New home sales in West drop 26 percent, largest dip in 6 years

SAN JOSE, Calif. (KGO) -- Economists are always looking for trends that forecast change, and on Tuesday a sharp drop in new home sales is raising questions of whether the real estate market is showing signs of softening.

There is a construction frenzy across the South Bay. KB Home, for example, has selling underway in 26 Bay Area communities, half of them in the South Bay.

However, the U.S. Commerce Department noticed a hiccup last month. New home sales in the West dropped 26 percent, the largest drop in over six years.

"I think we're about to see a shift in the marketplace, and the new home sales may be the leading indicator of that," real estate broker Quincy Virgilio said. He's starting to see a softening of the market. "Where I used to get 10 to 12 officers on a property, now I get two or three and where it used to be $100,000 over asking, it'd be $20,000 or $30,000."

The median priced home in San Jose has gone from $800,000 to $1 million, but the number of buyers who can afford to buy that home is at a tipping point.

"Right now, it's about 20 percent. Meaning 1 in 5 people, 1 in 5 families, can afford to buy the median-priced home. If that number falls below 20 percent, which it did in 2006 and 2007, typically we see a slowing in the marketplace," Virgilio said.

No one is predicting a bubble bursting, but change could be in the wind.

History teaches us that housing cycles tend to run five to seven years from the time a recovery starts until a market becomes a bit tense and could potentially develop a bubble. We are currently in year five of a housing market recovery.

Still, housing developers see the South Bay being a strong market due to the growth in jobs and in the scarcity of land.

Plus, many projects are being built bear public transit, including the expanded BART service to San Jose.

Click here to read the full April home sales report.