Each month we examine a single zip code, identifying micro-trends within the area to try and figure out how close (or far) that market could be from a bottom.

This month we shine the Zip Code Spotlight on 94703, an area smack in the middle of storied Berkeley, CA. The area contains an eclectic mix (it is Berkeley after all) of houses, condos and apartments. For this month’s analysis, we’ll focus on the single family residences within the zip code.

Looking at the zip’s sales history, one can see a trend that sets it apart from many other areas in the East Bay. Since the peak of the market in mid-2006, prices for homes in this zip code have fallen by 15%. Normally, this would seem like a staggering drop, but a 15% decline is mild when you consider the East Bay as a whole has come down more than 40%.

The area’s relative stability is likely a product of several factors (affordability, proximity to San Francisco and UC Berkeley, etc). Perhaps the most important of these is the fact that during the recent housing boom, home prices did not run up as much as many of the surrounding areas.

The average sale price is up 95% since 2000 — which is significant — but a moderate rise compared to the East Bay as a whole, which saw gains of more than 130%.

This is only part of story, however, and doesn’t explain why prices in 94703 have just come down to 2004 levels, while overall East Bay prices have already returned to levels not seen since 2000.

So is 94703 primed for a bigger drop or has it weathered the storm?

Source: Cirios Real Estate, MLS data

Only time will tell, of course, but until then we can watch for a few telling indicators.

First and foremost in our minds is supply, which, as we explain in detail in this month’s By the Numbers, can be an important leading indicator for prices. Spikes in supply often lead to price declines, as buyers can be more patient and sellers become more desperate. The larger the spike, the larger the decline.

As can be seen in the graph below, supply in 94703 is certainly moving higher and sits at the upper bound of its range over the past dozen or so years. We are watching this level carefully, as further increases would likely foretell more severe price drops in the future.

If, on the other hand, buyers step in and pick up lower priced homes, supply may return to more historic norms, supporting prices at their current levels.

As the nationwide housing crisis continues to unfold, one of the most important data points to watch is housing inventory. Housing inventory is examined by comparing the total number of listings in a given area to sales pace, resulting in a measurement of months’ supply. This number represents the number of months it would take to sell all the listed properties at the current sales pace, successfully integrating measures of supply (houses listed) and demand (houses sold).

As is often cited in the national media, inventory is way up around the country as foreclosed properties flood the market, while ready and able buyers struggle to scrape down payment money together or even qualify for a mortgage. Higher inventories put strong downward pressure on prices — more available properties and fewer prospective buyers create pricing competition that can send values spiraling downward. As we’ve seen in the last few years, areas with larger inventories (and more importantly higher months’ supply) have seen more precipitous declines. Areas that have maintained lower months’ supply have seen prices trickle downward, but haven’t fallen off the proverbial cliff.

Looking closely at historical months’ supply provides evidence that this measurement can actually be predictive for housing value trends, especially on a localized level. Looking at the graph below of sales activity in Santa Clara, CA, notice how increases in supply almost always precede price declines, and vice versa for supply decreases. Of course, the correlation isn’t perfect and there are many other factors at work in a given market, but by examining inventory for large changes in months’ supply, one can infer likely directional changes in price trends.

Source: Cirios Real Estate, MLS data

Predictive value aside, it’s clear that current downward trends in any market will not reverse until inventory is reduced. Until then, pay close attention to any numbers you run into regarding supply, as these can provide important insight into the timing of an eventual “bottom” of real estate markets.

At Cirios Real Estate, we closely monitor inventory at a variety of geographic levels, from county to neighborhood, for large moves in one direction or another.

If you’ve been eyeing a particular neighborhood, we can provide you with up-to-date analysis on inventory and a variety of other important factors in deciding when and where to purchase a home.

By ANDREW JEFFERY

This post first appeared on Minyanville.

It’s wishful thinking that artificially low interest rates alone are enough to rehabilitate the housing market.

The mortgage industry has undergone a swift and ruthless downsizing over the past 18 months. While a necessary part of the corrective process, the market is ill-equipped to handle the onslaught of new loans that regulators are hoping to incite.

