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San Francisco | December 2015 Real Estate Market Update

San Francisco Real Estate Report, December 2015 Market Update.
– Heading into the Holiday Slowdown after an Interesting Autumn Market
– Median home prices, over-bidding, housing affordability, luxury home sales, the new-home construction pipeline, and comparing the Shanghai and S&P 500 stock indices

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Median sales prices in October and November jumped back up to levels similar to the spring peak selling season. It’s important to remember that median prices are not a perfect reflection of changes in fair market value: They often fluctuate due to seasonal inventory and buyer-profile trends, as well as issues such as an influx of new-construction listings. It is the longer-term trend that is most meaningful – however we can say with confidence that there was clearly no significant “crash” in prices this past autumn.

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One indication of the heat of the market is the extent to which sales prices are bid up over asking prices. As is not untypical, the market becomes less competitive in November as it heads into the winter holidays. Still, an average sales price 6% over asking price would be considered crazy-hot in any other market in the country (though one also has to adjust for the fact that serious underpricing has become a not uncommon listing strategy in the SF market).

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This chart based on S&P Case Shiller Home Price Index data illustrates the seasonality of home price appreciation in the past 4 years: surging in our feverish spring selling seasons, and then generally plateauing through the rest of the year. Note that Case-Shiller looks at home prices in a totally different way than median sales price trends, and probably reflects changes in fair market value more accurately. Case-Shiller Index numbers refer back to a January 2000 value of 100, thus the current Index reading for higher-priced Bay Area homes of 217 signifies home prices 117% above January 2000.

As we enter the winter holiday market slowdown, the next real indication of the direction of the market will come in the first quarter of 2016. Will spring 2016 repeat the overheated, high demand/ low supply frenzies of previous springs or has the market finally reached a longer term plateau or even an affordability inflection point? We shall soon know more.

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In 2015 YTD, the dominant price segment for home sales in San Francisco was $1,000,000 to $1,499,000. As seen in the first chart above, the median sales prices for both condos and houses fall within this range. Note the change from just two years ago.

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San Francisco Luxury Home Market

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The high-end home market is the most seasonal segment in the city (as well as the most sensitive to sudden, large, negative movements in the financial markets). Market activity starts to plunge in November, hits its nadir in December, begins to pick up in the first quarter and then usually hits its peak in spring. Much of the center of gravity in the luxury market has been shifting in recent years from the city’s prestige northern neighborhoods to other districts of the city, such as the greater Noe Valley area and the South Beach/Yerba Buena district. This is not to say that the northern districts are not still both very expensive and considered highly desirable, and the greater Pacific Heights area still dominates the market for the most expensive houses in the city, i.e. those selling for $5m and more.

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After the semi-hysteria – already half forgotten – that erupted in late August and September regarding the Chinese stock market and its impact on the U.S. stock market and economy, and possibly the Bay Area housing market, we thought it interesting to take a look back at how it has played out so far.

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It is widely expected that the Fed will raise interest rates in December, probably by some minimal increment, but for the time being, as of the first week of December, rates have remained below 4%.

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In November, we issued two mini-reports, one on Bay Area housing affordability and another on San Francisco new housing construction. Below are the featured charts:

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I’ll continue to keep an eye on things for you, if you continue to read it.

Expect much lighter than usual blogging for the rest of the year, and don’t be surprised if theFrontSteps goes under construction.

Contact me today for a free property valuation, or to get you set up on my buyer system.

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Active Listings By Price Segment and Property Type

These Broker Metrics charts track weekly number of Active Listings over the past 6 months (early May to mid-October):

SFD, under $1m Active Listings – weekly inventory just below 6 month average, about same level as spring, lowest number of active listings since early July.

