20% Underwater

South Bay home value drop is slowing; nearly 20 percent of homes 'underwater'

Home values in the San Jose area continued to fall in the first quarter of this year, but the pace of the decline was slower than at any time since 2007, according to a report scheduled for release today. Zillow.com, a Web site that provides estimates of property values, reports that homes in the San Jose metropolitan area lost about $56.9 billion in market value in the 12 months that ended in March. But only about $98 million of that loss occurred in the first three months of this year — a significant improvement over the $30 billion decline Zillow reported for the fourth quarter of 2008. (DQ stats show the median resale declined -$19K in 1Q09 vs. -$130K in 4Q08. However, this ignores the fact that the October quarter is among the weakest every year while the January quarter includes two of the strongest months.

The estimated median value of individual homes in Santa Clara County fell 18.3 percent, to $573,779, in the first quarter compared with a year earlier. That was a record decline, according to the company, whose data goes back to 1996.

But it was only slightly worse than the drop in value posted in the previous quarter, according to Stan Humphries, Zillow's vice president of data and analytics, instead of markedly worse, which had been the case throughout much of last year. (Again, this ignores the seasonality in the numbers. 1Q is always better than 4Q.)

"The amount that it's getting worse each quarter is getting less," he said. When second-quarter estimates are completed, he said, it's "quite possible" that the year-over-year decline will be no worse than last quarter's, or even slightly better. (That may turn out to be correct but, again, it ignores the fact that 2Q is usually the strongest quarter every year.)

Proprietary method

As for when the decline in home values will flatten out, Humphries said, "You're minimally three quarters away, and it's not unreasonable to think it might happen sometime in 2010" in the San Jose area. (As jobs cuts and bank losses continue, even a 2010 "recovery" is very unlikely. Who is going to buy? And drive prices back up?)

Zillow, relying heavily on publicly available data on property characteristics and home sales, uses a proprietary method of gauging the estimated value of all homes, regardless of whether they have sold recently.

Santa Clara County Assessor Larry Stone said Tuesday that homes in the county have probably lost more value in the past 12 months than Zillow's $56.9 billion estimate would indicate.

"I was surprised it was so low," he said. "There's been a serious erosion of equity, whether you're in foreclosure status, or in Prop. 8 status, or whether you're just like me and have lost equity."

Stone estimates his home, in Sunnyvale, has lost about $300,000 in value since 2007.

"Prop. 8 status" refers to a law that allows a reduction in property taxes for homes whose market values fall below their assessed values. Assessed values are typically based on purchase price, and by law can increase no more than 2 percent each year.

Stone said his staff this year has reassessed nearly 91,000 residential properties to deliver tax reductions under Proposition 8, and those properties alone declined in value by $18 billion. With more than 400,000 properties in the county, Stone reasoned, the Zillow estimate seems low.

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With a foreclosure moratorium and huge bank bail-outs, the shock would have been if house prices had NOT stopped crashing for a moment.

"Virtually all of the residential properties in Santa Clara County in 2008 had some reduction in value," he said. (Not just low-end houses???)

'Underwater' loans

Zillow's report also said the erosion in home values has left nearly one-fifth of all homeowners in the county "underwater," owing more on their mortgages than their homes are worth.

Across the county and the Bay Area, the portion of underwater loans varied widely by neighborhood. In Los Altos' 94022 ZIP code, for example, 2 percent of owners owed more than their homes were worth, Zillow said, while in San Jose's 95111 ZIP, 39 percent were underwater.

Larry Pon, a financial planner and certified public accountant in Redwood City, said he's spoken with numerous clients this year who wonder what, if anything, to do about their underwater mortgages.

"Some people with these underwater mortgages, when the value of the houses were too high, they kept pulling money out" to pay for things other than home improvements, such as private school tuition, he said. "Depending on the situation "... the problem will solve itself when the market recovers, so for some clients I tell them to do nothing." (In other words, we will soon see the return of nothing-down, exotic financing? Along with the return of tens of thousands of lost jobs? Really?)

But, to his clients who are signed up for Zillow e-mail "alerts," which notify recipients about recent sales prices in their neighborhood, he advises, "Turn those off! Why do you want to know, especially when it's going down?" (That's right, bury your head in the sand. If you don't know prices are down, that's the same as prices being up. Right?)