DavisRealEstateGuide.com

Are we at the bottom yet?

That question is keenly on the mind of both buyers and sellers in the real estate market these days. And you can find bits and pieces of evidence that point at both ‘yes’ and ‘no’ as the answer.

But the only thing that can be said for certain is that the real estate market is still adjusting - and things can look pretty different in Yolo County, depending on whether you’re talking about Davis or Woodland.

Slower movement in Davis

In Davis, the pace of sales has been decelerating. In 2004 when the real estate market was hot, 390 Davis homes sold during the first six months. During the first half of 2005, that figured fell to 319. For the first half of 2006, there were 255.

Things picked up during the first six months of 2007, with 297 Davis homes sold. But things have slowed considerably since then, with 202 during the first half of 2008, and only 148 during the first half of 2009.

‘This could be the year we don’t sell 300 homes in Davis,’ mused Doug Arnold, of Coldwell Banker Doug Arnold Real Estate. ‘The last time that happened was maybe 2001.’

In Woodland, on the other hand, the pace of home sales is picking up. Home sales in Woodland were brisk back when the market peaked, with 338 sold during the first six months of 2004, and 348 during the first half of 2005. The Woodland market cooled during the first half of 2006 to 242 and hit a low ebb during the first half of 2007 at 176.

But Woodland sales picked up last year, with 235 homes sold during the first six months of 2008. And in the first half of 2009, 297 - almost exactly double the number sold in Davis during the same period.

What’s driving that difference in sales volume? Price is undoubtedly a factor. Counting homes sold during the first six months of the given year, the average price of a Woodland home peaked at $419,320 in 2006 - but fell to $205,286 in 2009. Woodland home prices are down about 30 percent compared to this time last year.

The decline in Davis home prices has been less pronounced, even as the pace of sales has slowed. Counting homes sold during the first six months of the given year, the average home price in Davis peaked at $604,707 in 2006 and dropped to $495,923 in 2009. That’s a roughly 20 percent overall drop. Davis home prices are down about 7 percent on average, compared to this time last year.

The differential between the average home price in Davis and Woodland - currently running around $290,000 - is the broadest that it’s been in years.

To put it another way, the same amount of money will get you a different sized house, depending on where you buy.

‘Right now in Woodland, you can get a nice house - about 2,500 square feet - for around $300,000 to $350,000,’ Arnold said. ‘In Davis, you’re going to get a three-bedroom, one-bath home with about 900 to 1,000 square feet’ for a similar amount of money.

Of course, Davis continues to have its selling points. ‘If people have children, they tend to prefer to be in Davis’ because of the schools, Arnold observed. The public parks and swimming pools in Davis are another draw, as is the close proximity to jobs at UC Davis.

What’s driving those low prices in Woodland? That’s an easy question to answer: homes in foreclosure, priced to sell by lenders who’ve been forced to take back homes that they’re now anxious to unload.

‘In Woodland, about two thirds of the properties being sold are foreclosures of some kind,’ Arnold said.

And Herb Cross, manager of the Lyon Real Estate in Davis and Woodland, showed sales statistics indicating that 155 Woodland ‘REO’ homes - meaning homes that were taken back by the lender after an unsuccessful foreclosure sale - sold from January to June of this year. By comparison, there were only eight Davis ‘REO’ homes sold during that same time.

These starkly different market conditions are also producing a somewhat different profile among home buyers.

‘There are investors buying houses in Woodland, and then renting them out,’ Arnold said. ‘Not so much in Davis,’ where the buyer is more likely to be living in the home.

Cross agreed, saying ‘We’re seeing investors going to REOs in Woodland and West Sacramento, where they can buy properties that have cash flow’ (meaning that the monthly rent amounts to more than the monthly mortgage payment, given the low purchase price for a home in foreclosure).

Another trend: Among those home buyers who intend to live in the property they’re purchasing, there’s a growing percentage of first-time home buyers - and that’s the case in Davis, Woodland and statewide. The California Association of Realtors said that 38 percent of home buyers in 2009 have been first-time buyers, compared with 19 percent in 2008. The association also found that most 2009 home buyers are thinking long-term: 44 percent plan to live in the home for three-to-four years, and 30 percent plan to stay for four-to-five years.

Appraisals a problem

Yet another trend - most of the action is in the middle segment of the market. ‘The high end just isn’t active, anywhere,’ Cross said. ‘There were not many sales in the $1 million range during the first six months of the year. The average home price in Davis is just under $500,000 - which is partly a function of what’s currently selling.’

