San Jose's housing market has been voted the housing market most likely to fail, but it's difficult to see what would make that so.

Walnut Creek based PMI Mortgage Insurance Co. says San Jose, the capital of Silicon Valley, has the highest PMI Risk Index -- 437 -- among the nation's 50 large metropolitan areas. According to PMI's report released this week, the economically floundering technology mecca's housing market has a 43.7 probability of experiencing a home price decline within the next two years.

The PMI Risk Index is a statistical model based on certain measures of economic activity and conditions that PMI believe predict the likelihood of home price declines over the next two years. The index examines the House Price Index from the Office of Federal Housing Enterprise Oversight and labor market statistics from the Bureau of Labor Statistics among its data sources.

After San Jose, cities with a greater than 25 percent chance of experiencing home price declines were Portland-Vancouver, OR-WA PMSA (37 percent); Detroit, MI, (30.6 percent); Seattle-Bellevue-Everett, WA (29.7 percent); Dallas, TX (29.7 percent); Denver, CO (25.5 percent); and Greensboro-Winston-Salem-High Point, NC (25.4 percent).

The Index has put San Jose's housing market at or near the top of the list for years, but even in the face of dot combustion, 200,000 job losses, massive state and local budgetary deficits and a declining population, the seemingly unstoppable market continues to push prices up, not down -- even at the high-end -- and homeowners continue to spend money, generating one of the strongest retail markets in the nation.

"The high-end market has seen renewed activity recently. We have seen quite a few high-end sales just in the last month or so, which could indicate that those with the money to spend are feeling that the upper-end market has finally bottomed out and are now taking the plunge. Many of them are still insisting on bargains when they do buy, but the activity is certainly encouraging," said Stefan Walker, a real estate agent with Alain Pinel Realtors in Los Gatos, CA.

The median price of single-family homes involved in closed sales was $565,000 in August, up from $540,000 in 2002 and $516,000 in 2001, according to Creekside Realty broker-owner Richard Calhoun's Market Report, data gleaned from the area's multiple listing service.

Low inventories, a third of what they were at the onset of the dot com era, are helping keep prices aloft, says Jim Myric broker manager of Realty World Realty Solutions in San Jose.

"The inventory hasn't gone nuts like it did in 1989. It was a blood bath with 11,000 to 12,000 homes on the market during the worst of it," said Myric, who is also vice president of the Santa Clara County Association of Realtors.

Hot sales

Silicon Valley homes were selling like hotcakes, with a frenzy not seen in a September for 15 years, according to DataQuick Information Systems of La Jolla, CA.

DataQuick said 2,988 homes sold in Santa Clara County in September. San Jose is the county's largest city and county seat. That's 1,151 more than were sold in September of last year -- a whopping 62.7 percent increase in sales -- in the midst of what some call a persistent, localized recession.

Santa Clara County's September home sales increase and the number of homes sold was the highest in the San Francisco Bay Area, accounting for one-out-of-every-four homes sold in the nine-county San Francisco Bay Area region.

DataQuick also says indicators of housing market distress remain largely absent. Foreclosure rates are low, flipping rates are low, down payment sizes are stable and there have been no significant shifts in market mix.

Myric concedes the big spenders who once paid twice the asking price of homes have left the market, but numerous creative financing programs are giving first-time home buyers the keys to home ownership.

"A lot of first-time home buyers -- college guys -- are coming in and this gives them a great opportunity to get in," said Myric.

Even though California is experiencing a net out-migration of the general population, due to the soft economy, the San Francisco Bay Area remains attractive to young, single college grads. Of the 20 largest metropolitan areas, San Jose-Oakland-San Francisco, from 1995 to 2000, had the highest net migration gain of nearly 50,000 single college graduates in the 25- to 39-year-old range, according to "Migration of the Young, Single and College Educated: 1995 to 2000," from the U.S. Census.

Three years later, the best and the brightest are buying homes and the stuff to fill them.

So where does PMI get off?

Red flags

Some local investors say the numbers in Silicon Valley don't reveal homeowners who have yanked their homes from the market because they've been unable to get high asking prices, set in the stratosphere to pay off upside down mortgages -- mortgage balances that are higher than the home is actually worth.

PMI analysts say the overall increase in its index is largely the result of slowing home-price appreciation rates, the sluggish economy and weak labor markets in various industries around the country, particularly in both the high-tech and manufacturing sectors which heavily impact the Silicon Valley market.

Exposure to high-tech, manufacturing, telecommunications or the troubled airline industry remains a common variable among metropolitan areas with a higher-than-average PMI Risk Index, PMI says.

Many of the areas in California, Washington and Texas have exposure to one or more of these industries and have experienced an increase in their risk index over the past several quarters.

You just couldn't tell that by the fall sales activity in San Jose.

"Another good indicator is land sales. Land has for most of the year been viewed as too risky -- speculative builders haven't had enough faith in the market to take on projects unless they could get land at prices most owners were not willing to consider, and resale values in the luxury markets had dropped to the point where buyers could buy newer homes cheaper than they could build. So, there has been very little demand for land this year -- until the last month or so. It seems that those with cash could be seeing that we have hit bottom. I wouldn't be surprised to see activity continue to be strong straight through the holidays," said Walker

It's as if two crystal balls are showing two completely different signs and it's sometimes tough to find agreement among local real estate agents.

"The Silicon Valley Real Estate market remains strong in spite of an economic environment of continued layoffs and salary freezes. For selected well-priced properties, particularly within the highly rated school districts, multiple offers are occurring weekly. The number of multiple offers has, in fact, risen since June. Currently, the market is quite balanced between buyers and sellers and may tend to become a seller's market as current trends continue," Diane Bogart, a Los Gatos, CA Coldwell Banker agent, reported to Realty Times' Market Conditions Report for Silicon Valley.

"The overall Silicon Valley or Santa Clara County real estate market has recently seen activity increase while prices have firmed and actually show a slight increase over the past three months, but now show a decrease when compared to the same month a year ago," Tom McEvoy, broker owner of ST Real Estate & Financial Services, Inc. in San Jose also reported to Realty Times' Market Conditions Report for Silicon Valley.

Bogart did take it one step further to couch her comments. "Currently the market is quite balanced between buyers and sellers and may tend to become a seller's market as current trends continue," she told Realty Times.

Published: November 5, 2003

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.