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Condo, under $1m Active Listings – autumn inventory levels well above (about 25%) spring-summer levels

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SFD, $1m – $1.499m Active Listings – weekly inventory just fell below 6-month average

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Condo/Co-op, $1m – $1.499m – autumn inventory running far above (about 40%) spring-summer inventory levels

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SFD, $1.5m – $1.999m Active Listings – autumn inventory levels well above (about 30%) spring-summer levels

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Condo/Co-op, $1.5m – $1.999m – autumn inventory levels well above spring-summer levels

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SFD, $2m – 2.499m Active Listings – autumn listing inventory running well above (33%) 6-month average, and equal to mid-May levels

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Condo/Co-op, $2m+ Active Listings – inventory running about 25% above 6-month average, and well above spring-summer levels

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SFD, $2.5m+ Active Listings – inventory running about 29% above 6-month average, and about 20% above May levels

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San Francisco Condo Prices Down 3% Since Month Prior, Up 15% YTD

SAN FRANCISCO CONDOMINIUM PRICES DECLINED 3 PERCENT IN SEPTEMBER FROM PREVIOUS MONTH, UP 15 PERCENT FROM LAST YEAR

Resale Inventory Surpasses Two Months of Supply for First Time in Two Years
According to The Mark Company Trend Sheet

San Francisco – October 14, 2015 – San Francisco condominium prices declined 3 percent from the previous month according to the Condominium Pricing Index released today by The Mark Company, a leading urban residential marketing and sales firm.
The San Francisco Condominium Pricing Index fell to $1,294 per-square-foot in September, retreating from the $1,340 per square foot record set the previous month, but remains 15 percent higher than September 2014. Monthly appreciation during this time of year is typically low or even negative.

There are approximately 656 new condominiums for sale in San Francisco, marking the lowest inventory level since March of this year. The scarcity of inventory will be eased slightly when sales commence at several developments during the fourth quarter of this year, including 41 units at 450 Hayes in Hayes Valley and 34 units at LuXe in Pacific Heights.

Prices for resale condominiums also decreased slightly to an average of $953 per-square-foot, falling 2 percent compared to August. Despite the recent decrease, prices are still 8 percent higher than one year ago. The number of resales is trending downward, falling 19% since last month, and 25% year-over-year.

“There are currently 395 active resale condominium listings in San Francisco, representing 2.4 months of supply. This is the first time in over two years that active inventory has increased to more than two months of supply, however inventory is still extremely low,” said Erin Kennelly, senior director of research, The Mark Company. Six months of inventory is considered to be the equilibrium between a buyers and seller’s market.

New construction absorption (the number of new condominiums placed into contract), fell approximately 25 percent in September, following a decline of 39 percent in August. “Slowdown is typical in the late summer, however absorption is still 36 percent higher than the same month one year ago,” noted Kennelly.

The Condominium Pricing Index, part of the firm’s monthly Trend Sheet (available at http://www.themarkcompany.com), is based on recent sales data, and uses a proprietary quantitative method to measure trends in market demand. It tracks the value of a new construction condominium without the volatility of inventory changes.

San Francisco Home Prices Remain High, affordability index stays low

What an interesting Summer! We are still in the midst of a hot real estate market where homes are getting quickly snatched up, buyers are stretching to pay over asking. The recent stock market gyration and Chinese currency devaluation add some uncertainty to the economy, and later this month the Fed is going to tell us where interest rates might go, but the San Francisco real estate market is steaming along.

The Housing Affordability Index (HAI), an index released periodically by the California Association of Realtors to measure the percentage of households that can afford to buy the median priced single family dwelling, shows all Bay Area counties saw declines in their affordability index reading, and San Francisco is now only 2 percentage points above its all-time low of 8%, last reached in Q3 2007.

The median house price, mortgage interest rates, and household income are the 3 major factors affecting the Housing Affordability Index. A picture is worth a thousand words, so here are the graphs:

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Interest rates play a huge role in affordability, and it is certainly reasonable to be concerned that affordability percentages are now hitting such depths while interest rates are also close to historic lows. For example, in 2007, when affordability percentages hit previous low points, prevailing mortgage interest rates were approximately 50% higher than today’s. When interest rates start to rise – when and how much being the real questions – there will be potentially dramatic effects on affordability, which could presumably affect demand and prices.

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As the HAI is approaching the record low, don’t hit the panic button yet. I’d like to show a unique perspective from John H Dolan, the sole market maker for the Case Shiller home price futures contracts that are traded (very infrequently) on the Chicago Mercantile Exchange.

