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Silicon Valley Experiences a Reversal of Fortune

March 9, 2001

Article by Broderick Perkins

SILICON VALLEY -- Move-up buyers can get more home for their money these days, but the value of a high-end move-up home may not hold up in a market just fractions away from buyers holding sway.

In February, the single-family resale home inventory in the nation's technology center swelled to more than three times last year's levels, sales fell, and after years of heart-pounding sticker shock, the median price flatlined.

Blame the deflation effect in the nation's once hottest housing market on those over-valued, $1 million-plus homes frenzied buyers snatched up at twice the asking price in market madness that began only a year ago February. Then, a bullish stock market, a sizzling hot jobs market and an abundance of stock options and other securities-related employment compensation turned silicon into gold.

Now, with the stock market in the tank, tech stocks heaving, the economy on the ropes and consumer confidence corralled, fewer buyers are willing to commit financial suicide with a million-dollar or more fixer-upper.

And it shows.

"Now you see some of this reverse wealth-effect," says Stuart A. Gabriel, director and chairman of the University of Southern California's Lusk Center for Real Estate a study center for real estate, finance and urban economics.

"It's a principle that works as follows: The air gets thinner at higher altitudes. The market gets thinner at higher price levels. The more affordable homes have a broader base of potential buyers, a thicker market. One of the risks as you trade up is there will be fewer people qualified to purchase the home and that will make for more volatility in prices," said Gabriel, reacting to the latest "Santa Clara County Market Update".

That means move-up buyers can find bargains, in terms of larger homes for their money, but not without the possibility of suffering lost value as soon as the deal closes.

The emotionally and statistically depressing effects of over-valued, high-end homes have likely cut into the region's appreciation cycle. A seasonal price spurt that typically occurs in January, may have occurred sooner, last fall, boosting the inventory, says the update's producer Richard Calhoun, broker owner of San Jose, CA-based Creekside Realty.

"I believe that the appreciation during the fall of 2000, which is unusual, may have encouraged additional sellers to put their homes on the market earlier this year than normal and that could explain the high inventory," said Calhoun.

Continued strong demand from buyers allows Silicon Valley to retain it's seller's market title -- but not by much. For transactions that closed in February, the average seller received 100.8 percent of the asking price.

"In a normal market, sellers get about 98.5 percent of their final asking price," Calhoun said.

By the not so glittery numbers

Here's how Calhoun's February report shakes out for single family homes.

-The median closed sale price was down to $555,000 in February, from a market record of $577,500 in January, but up from $467,500 a year ago.

-For closed sales in February, the average seller received 100.8 percent of the asking price, down from 105.1 percent a year ago and 101.1 percent in January this year.

-Closed sales plummeted from 865 in February, 2000 to 571 last month and 599 in January this year.

-Inventories of single family homes rose from 649 in February 2000 to a whopping 2,187 last month. They were also up from 1,505 in January this year.

-The number of days a home remained on the market rose from 23 days in February last year to 30 days in February this year, which was down a bit from 33 days in January this year.

-The theoretical days-of-inventory (DOI)soared from 22.6 in February 2000 to 59 in January this year and 73.3 in February this year. DOI is a theoretical number indicating how many days the current inventory would last at the current sales pace if no new listings became available.

"It all depends on what they are selling and what they are buying and how much they are trading-up. But the top end is falling and the bottom end is increasing. This means, the buyer would tend to get more house for their money. After the purchase is complete, if the market continues in its current direction, yes the new purchase would fall in price,"said Calhoun.