It was raining this weekend so I was unable to show houses and had no open houses scheduled. Therefore my options were to read or study the MLS. Reading makes me sleepy so the MLS won out. Each day I hear a great deal from the real estate pundits trying to predict the housing market. Have we seen the worst of it? Are some neighborhoods at bottom? Where are the best deals for first time home buyers? Where are the best deals for investors? All, very important questions.

Many say the next “wave” for the distressed property market is in adjusting mortgages. I have been unable to find a source that tells me how many home loans are adjusting in San Jose. The challenge with that idea is that many loans are actually adjusting down not up. In general the logic is missing on why that would be the next wave except how it might apply to negative amortization loans.

To me the next wave of housing challenges are completely related to job loss. More specifically blue collar, manufacturing job loss. Why? The largest group to purchase homes using exotic loan products were the very people looking for a way to afford a house in the Bay Area on an average blue collar income. This very group were more likely to pool incomes from different family members and when one of those sources loses their job, the house payment is in jeopardy. Loan modifications are not offered to the unemployed, recently disabled, or recently divorced. The home becomes under water quickly.

Which leads us to the short sale process. Oh my, don’t get me started. Bottom line, short sales are not being approved as quickly or as often as they should be to stem the tide of foreclosures. More and more short sales will move toward foreclosure. Another guaranteed, downward pull on the market.

The potential areas for deals are where the distressed property inventory is the largest proportion of the total active listings. This first graphs shows the number of short sale and REO listings as a percentage of the total active listings. There is no “bottom of the market” per se when short sales are a large majority of the active listings as those are the very listings that will move toward foreclosure and become bank owned.

Next the condominium and town home (attached) market. The Gilroy market has really taken a beating with the REOs. One of the listings, a 2-bedroom, 2 bath condo is for sale for $98,900. If that does not scream “investor”, I am not sure what will. Yet, there are more deals to be had closer to Silicon Valley and this may be the reason why the condominium market has not moved faster in Gilroy.

But obviously the majority of the inventory for Santa Clara County resides in the city limits of San Jose. Therefore, I wanted to break down by neighborhood the distressed market, to see what patterns might present. I am going to go out on a limb and say that Blossom Valley, Santa Teresa, and Down Town San Jose are going to become the next hot bed for REOs. All three neighborhoods are seeing 2-5% per month drops already. The short sale process does not work well in dynamic markets. Whereas a REO agent sends an updated market analysis each month. The short sale agent only sends in a market analysis when an offer is received. By the time the loss mitagator gets to the file (If you are lucky, within 30 days.), the market can drop another 2% and not surprising, the buyer has found a better deal somewhere else.

Is the condominium and town home market any different for San Jose neighborhoods? I believe we can say that the investors and first time buyers will be scooping up the Alum Rock condominium and town home market. Close to down town. Great student rentals. Again, pulling out my crystal ball, I would say Berryessa is prime territory for the next wave of good deals on REOs.

So what to make of all these pretty graphs? First, a large portion of the distressed homes are still being kept up in the air by short sales. The process is not working to reduce these homes quickly. Second, we all know that the sooner we reduce the inventory of over priced or slow moving homes (because of repairs, location,etc.) we will have a better chance of stabilizing the market. If you are a seller, you should be tidying your house and adjusting your price down at least every month. Third, the key to a market turn around is showing buyers how they can be pre-approved in this new loan market and how to find the great deal in the neighborhood they want. Finally, we must do this all quickly before the next wave of job losses place more homes in jeopardy.

If you are an agent reading this, I encourage you to throw your opinion into the hat so readers can hear professionals discuss the market in Santa Clara County. If you are a buyer or seller, you need to be working with an agent who is as determined as a bull dog to work this market. Agents who are shy about short sales, hesitant to recommend FHA loans, or can’t manage an REO will not be the professional that gets you through this current market.

One last point. Many of the neighborhoods have less than 20% of their inventory in distressed listings. It may be raining but much like our beautiful hills, sometimes it takes a good rain to make everything all green again.