Taking a GlobeXplorer view of real estate.
We compare our "Zone of Gracious Living" to the changing fortunes of national and regional markets.
Using satellite photography, GlobeXplorer gives you a bird's eye view of virtually any part of the country. Type in a street address and then zoom in for a close-up of the house, zoom out for a view of the neighborhood, or zoom out even more for a view of the entire city.
We need a GlobeXplorer for real estate markets, because it would show that reports of real estate's demise are greatly exaggerated, particularly in the area I call, only somewhat tongue-in-cheek, "The Zone of Gracious Living": Menlo Park (west of 101), Palo Alto, Los Altos and Mountain View.
Encouraged by stories of of a distressed real estate market, several people returning to The Zone after a short absence have remarked on the vastly greater number of "For Sale" signs this year. But since our inventory isn't vastly greater this year than it was in 2005, this looks like a not-uncommon case of media-induced mass suggestion.
This calls for a GlobeXplorer look at real estate, from the macro to the micro. We'll start at the national level, then zoom down in stages until we reach The Zone. It'll take a while, and you'll have to wade through a few statistics, so to whet your appetite I'll give you some teasers.
First, those of you waiting for The Zone's real estate market to start selling at distressed prices will have to keep waiting. Sorry about that, Chief.
Second, one of the ironies of real estate is that it's first-time buyers who worry most about price volatility, yet the entry-level market is the least volatile in real estate. Want volatility? Buy a trophy property for $20,000,000 in 2000, then watch it lose half its value over the next few years. That typically doesn't happen down at the first-time buyer's end of the price range, which may be why move-up buyers move up so fearlessly into more expensive, more volatile markets.
Third, what we're about to see is good news for motivated, realistic sellers with homes that show well. It's bad news for sellers with pie-in-the-sky expectations, and for agents who've gotten into real estate over the past few years for the "easy money". We'll see much attrition in both camps.
And finally, 2006 sales numbers are misleading unless compared, not just to 2005's numbers, but to the numbers of the past ten years. To judge 2006 only by 2005's record performance is like panning last year's Super Bowl winner for losing this year's divisional championship game. It's tough to keep up that kind of momentum. And in fact, sales numbers are far less an indication of the health of real estate than a) sales prices, and b) something called the absorption rate, which measures the percentage of available homes that sold. But unfortunately, even the real estate industry's own press releases don't give this context, and I can provide it only for The Zone, not for national, regional or California markets.
Now for the numbers.
The National Association of Realtors® tells us that national existing (as opposed to new) home sales were down 4.1 percent in July from June, and down 11.2 percent compared to July 2005 sales. National median sales price was virtually flat, up just .9 percent compared to July 2005. Not the eye-popping performance of the past few years, but not bad enough that sellers should start heading for the lifeboats.
Zooming down from the national to the regional level, NAR reports that existing home sales in the western region fell 6.4 percent in July versus June, and a whopping 18 percent from July 2006 to July 2005. But here too, median sales price was virtually flat, up .2 percent from June and down .3 percent from July 2005. The 18 percent drop in sales is noteworthy mainly in that it means 18 percent fewer commission checks for agents, which means the writing is on the wall for about 18 percent of them.
Zooming down still further to the California market, the California Association of Realtors® says that July sales of single-family homes fell a modest 6.1 percent from June, while condo sales plunged 17 percent. But both single-family and condos saw almost identical declines in sales year over year, with single-family nose-diving 29.9 percent from its July 2005 level, condos 32.4 percent. So far the data suggests that California has been hit harder than the national or regional markets. But the median price of a California single-family went up 5.1 percent since last July, and while it decreased 1.5 percent from June 2006, price declines are normal over the summer. July median condo price was essentially flat, falling 1.9 percent from June 2006 and .9 percent from July 2005. So state-wide it's a mixed bag.
