Boom, Bust, Bargain
As foreclosures eat into our wealthiest neighborhoods, turmoil hits the high-end market. But the deals are unreal.
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It's no secret. Our real estate market has been caught in a serious tailspin. We’ve seen Antioch, Brentwood, and Concord ravaged by foreclosures, leaving a trail of heartbreak, empty houses, and distress sales, with prices falling up to 70 percent.
But did you know that Danville, Lafayette, Pleasanton, and Walnut Creek are also being slammed by foreclosures? Property values are still slipping in many of our cities, and short sales and bank takeovers are hitting our most affluent neighborhoods. The silver lining is that buyers are seeing some very good prices. So good that investors are starting to swoop in and snap up parcels.
Here’s a look at the good news, the bad news, and where to find those screaming real estate deals.
The Forecast: Partly Sunny, With Scattered Showers
Ask real estate agents for the lowdown on the East Bay market, and they nearly always spout optimism. It’s part of their job. But is there really any good news? Yes. A little.
Recent figures show that our unemployment rate—while still very high—has dipped slightly. In Contra Costa, it dropped from 11.2 percent in 2009 to 10.9 percent in 2010, and in Alameda County, from 11 percent to 10.8 percent—meaning a few more people will be able to keep, buy, or rent homes. Also, interest rates, while inching up in recent months, remain low, and some of our cities have enjoyed slight increases in median home sale prices in 2011 compared to 2010.
Most real estate agents and industry leaders agree that our market has pretty much hit bottom. “The hardest part of what we’ve all gone through is now behind us,” says Mark McLaughlin, CEO of Pacific Union International & Christie’s Great Estates.
McLaughlin predicts a recovery led by jobs. “The first areas where we’re going to see Bay Area jobs come back are in Silicon Valley and out there in the 680 corridor,” McLaughlin says. “From this perspective, I feel there’s great opportunity in Contra Costa County.”
We might well be heading toward recovery. But before we start whooping it up, some dark clouds still hover on the horizon. The number of foreclosures in many of our cities fell in 2010, but in January 2011, the number of default notices went up 51 percent in Contra Costa and 30 percent in Alameda County compared to January 2010.
Daren Blomquist, director of marketing communications at RealtyTrac, believes the number of foreclosures spiked because banks started to process a backlog of delinquent homes. It is unknown how many more bank-owned homes are lurking in the shadows to be dumped onto our market, potentially driving prices down further. But it will mostly affect higher-end neighborhoods, where banks had been reluctant to pull the plug, he says.
“What we could see is a roller-coaster ride,” says Blomquist. “There might be further spikes in future months but not necessarily every month.”
Also, the MLS (Multiple Listing Service) for real estate agents shows an increase in short sales in our neighborhoods. That means the mortgage lender accepted a sale price that was less than the amount the homeowner owed on the property, so the bank took the hit.
Neighborhoods also take the hit, as homes selling for less and less continually undermine the market.
There is little doubt that this year, more East Bay homeowners will be feeling the fallout.
Trouble in Paradise: Foreclosures eating into High-End Homes
Sitting pretty in the hills of our most wealthy neighborhoods, some of the biggest and most beautiful homes are edging toward trouble.
Since 2007, distress sales (both foreclosures and short sales) in Alamo, Blackhawk, Danville, Diablo, Lafayette, Montclair, Orinda, Walnut Creek, and Pleasanton’s Ruby Hill have risen significantly. According to the MLS, last year, distress sales counted for a third of homes sold in Blackhawk, 22 percent in Alamo, and 21 percent in Ruby Hill.
“The average value of all the houses currently in duress in Danville is $840,000,” says Hank Perry, president of Empire Realty. “I’m staggered by that number. I had to do the data again because it was amazing to think of it in the city of Danville.”
Slashed income from unemployment and pay cuts is thought to be the number one culprit pushing high-end homes underwater. But there is another factor: judgment day for massive loans.
“If you start looking around in any fine neighborhood in California, about a quarter of homeowners are not making payments,” says Perry. “They’re people who have borrowed against their home because they were taught by the Greenspan era that it was the way to behave. Everybody did it. It’s like the skeleton in the closet.”
Most homeowners will try to negotiate a short sale with the bank to avoid foreclosure and a bad rap on their credit. But some are jumping into foreclosure headfirst. Surprisingly, they are people who can afford to make their mortgage payments. But realizing how upside down they are, and how unlikely they are to recapture their home’s value anytime soon, they stop paying. It’s known as strategic default.
All of which raises the question of whether the East Bay has enough qualified buyers to deal with a possible torrent of upper-end properties
for sale. With less high-end financing available, the pool has certainly diminished. “Our move-up buyer has been decimated by unemployment, declining market conditions, and foreclosure,” says Jon Wood, an agent with J. Rockcliff Realtors. “Values are going to have to drop for that higher-end inventory to clear.”
How low these prices will need to drop is also up for debate. According to the MLS, the number of single-family home sales in high-end neighborhoods was actually up in 2010. But the median sales prices for single-family homes in Alamo ($1.1 million), Blackhawk ($1 million), Danville ($1 million), Moraga ($880,000), and Ruby Hill ($1.6 million) were down for the third consecutive year.
The good news? The East Bay is not completely without high-end buyers. There are people who didn’t use their homes like a credit card. “These homeowners are sitting there with high equity and job security,” says Perry. “They’re going about their business, seeing low interest rates and phenomenal pricing, and they’re cashing in.”
Overseas buyers are also looking. One Alamo listing recently drew multiple offers from overseas; a $900,000 Blackhawk home received serious interest from Beijing; a Walnut Creek home just sold for $1 million to buyers from China (who paid all cash); and a house in Diablo, having sat on the market for two years, was recently snatched up by an investor who, while remaining in China, now rents out the property.
An increasing number of super-high-end homeowners (with properties worth $4 million plus) are opting to lease their properties. “These people can afford their home, but they’re not selling because they don’t want to take a $2 million hit on a property,” says Jeff Sposito, president of J. Rockcliff Realtors. “They’re going to rent it out, wait for the market to come back, and go about their business. I’ve seen more of that in the last seven months than I’ve seen in the last three years. Particularly in Blackhawk.”