Western US Market Appears Strong in Light of New Home Sales Declines

It appears the sales of new homes did not follow existing homes as new home sales slide 1.8 percent in February. This is the fourth month in a row where new homes sales have declined and was slightly worse than expected. The sales pace of new homes is now at February 1995 levels.

As the median price of a new home fell to $244,100, down 2.7 percent year-over-year, experts predict the housing slump may last into 2009. New home inventory levels are at a 10 month supply, the highest in nearly 26 years. The housing market continues to be hurt by tighter lending markets, increase foreclosure rates, and tepid buyers afraid to enter the housing market for fear prices may fall further.

Interestingly, the largest declines were seen in the Northeast and Midwest. The West actually saw an increase of 0.7 percent. This includes poor performing areas such as Sacramento and Las Vegas. We continue to believe the strong markets in many parts of the San Francisco Bay Area continue to bolster housing in this area. There are many desirable areas which are at their lowest prices in years, and which may never see these prices again.

Foreclosures Levels Down from January but Remain High

If you’re keeping score, homeowners are still losing the fight with the credit markets. However, there are signs we may be reaching stabilization and ready for an upturn later in the third or fourth quarters of 2008. Although foreclosure filings in February were up 60 percent year over year, they were down slight from January foreclosure rates. There were still nearly a quarter million foreclosure filings in February, signaling the end is not yet here. Also, 2007 saw a month over month decrease from January to February, leading some experts to believe there is still some time yet before the housing market settles.

On a national basis, there was one foreclosure filing for every 557 households in the U.S. in February. Nevada and California, which have seen some of the hottest real estate markets, saw much higher rates. Nevada saw one foreclosure filing for every 165 households, while California saw one filing for every 242 households in the state. Florida ranked a close third behind California.

Lawmakers are scrambling to find a fiscal policy which can help fight foreclosure rates. In particular, as adjustable rate mortgages continue to reset higher and lenders use stricter guidelines, homeowners are finding their mortgages increase. Until the credit markets quiet down, the housing markets will be rough for a while, which means consumer spending and overall economic activity will slow down.

With all these foreclosures, this makes it a great time to buy if you can find the right home in the right location. As we’ve said before, many homes in desirable areas such as Los Altos, Saratoga, Cupertino, San Francisco, and Palo Alto have seen stable prices or even continued increases in home prices. If you’re able to find a home that you plan to live in for the longer term, this is the best buying opportunity we’ve seen in decades.

Existing Home Sales Increases, While Home Prices Continue to Slide

If you’re in the market to purchase a home, this may be the time to find that dream home you’ve wanted to buy. For the first time in six months, the National Association of Realtors reported a 2.9 percent increase in existing home sales. This was an unexpected increase, despite continued job losses and the lowest consumer confidence levels in five years.

Despite this good news, home prices also reported the sharpest drop as sellers cut prices and as the country saw an increase in foreclosures. Home prices fell a record 10.7 percent to an average price of $195,000, with some markets such as Miami and Las Vegas taking hits of over 19 percent. These cities, along with those such as Phoenix, Detroit, and San Diego are being punished for years of speculation and overbuilding. Some attribute the increase in existing home sales to desperate sellers and an increase in foreclosures.

What’s interesting to note is that areas such as San Francisco only saw a 1 percent decline in home prices. Many parts of the San Francisco Bay Area have been relatively insulated from the housing meltdown. Areas such as Cupertino, Saratoga, Los Altos, Palo Alto, and Hillsborough continue to withstand housing pressures. These areas are located in highly desirable school districts, and many residents in these areas work in higher income, recession-resistant professions.

Despite the decline in home prices, many believe the bottom of the home market may only be two or three quarters away. Combined with the lowest Fed interest rates in years, this is a prime opportunity to purchase a home, especially as summer approaches and more homes will be put on the market.

Setting Money Aside for Home Expenses

Some first time home buyers believe that the only expense they need to worry about is how to finance the cost of their home. Many do not realize that there are many auxiliary expense that appear once you buy and move into your dream home.

For example, shutters are not included with the purchase of many new developments. Because of the unique nature of most homes, blinds/shutters will need to be custom made and fitted to your house. Hunter Douglas blinds/shutters can easily run you over $2,000 for only 3 windows.

Most apartments and rental units include water and garbage as part of the rental fees, while the renter pays for gas and electricity. You will need to take into account as a new home owner that you will be paying for all of them. This can easily double your monthly utility expense.

Most importantly, almost all new homes and some pre-occupied homes do not include with the purchase a refrigerator, washer, or dryer. That will be an additional $3,000-$5,000, depending on what brand and style you get.

One way of mitigating these expenses is to negotiate the cost into your final purchase price. Many new developments have on site "design centers" that can help make your new home "turn key" ready. The cost of this is incorporated into your final price and mortgage.

Amazing Deals in Palo Alto Homes

Even with the housing market decline, developers who were late to the game still continue to build new developments hoping to break even. Because most builders are not regional, and build in a variety of markets, one market slump can adversely affect their whole portfolio.

One prime example is in Palo Alto, Warmington Homes is starting to advertise a couple of their more common "standard" units at a $45K discount. A brand new home that 6 month ago sold for $850K+ is now being advertised for $800K. Across the street, a new development is advertising their homes for sale for as low as $700K.

Although these declines are nowhere near as much as other areas such as parts of Sacramento/ Los Angeles/ Oakland/ Antioch, the decline is still significant to be noticed.

Why is this decline important? The best news is this may be the best time to buy into Palo Alto and their great neighborhoods and school districts. It is unheard of to be able to buy into Palo Alto High or Gunn High School for $700K.