Realty in San Jose and publisher of the Bay Area Real Estate Market Newsletter, a report comprised local MLS statistics.
The July median is well above the $805,000 median of a year ago, but just as rising median prices earlier this year reflected the impact of the high end market, a flatter and falling median price also reflects growing stress in the higher end as the mortgage market continues to shake out.
The shake out stems from too many risky subprime and Alt-A loans written without regard to borrowers ability to pay, a resultant rise in foreclosures from those unable to pay rate-reset increases in monthly payments and the negative impact of those foreclosures on investment funds that buy and repackage the loans as securities.
With the securities failing as investment vehicles and some lenders shuttering shops and filing for bankruptcy, lenders have attempted to stop plug the financial drain, by tightening underwriting standards and by taking many loans off the menu.
Not only are subprime and nontraditional loan customers finding it difficult, if not impossible to find financing, even those with the best credit are beginning to feel the pinch.
"People are not buying high end homes at the velocity that they were, but I think that is across the board. The high-end is now correcting itself. People are still buying million-dollar homes. They just aren't selling as quickly as they used to," said Shawneequa Badger a real estate agent with Century-21 Alpha.
Calhoun said the number of transactions in the calendar month of July for both single family homes (888 closed sales) and condo/townhouse (387 closed sales) were the lowest number since 1998.
More than 6,000 homes (condos and single-family homes) were for sale in early August -- more than ever since 2001, Calhoun said.
"This corresponds with when Wells Fargo raised the interest rates on nonconforming loans (so-called "jumbo loans" those above $417,000) by a full percentage point. This corresponds to about a 15 percent increase in the mortgage payment. This will cause a lot of buyers to sit on the sidelines until the financial markets over-reaction settles down and rates return to a more normal spread," Calhoun said.
Even with the tight-money hit, the high end continues to push the market with the days of unsold inventory (DUI) only 34 days in the more expensive cities of Mountain View, Los Altos and Palo Alto, as the DUI in East, South and Central San Jose averages 397, Calhoun reported.
The break down by price also shows the $1.0 million to $2.5 million home selling much faster than homes at the low end -- the opposite of a typical market.
"The sky is not falling," says Warren Winsness, president of the Santa Clara County Association of Realtors.
"What's happening is really good. The qualified can get loans at somewhat stiffer requirements. Most people don't have a problem. It's the best buyers market in years," Winsness said.
Unfortunately, only those who can manage to buy with such tight money supplies can truly enjoy the buyer's market.
Perhaps more than any other time in recent housing market history, now is the time to obtain professional, experienced representation.
"It's crucial for you to be represented properly in all areas, mortgage, buying or selling. Maybe that loan is not good for you. Maybe that home is a good buy because it's below market value. Work with someone who is aware of the market flexibility, has seen the trends and has overall knowledge. That's the key to a successful transaction in today's market," said Badger.