San Francisco home prices have been rising sharply but how much higher might they run? Are they in a bubble? When, and how, will we know? Homeowners want to stay on top of expectations, while potential home buyers don’t want to see the market run away from them. While there may be many opinions, there is also one public market that home owners and buyers can access, to see what the market “thinks”.

The CME (Chicago Mercantile Exchange) has listed futures contracts for a number of the Case Shiller indices, including San Francisco (SFR), since 2006.^1 Essentially, the contracts allow participants to either view, or place a bet, on where the Case Shiller SFR index will be at various points over the next few years.^2 Since these housing contracts cash-settle on the value of the index in the settlement month (much like the S&P 500) it has been argued that traders may be “betting” on where they expect the index to be.^3 People can freely view the contract prices as a component of their own home price forecasts.^4

The graph below shows both the historical Case Shiller SFR index (in black), bids (blue axis), offers (red pluses), and contract closes (in purple). Finally contract values for Dec ’14 are shown in red.

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There are sets of 11 contracts (one for the Case Shiller 10-city index, and one for each of the ten components. San Francisco (SFR) is one of those ten.) While index levels react more slowly, and are backward looking, contract prices can change daily. While forward prices have been rising over the last few years on better-than-“expected” home price gains (at least as expected by this market), contract prices (particularly longer-dated expirations) have fallen this month.

While the SFR home price index has nearly doubled over the last five years (from a low of 117.42 in May 2009 to 214.53 this month), forward market prices are consistent with much more muted gains in 2016 and 2017. For example the 225.0 bid and 229.0 offer on the Nov ’16 contract are 4.9% and 6.7% above today’s level. The Nov ’17 contract is priced for an additional 4.3% gain the following year.

As such, expect headlines to note the slowdown in SFR home price appreciation (HPA) over the next year.

While contract prices for Nov ’16 and ’17 are higher than where they were at Dec ’14, they are off 4-5 points in the last few weeks as news of the Yuan devaluation and stock market gyrations have dampened expectations. The recent decline in prices is indicative that futures contracts are not predicators of the future, but reflective of expectations (that change as news occurs). That is, just as prices for oil futures dropped $50 in the last year as expectations changed, home price futures contracts also move.

In addition to just viewing bids and offers, those that either want to hedge an exposure (or future purchase), or who have a strongly different view of forward index levels can trade contracts to lock in forward prices. For example, someone thinking that SFR index levels will be lower by Nov 2016 might look at selling Nov ’16 contracts, while someone expecting another 10% annual gain might prefer to buy contracts.

Contracts have notional value of $250 * index price, so at a price of 225.0, the notional value is $56,250. A one point move in the futures price (e.g. from 225 to 226) is worth $250.

A trader would have to have a futures account, but the CME would be the legal counterparty to any trade. Margins tend to be less than 10% of the notional value.

As such, someone with a more bullish outlook in 2014, or someone looking to buy a house in 2015/16, could have (hypothetically) bought Nov ’16 SFR futures near 198 (mid-market price that day). With the contract 225 bid today, the buyer wouldíve made $6,750/contract

The contracts have been extremely thinly traded (e.g. there was only one SFR contract traded last month) so caution and patience are important. The markets are often quoted 1×1 (one contract bid/ one contract offered) so market orders for more than one contract are discouraged. The market-maker has expressed willingness to trade larger size, so best to contact him for larger orders.

Finally, contracts are traded on the SFR index which covers a wide area. Prices in any one neighborhood might diverge from the overall index levels. In addition, there’s (of course) no hedge for over-paying for a house.

Net, CME Case Shiller home price futures offer a useful tool for forecasters in framing their housing outlook. Unlike surveys, prices are continually updated, and traders are putting their money behind their bids and offers. The current thinness (limited trading) of the market suggests that CME prices might be one tool (but not the only) that homeowners can use to see what the market “thinks” about where home prices are headed.

