San Jose Housing Market Projections for Q4 2006

The median single family home price in San Jose this week is $740,000. House prices in San Jose continue their gentle pull-back from this spring's high-water mark of $758,000. But the data are starting to betray something surprising: could it be? increasing demand?!

The short term Market Action trend for San Jose has turned positive. The Altos Research Market Action Index, you'll remember, is measures demand relative to available supply. MAI is trending UP in 11 of the 26 San Jose zip codes with more than 25 homes for sale. MAI is trending lower in 9 of the zips. A month ago, only four zip codes in San Jose were showing increasing demand trends.

A further observation is that these positive zip codes skew toward the higher-end of the market in San Jose. Here's a chart that illustrates the phenomenon. This shows how all quartiles of 95138 are turning up. Zip code 95138 covers the Evergreen neighborhood in Southeast San Jose. Lots of late 1990's development made this the highest-priced zip code in San Jose. Median Price in Evergreen is $1.4 million this week.

Market Action Index for San Jose 95138 September 25, 2006. Housing Supply and Demand indicator

Again, this is mildly unexpected for us. I had assumed that the low end of the market would continue it's tear. Prices in Evergreen are down from their peak of early 2005. Days on Market is up substantially at 72 and inventory is slightly higher than last year at this time. All this illustrates not a robust market but one where good properties, priced right are still moving.

To complete the San Jose October-December 2006 market projection, our hypothesis goes something this:

• Prices at the high end of the market have pulled way back from their 2005 highs. Enough so that some pent-up demand is testing the waters.
• Mortgage rates have stayed low and even dropped in September after the Fed stopped raising short-term rates. This is helping current deals close. Get-it-while-its-good.
• Meanwhile, at the low end, mortgage opportunities are tightening. Standards are increasing in the wake of a lot of bad publicity. So demand remains low and falling in the lowest-priced zip codes. Prices in this part of the market are 20% higher than last year. The bottom quartile could easily correct downward at the first sight of economic slowdown (which would arguably hit the low end of the market first.)
• But if mortgage rates stay low and assuming that we don't see significant evidence of an economic recession coming, expect this pent-up demand to keep prices at least stable in San Jose until next Spring's buying season starts again.

Sum it up this way:

The high-end professionals in Silicon Valley have a lot of confidence in their economy, jobs and outlook for the next few years. Money is still way cheap. Properties are much easier to get in to than a year ago. So you can see why an uptick in demand starts to kick in. Barring significant economic changes, we see the rest of the year playing out similarly.