Arnold agreed, saying ‘The upper end is slower. When you get over $700,000 there are fewer buyers.’

That’s partly related to the continued reluctance of many lenders to make the ‘jumbo’ loans, which were easier to get back around 2003-2005.

Still another trend: Low property appraisals of certain Davis homes, made by out-of-town appraisers, have knocked out several deals in which the buyer and seller had already agreed to a higher price. This stems from changes made by the federal government last year, creating a pool of appraisers from which an appraiser is drawn potluck, rather than letting lenders pick an appraiser.

Cross said he’s seen it. ‘Appraisers from outside of Davis often don’t understand that there are pockets of Davis - and Village Homes is a perfect example - that have extraordinary value. An outside appraiser may go outside Village Homes to justify the price, and can’t find it,’ and may come in with a low appraisal of such a property as a result.’

Arnold has experienced the same frustration. ‘It’s nothing to have an appraiser show up from Vacaville or Fairfield or Vallejo, and they know nothing about Davis. Their usual mindset is that for $300,000 you can get a real nice house. But in Davis, you’re not going to get much of a house’ at that price, Arnold said.

The situation is not just a ‘Davis problem.’ In late June, the chief economist with the National Association of Realtors, Lawrence Yun, said ’stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment.’ Yun complained that ‘poor appraisals are stalling transactions.’

That didn’t sit well with Bill Garber, who represents The Appraisal Institute, a national group. ‘We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with,’ he fired back.

Regardless of which argument is more persuasive, the reality is that given the current situation with appraisals, a home sale these days isn’t over until the deal has formally closed.

Shrinking supply in Woodland

The lower home prices and brisk sales in Woodland, together with the comparatively higher prices and slower pace of sales in Davis, have also reversed some long-prevailing market conditions in both cities.

‘We now have a five-month supply of homes for sale in Davis, which we usually don’t have,’ Arnold observed. ‘In Davis, it’s usually been more like a two-month or two-and-a-half month supply. Now Woodland has a two-and-a-half month supply, and Woodland usually has a five month supply.’

In Woodland, as the sales volume has picked up over the past few months, prices are starting to pick up a little bit as well. In March, when 51 Woodland homes were sold, the average price was $176,500. The average price rose to $208,000 in June, when 57 homes were sold. ‘They’ve had several months in a row where prices have gone up,’ Arnold said, meaning that Woodland could be right around the so-called ‘bottom of the market,’ after which prices and sales volume both start to show modest increases.

Davis, with home prices and sales volume still drifting lower, might need to wait a little longer to see the ‘bottom of the market’ - though it may not be far off.

Government workers concerned

One factor in that equation is the income of public-sector workers - people who are employed by the University of California, or state government in Sacramento, or one of the school districts or city governments in the area.

An uncommonly high percentage of Davis households draw at least part of their income from the public sector. And with many state government employees facing three ‘furlough Fridays’ a month, and school districts giving no ‘cost of living’ raises to teachers, and UC Davis cutting back on staffing, there will undoubtedly be ramifications in terms of Davis home sales.

People uncertain about their income are much more likely to postpone a big purchase - whether it’s a home, or a car or something else.

Yet for those who feel confident in their financial situation, the Davis housing market may look attractive. Prices are down roughly 20 percent from the peak about three years ago. Mortgage interest rates are comparatively low, in many cases running in the low 5-percent range for 30-year-fixed rate mortgages, and in the high 4-percent range for some 15-year-fixed rate mortgages.

But getting back to the central question that dominates many conversations about real estate - ‘Are we at the bottom yet?’ - different experts read the tea leaves in different ways.

Floyd Norris, a financial blogger for the New York Times, suggested in late June that California ‘is the only area (of the nation) where sales clearly have hit bottom and bounced back, and it is the area where prices have plunged the farthest’ - down 44 percent (on average) from the peak for single family homes, he said.

But PMI Mortgage Insurance Inc. - an international firm with offices in Walnut Creek, which issues quarterly studies on real estate trends - continues to rate the Sacramento region as a ‘high risk’ for a further decline in home prices - though Sacramento has slipped from a position in the top three riskiest markets (which Sacramento held a few years ago) down to No. 35. In a 2nd Quarter 2009 survey released last week, PMI concluded that nationally, ‘there are some signs of coming improvement, but it is still too early to say that we have reached the bottom of the market.’

- Reach Jeff Hudson at jhudson@davisenterprise.net or (530) 747-8055. Comment on this story at www.davisenterprise.com