1-For those new to home price indices, the Case Shiller index is the grand-daddy of home price indices. The indices were originally introduced in the early 1990’s by Nobel Laureate Robert Shiller and Carl Casein, and remain one the oldest that are currently being used. CS indices are often cited in news reports and in the financial press (e.g. CNBC). The CME has contracts for the Case-Shiller 10-city index (CUS) and, in addition to SFR, each of the other 9 components: (BOS, CHI, DEN, LAV, LAX, MIA, NYM,SDG, and WDC).

2- There are 11 expirations that today range from Nov 2015 to Nov 2019 (although some contracts do not often have posted prices).

3- Case Shiller indices are released on the last Tuesday of every month

4- e.g. Bloomberg

Big thanks to John H Dolan for the information, and new point of view! Visit HomePriceFutures.com for more analysis on home price derivatives.

That’s it. My head is spinning.

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Will Stock Market Panic Humble San Francisco Real Estate

The stock market has gone crazy in the last couple of days, but does it have any significance to the San Francisco real estate market? I’d like to share with you this interesting analysis from our marketing analyst. He doesn’t profess to be a Nobel Laureate in Economics, so take this analysis for what it’s worth – one point of view based on one assessment of the data (that he crunches all day every day).

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Housing prices typically don’t react at all to short term ups and downs in the stock market, though depending on how dramatic they are, they can temporarily slow activity as buyers wait to see if something really serious, with long-term ramifications, is developing. It is generally the more affluent who step back and wait, since 1) they have much more wealth in financial investments (stocks), and 2) they’re much more tuned into financial market movements. Housing prices are not a liquid bid-ask market – we sell small numbers of relatively unique homes in San Francisco, not millions of uniform shares of stock – and sellers always react more slowly to economic downturns since they don’t want to reduce prices if they don’t have to, and no one can make them sell. Also, of course, there’s a built-in delay in sales between offer negotiations and closed transactions, so it takes a while for price movements to clarify.

Generally, all market segments react to big, sustained, macro-economic events as can be seen in the 3 S&P Case-Shiller charts below for the low, mid an high-priced tiers of the Bay Area home markets. However, it is interesting that when the dotcom bubble burst, only the mid and high price tiers’ home prices were affected (and then, briefly), and the high-priced tier was impacted more than the mid-tier. The buyers in the high tier were much more affected in their wealth by the crash in the Nasdaq, especially in the Bay Area, and the most affluent buyers drew back the most as they waited to assess the shake out.

For what it’s worth, in the last cycle, our more expensive SF neighborhoods were the last to peak in value in early 2008, and the first to recover in late 2011/early 2012. San Francisco was generally much less impacted by the bubble’s crash than the rest of the Bay Area, state and the country, though some neighborhoods were more affected than others. Generally speaking, San Francisco’s housing market has since appreciated well beyond its previous peak values.

In the last bubble and recession, lower priced homes surged much higher and crashed much more dramatically than higher priced ones, but that was not because of the stock market, but because of the subprime loan situation which led to massive foreclosures in the lower end (with buyers who couldn’t afford the home they were buying in the first place). Subprime lending played a very small part in higher priced home purchases (which dominate in San Francisco), whose buyers also tended to be more financially savvy (and weren’t targeted by predatory loan brokers and generally didn’t buy homes they couldn’t afford).

I’ll start out with our updated chart on the S&P 500 so one can compare the stock market to the various Case-Shiller Index Bay Area home price tiers. Again, different price tiers had bubbles and crashes of different magnitude due to the subprime financing (and refinancing) fiasco. And please note that while the latest stock market decline is indicated, other short-term fluctuations will not show up in year to year figures.

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It’s interesting to note that all 3 Bay Area housing price tiers, according to Case-Shiller, are now showing a uniform 117% appreciation rate since year 2000.

This chart below tracks the appreciation that has occurred in the high-price-tier market – which most of San Francisco’s housing is in – since the recover began in 2012.

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There you go. A little bit of insight to get you through the next dinner table discussion.

