Housing Demand Is Back in San Jose

San Jose, after three year of consistent ask price declines, is finally showing an uptick this Spring:

When examining housing activity by price quartile, it's interesting to see how the San Jose market has developed, inverted, and returned back to replicate 2005 activity.

In final years of the San Jose housing market boom, even though the market couldn't sustain inflated price levels over the long term, buyers were desperate to get into the market. Demand levels were high and shifting along the supply curve, causing home prices to rise.

As home prices rose and became less and less affordable in 2005-2006, the entry level homes (the least expensive 25%) became the hottest properties, represented by the blue curve on the chart. Once the bubble burst and mortgages became scarce, housing activity inverted in 2007 - the most expensive 25% of home experience the most activity. These are presumably market participants with Jumbo mortgages and sound personal financial situations, initially unaffected by the initial phase of the housing market collapse and macroeconomic slowdowns.

With home prices in San Jose currently at 30-40% below their previous peaks, housing market activity by price level has inverted back - with the least expensive 25% showing the most activity. Prices have fallen, interest rates are low, and the $8500 tax credit is spurring activity again for first-time buyers, and thus the quantity demanded rises. Additionally, there are a certain population of these properties that are exiting the market due to foreclosure because current home owners that bought in 2005-2006 are seeing the home values well under water and their exotic 3-year mortgages adjusting.

Comments

[Mad Hedge F...:]

Maybe in in San Jose, Costa Rica. Anyone who thinks that we have hit bottom in real estate should start smoking something else. The S&P Case-Shiller National Home Price Index fell 19.1% in Q1, the sharpest drop in history. Charlotte, NC did best, rising 0.3% while Detroit, where prices have fallen to 1995 levels, did the worst at -4.9%. San Francisco came in at -2.2%. Most disturbing is that the disease is metastasizing from the West coast and the Sunbelt to infect the entire nation. Home prices are now back to the 2000 level, meaning that we have given back the century to date. Foreclosures are accounting for up to 70% in some local markets, and while they are boosting sales volumes, they are also accelerating the downward march in prices. Today’s data shows that the downward spiral is continuing, so most Americans are probably looking at another $100,000-$200,000 fall in home values. Not exactly a springboard for an economic recovery.

May 26 08:50 PM

[Scott Sambucci:]

Mad Hedge - Thanks for the note. The editors drastically altered the headline title for this article. It's purpose was to show market activity by price zone, and how the lower end of the market is indeed clearing now that prices have fallen dramatically. Previously in 2005 and 2006, the housing demand was spurred by bubble activity - buyers wanted to get into the market as it was rising and could only afford lower-priced homes because of the prices levels then. Now, the market is beginning to show signs of picking up at the lowest price segment because homes are priced far more aggressively and because of foreclosure activity.

May 27 07:18 AM

[Tim Plaehn:]

Q1 housing prices are old history. San Diego and Sacramento have also shown modest price increases over the last couple of months. With the stock market up 35% in the last 2 months, the 90% of folks still working are feeling more confidant about the future and see the tremendous value in current home prices.

May 27 08:37 AM