Last week, the Wall Street Journal reported the Treasury Department is considering pushing down mortgage rates to levels not seen since the heyday of the housing bubble. Through the recently nationalized mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), loans would be offered to qualified homebuyers with rates as low as 4.5%.

The story sparked a wave of refinancing as rates on all types of mortgages tumbled. Coupled with the Federal Reserve’s plans to buy agency debt and freshly originated mortgage-backed securities, the stage is set for renewed buying activity.

Although Treasury Secretary Hank Paulson has since denied that he’s planning such a move, he did say that he’s “always looking at new ideas” and that “the key thing to get us through this period is getting housing prices down.”

Whether there’s an official program of 4.5% mortgages is immaterial, as Washington is doing everything in its power to push rates as low as possible.

It’s hard to argue cheaper mortgages won’t encourage buyers to leave the sidelines and jump into the market. However, as Bloomberg noted this morning, layoffs at mortgage companies and banks like Citigroup (C), JPMorgan (JPM) and Bank of America (BAC) have greatly diminshed origination capacity. Lenders, having already tightened underwriting standards, have limited resources to process new applications.

Many are hoping low rates will encourage refinancing and help clear out the toxic subprime and Alt-A securities still plaguing the financial system. Unfortunately, the loans originated for securities in 2005, 2006 and 2007 – the ones causing all the trouble — were done with minimal down-payment requirements. Falling home prices mean most of these borrowers are underwater - and thus unable to refinance.

Furthermore, any renewed buying is likely to be met with a flood of new supply. There’s a concept in real estate known as “phantom inventory,” which refers to homeowners who want to sell, but keep their homes off the market while they hope for conditions to improve. Some experts believe actual inventory levels, when these would-be sellers are taken into account, is as much as 25% higher than official data show.

Anecdotally, this makes sense. For each buyer waiting for lower prices to step in, there’s a seller waiting for a better market. So any pop in buying activity will offer sellers an opportunity to list their homes in a seemingly stronger market. As foreclosures continue to spread into previously unaffected areas, inventory levels are likely to remain high throughout much of the country.

And while attractively-priced, well-maintained homes in desirable neighborhoods will continue to sell, more of the same will be available in each successive month. Patience remains the best ally for the prospective buyer.

By AUSTIN NELSON

The National Association of Realtors (NAR) posted its monthly Pending Home Sales Index for September today, showing a pullback in the gains seen in last month’s report. The index, touted as “a leading indicator of housing activity,” is based on signed housing contracts. These contracts are not counted as sales but are taken as an indication of future sales data.

Specifically, the data show the following:

Month over month (seasonally adjusted)

• US: -4.6%
• Northeast: -16.8%
• Midwest: -0.7%
• South: -7.9%
• West: +3.7%

Year over year (seasonally adjusted)

• US: 1.6%
• Northeast: -9.4%
• Midwest: -3.1%
• South: -11.3%
• West: +39.5%

These monthly declines come following gains in August numbers (US up 6.5%). In last month’s report, the NAR pointed to the monthly figures as a sign of housing market recovery, but this month’s reversion evidences the continuing weakness of the market as a whole.

Now the polyannas at the NAR are choosing to focus instead on the year-over-year increase in the overall market, saying it indicates “we’re still in a broad period of stabilization.” However, the west region has shown a resurgence in sales and contracts are up almost 40% over this time last year, which is single handedly propping up the overall US numbers.

Taking the west out of the picture shows the US housing market as a whole continues to slide, where previously strong markets are beginning to show weakness in the face of continued economic crisis. The west is simply further along in the process of extreme market correction.

It is important to remember that this index should be taken with two very large grains of salt. The first is that these indices are based on housing contracts and do not represent completed sales. Fallout rates remain high, especially amidst a difficult lending environment.

The second, and more important, is that while sales volume may be stabilizing in some areas, sales prices are still unstable. With inventories continuing to hover at near record levels, downward pressure will still be exerted on home values.

Finally, unemployment data released today by the labor department indicate that unemployment is at a 14-year high of 6.5%. There is no reason to expect that this number will go down any time in the near future, as our economy is still locked into a death spiral of bad debt and tight credit.

This isn’t 2006 anymore, people who don’t have jobs don’t buy houses.