We have all heard the old saying “Don’t judge a book by its cover.” This also applies to real estate. Just like a house that looks great from the outside could be a money pit, don’t assume that just because a neighborhood isn’t littered with For Sale signs, foreclosure activity is low. RealtyTrac.com is one of the best free resources available to evaluate the true health of a given real estate market.

RealtyTrac is the closest thing we have to a crystal ball when it comes to evaluating the direction of residential real estate values. While almost everyone knows about the foreclosure epidemic sweeping the country, and indeed California, few have a good sense of what’s happening on the street level. Realty Trac, by pulling information from some of the big real estate data and loan servicing firms, can help answer these questions.

While the site does offer a fee-based premium service, lots of useful information is available for free.

The non-subscriber can look at an area or zip code on a map to get the total number of distressed properties in that area. “Distressed” in this context means any home where the owner is delinquent on his or her mortgage by more than 90 days, at some point in the foreclosure process or the home has already been taken back by the bank.

To get started, type in a zip code and click “View Map.” Use the scroll buttons to zoom in and out.

The “P” symbol indicates that a borrower is more than 90 days behind on his or her mortgage. Foreclosure could be imminent. A neighborhood with a lot of these “P’s” won’t look distressed because the homes aren’t yet for sale, but this is one of the best ways to determine the near-term direction of housing prices because more often than not, Ps become Bs, raising supply and pushing down prices.

The symbol “B” indicates that a home is owned by the bank; the foreclosure process already complete.

Of late, a trend we have noticed is that even though an area may light up like a Christmas Tree on RealtyTrac, (ie, the area has a very high level of foreclosure activity) few homes nearby are for sale. This is indicative of a trend that is only barely percolating in the mainstream media: Phantom Supply.

Phantom Supply measures how much inventory is sitting on bank balance sheets, but is yet to be released out onto the market. Banks are reticent to sell all the homes they have in inventory, because flooding the market would push already depressed prices down even further. For more on Phantom Supply, please read: Keepin’ It Real Estate: The Stabilization Fallacy.

A final note about RealtyTrac is that their data is far from all-encompassing. It should used to compare areas relative to one another, not on an absolute basis.

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.