Rental Boom is Boon to San Francisco Economy | $25.3B Contributed

Study: Rental Boom is Boon to San Francisco Area Economy,
Contributing $25.3B Locally in 2013
Fueled by Demographic Changes, Growing Millennial Population, Rediscovery of Urban Cores, People are Increasingly Drawn to Apartment Living

WASHINGTON, D.C. – The apartment industry emerged as one of the strongest sectors coming out of the Great Recession, and a new study shows just how much the San Francisco metro area’s economy benefited from the rental boom. In 2013 – the latest numbers available – apartment construction, operations and resident spending contributed $25.3 billion locally and supported 209,400 jobs in the metro area.

The economic data are part of new research commissioned by the National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA), which looks at dollars and jobs from apartment construction, operations and resident spending, nationally, by state and in 40 specific metro areas, including the San Francisco metro area. The data is based on research by economist Stephen S. Fuller, Ph.D., of George Mason University’s Center for Regional Analysis

Nationally, the apartment industry and its 36 million residents contributed an impressive $1.3 trillion to the U.S. economy, supporting 12.3 million jobs across the U.S. in 2013.

The study showed that in the San Francisco metro area:

· The local economic contribution from the apartment industry totaled $25.3 billion, supporting 209,400 jobs.
· The economic contribution of local apartment construction totaled $3.1 billion.
· The economic contribution of local apartment operations totaled $3.4 billion.
· Apartment construction and operations supported more than $1.9 billion in personal earnings for local workers.
· Renter spending in the San Francisco metro area contributed $18.8 billion to the local economy.
· The total economic contribution of the apartment industry and its residents in California totaled $139.1 billion and supported 1.3 million jobs.

“The Bay Area is headquarters to a number of technology powerhouses, including Google, Intel and Apple, which attract a highly educated workforce of young adults to the metro area. The diverse Bay Area economy is also driven by strong construction, finance and tourism industries that, collectively, generate a tremendous demand for area apartments. Even as construction levels stand at a 20-year high, especially in San Francisco and Oakland, the supply of apartments in the Bay Area remains insufficient,” said Jill Broadhurst, Executive Director of the East Bay Rental Housing Association. “The rental boon – both locally and nationally – has been fueled by demographic changes like the growing Millennial population and a rediscovery of metropolitan urban cores.”

“Here in the Bay Area, we’re feeling the positive economic impact of the booming apartment industry, which is helping our city thrive,” Broadhurst explained. “The great news about the apartment industry is that the dollars and jobs don’t end with construction. The ongoing operations and resident spending make each apartment community an economic engine, supporting local jobs and making a positive economic impact in our area – and in towns across the country.”

Some of the apartment construction projects in the East Bay area include Summerhill in Walnut Creek, Del Monte Conversion in Alameda, the Lampwork Lofts in Oakland, as well as a new project by AvalonBay in Emeryville.

“Our study showed major increases around apartment construction, with construction spending, economic contributions and personal earnings all rising substantially,” said Fuller. “The construction for multifamily apartment buildings is a significant and growing source of economic activity, jobs and personal earnings in communities nationwide.”

“According to our study findings, apartment construction has been on the rise over the past five years. In 2009, during the economic recession, there were only 97,000 construction starts, which was the lowest level since records began in 1964. In comparison, there were 294,000 construction starts in 2013 – a significant increase,” said NAA Chairman Tom Beaton, Senior Vice President, Management, The Dolben Co.

“The most visible sign of the rental resurgence – apartment construction – is on the rise, contributing $93 billion to the national economy in 2013, resulting in $30 billion going directly into the paychecks of more than 700,000 workers,” said NMHC Chairman Daryl Carter, CEO of Avanath Capital Management. “Besides all the dollars and jobs, the increase of available apartments will also help address affordability challenges that we see in many markets across the U.S.”

Chief Economist And Forecasters For C.A.R. Say Market Rising…And [Likely] Falling

Herein lies the problem with reporting on real estate: Everybody has their opinion on what the market is doing, but nobody knows for sure. Case in point, just yesterday we posted “San Francisco housing market continues to show promising signs of recovery”. We posted that from information obtained from the San Francisco Association of Realtors, and if you read the whole thing, they basically say all is good, the market is rising, but watch out because there is potential doom on the horizon that could sour the sauce.

