2009 Real Estate Outlook

Well, no one can say 2008 was boring. The past year was nothing short of a wild and wooly, heart-pounding roller coaster ride—whether you’re talking about the stock market, the credit market or the housing market.

This year will go down in the books as one of the more tumultuous the nation has seen in the financial markets and that had a very real impact on the housing market across the nation and right here at home.

Residential real estate was already slowing early in the year when we were hit by the crisis in worldwide credit markets and the resulting turmoil in the stock market. The problems on Wall Street left all of us on Main Street—including potential home buyers—feeling a lot less wealthy and a whole lot more vulnerable. In addition, it was harder for even well-qualified buyers to get mortgage loans.

What was the result of all this? As of October (the most current figures available at time of writing) the median price for Bay Area homes was down 38 percent from the previous year,according to DataQuick, the La Jolla-based information services company. San Francisco and San Mateo County’s median price held up much better, dipping 12 percent and 21.9 percent,respectively. The hardest hit areas were the more affordable inland communities of Contra Costa County, which endured a46 percent drop in median sales price from the previous year, “A total of 7,613 new and resale houses and condos closed escrow in the nine-county Bay Area in October. That was up4.7 percent from 7,271 in September, and up 38.8 percent from5,486 in October 2007, according to San Diego-based MDADataQuick.”

It’s important to understand that the drop in median price doesn’t mean that your home has necessarily declined by that much. It simply reflects that the mix of homes that sold last year had changed as a result of foreclosures and distressed property sales, and lots of people bargain hunting in the lower end of the market.

More than ever, our market was a story of “micro climates” with dramatically different housing markets depending on where you live. Some parts of the North Bay, East Bay and southern Santa Clara County have been hit particularly hard by surplus inventory and foreclosures. But housing markets in San Francisco and the Peninsula, in general, have remained fairly stable. In fact, even as markets around us struggled, well-priced homes in desirable neighborhoods in our local market still attracted strong buyer interest and sometimes even multiple offers.

As the year came to a close, we began to see an increase in sales throughout the Bay Area—but especially in those regions that had been hardest hit by foreclosures. That’s encouraging news for the market overall. This is all part of a bottoming process; we need to work through this excess inventory in the lower price levels before the entire housing market can fully recover.

So, where does all of this leave us as we prepare for 2009? No one can say for sure, but undoubtedly there will continue to be economic challenges—at least in the first half of the year. The California Association of Realtors is forecasting a 6 percent drop in the state’s median price for single-family homes, but a continued rise in the number of home sales with buyers taking advantage of lower prices.

A lot will depend on whether the financial crisis on Wall Street can be solved, whether the tight credit markets can be unclogged,whether the nation officially slips into a recession and, if so, how deep of a downturn it may be. A lot of questions indeed.

But I remain fairly optimistic. The housing market goes through cycles, and the downturns rarely last very long. We’ve already gone through nearly two years of this cycle. Interest rates remain near historic lows, and homes prices are as attractive as they have been in years. We are rapidly working through the excess inventory of homes in many markets, and the number of sale sis starting to rise once again.

The housing market historically has fared well, especially in the Bay Area. Since CAR began keeping records on Bay Area home sales in 1982, the median price has only dropped six times. And the average annual rate of appreciation has been 8 percent,thanks to our local economy, outstanding quality of life, world class universities and well-heeled residents.

To me, this all adds up to strong reason for optimism as we approach 2009. Here’s to a great New Year!