It’s no mystery San Francisco’s market performs differently than most markets in California, but check this out:

[For California] distressed sales will account for nearly one-third of sales, inventory will be relatively lean, and the state’s median home prices are forecasted to reach $280,000 in 2010 [that’s up from $271,000], according to C.A.R and Vice President and Chief Economist Leslie Appleton-Young.

In addition, she noted, ‘Sales for 2010 are projected to decrease 2.3 percent to 527,500 units, compared with 540,000 units (projected) in 2009.’

In 2010, agents should see the low-end market attract first-time buyers and investors, with a resulting shortage in the number of homes for sale. Sellers at the high end [that’d be almost ALL of San Francisco], however, will continue to be challenged by the ability of home buyers to secure financing as well as their concerns about where prices are headed [So you see, they don’t know where prices are headed…nobody does].

‘Although it appears at this time that lenders are closely monitoring the flow of distressed properties onto the market, there could be an exertion of downward pressure on home prices should a heavier than expected wave of foreclosures come to market next year,’ she said.

They should all be politicians! The market is going up…but wait, if that laundry list of likely scenarios comes to fruition, it could also go down. No sh*t! Thanks for pointing that out.

C.A.R Forecast 2010

Get While The Gettin’s Good: Sell Now Or Forever Hold Your Peace

We’ve been on a lot of listing presentations lately where the motivation to call us in off the bench has been, in so many words:

We’re thinking we should sell our place now before it gets any worse.

The media (and certain local real estate blogs) are certainly good at creating panic, and Realtor blogs are certainly good at glossing over all the doom and gloom, but what’s really going on? If you’re a buyer, are you really feeling the urge to buy for fear of missing that boat again? More importantly for this thread, if you’re a homeowner and been thinking of moving (within the next 2-3 years), are you getting that feeling? You know, that one you all keep telling us? “We’re worried if we don’t sell now, we might have to wait years.”

Be honest, be anonymous, and please share your thoughts in the comments below. (NOTE: To be totally anonymous, when asked to enter email use, “a@a.com”.)

Thanks! We’re very curious to hear what you have to say.

Can Steve Jobs’ Leave Of Absence Affect SF Real Estate?

Is Steve Jobs so much of a factor that his absence could further derail the economy and possibly even our local real estate market? Certainly Steve Jobs taking a leave of absence until the end of June is not good news for Apple, and not necessarily good news for morale around these parts, but there must be a chain of command capable of taking over the reigns during this time? For chrissakes we just switched to a Mac!

Direct from the San Francisco Business Times Online:

Apple CEO Steve Jobs has told employees that he will be taking medical leave until June.

“During the past week I have learned that my health-related issues are more complex than I originally thought,” Jobs wrote in a message to employees on Wednesday.

“Unfortunately, the curiosity over my personal health continues to be a distraction not only for me and my family, but everyone else at Apple as well,” Jobs said.

“In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June,” the message continued.

Jobs said Apple COO Tim Cook will handle Apple’s (NASDAQ:AAPL) day-to-day operations, but that Jobs would continue to take part in “major strategic decisions.”

Jobs had skipped his traditional gig as keynote speaker at the Macworld expo in San Francisco last week. Just before the show, he revealed that he has a hormone deficiency that has caused him to lose weight. He had had a bout with pancreatic cancer in 2004 that was treated with surgery.

Godspeed for a healthy recovery!

A Little Holiday Cheer To Take You Into The Weekend

So we got this little text come across our channels yesterday and we thought we’d share it with you.

The Dow is going to drop to 7500 (at least) next year. It’s going to get uglier before it gets better. The hedge funds have yet to implode, and while not as damaging as the big time investment banks, it’s still going to bring the market down further. This is from a [higher up at a higher up bank…not currently going under].

Believe it or not? One thing is for sure, it’s a great time to be a buyer.

Have a good weekend, voting starts next week for our Sexiest Realtor, so make sure to check back on Monday, and feel free to buy a t-shirt for your friends in real estate.