Zooming down even more tightly to the overall Bay Area market shows much the same picture. According to CAR, home sales (both single-family and condo) fell 19.4 percent from June to July, and 27.6 percent from July 2005. Median price declined .8 percent from last month, but actually rose 4.1 percent from July 2005.
Still with me? Now let's drill down to the markets of each of the nine Bay Area counties. This is where it starts getting interesting.
According to DataQuick, a widely-quoted real estate information service, sales in Solano and Sonoma Counties are down a jaw-dropping 40 percent from July 2005, but most other Bay Area counties have seen declines in the 20 to 30 percent range, similar to state and regional drop-offs. Median price changes from July 2005 range from -2.1 to +4.7 percent. San Mateo County has fared comparatively well, with sales down "just" 16.6 percent and median price virtually flat at -.7 pecent. Santa Clara County sales were harder hit, down 29.7 percent from July 2005, but median price went up a healthy 4.5 percent.
Finally let's zoom down to The Zone of Gracious Living, where most of you live. Have we finally reached real estate Armageddon here, the day of reckoning long predicted for our volatile and "overpriced" market? Here you'll have to trust my own statistics, since no one else recognizes The Zone, let alone slices and dices it the way I do.
Let's start with a look at what we in The Zone call the "entry level" single-family home market, although in most parts of the country that same money might buy you an entire housing tract. The July 2006 average sales price for "starter homes" was flat at $1,126,000, just $2000 off June's average and only $7000 higher than July 2005. For some much-needed historical perspective, let's contrast July's sales price with those of two milestone markets, the tech boom of 2000 and the tech bust of 2001, because both set the stage for the climate of fear surrounding local real estate. To wit: "People paid too much in 2000, then lost their shirts in 2001. I'm waiting for things to settle down." So let's see how things have "settled down" so far. July 2006's average sales price is 40 percent higher than July 2000's $805,000, and 46 percent higher than July 2001's $769,000. Those fearful of volatility should note that prices in this market segment dropped just 4 percent, far less than the average down payment, between July 2000 and July 2001. Not great if you had to sell in July 2001, as many did, but no catastrophe either.
July 2006 entry-level sales of 66 are down sharply from last July's 90, but the July 2005 market was unusually active and this 27 percent decline is in line with state and regional numbers. But let's go back to something I mentioned, a market measurement that I think is far more important than sales, the absorption rate: the percentage of homes on the market that sold. July's absorption rate of 35 percent is close to the ten-year July average of 38 percent. The Zone's entry-level SFR market wasn't a high flier this July, but it wasn't a wounded duck either.
Now let's look at activity in the next-higher price range, what's called the "midrange" here in The Zone and "estate property prices" almost anywhere else. July's 44 sales were down a precipitous 38 percent from 71 in July 2005. Much less alarming was the 4 percent drop in average sales price, typical of summertime price declines, although still a substantial drop in dollar terms, from $1,722,000 to $1,651,000.
Midrange absorption was just 21 percent, significantly below this price range's ten-year July average of 30 percent, although not far off July 2005's 26 percent. But here again, some perspective helps. July has been a slow month in the midrange segment for most of the past ten years, and since 2003 each succeeding July has been slower than the last. In fact, since 2001 the average July absorption rate for the midrange market has been a somnambulant 25 percent. This echoes my manager's recent comment that summers seem to be getting slower every year. Why? You're not buying Bay Area real estate when you're renting a villa in Tuscany. Buyers in this price range are more likely to be out of town during the summer, and for longer periods of time, than those further down the price ladder.
Finally, let's look at the most affordable of our local market segments, the condos and townhouses that make up the Common Interest Development (CID) market. But here we'll have to click the "zoom out" button and shift our focus southward a bit, because The Zone's CID market defies easy analysis simply because it is The Zone. The money and lifestyle found in this area mean you'll find far less of the entry-level CID housing that makes up the bottom rung of the market. Instead, you'll find proportionately more of the large, upmarket condos and townhouses that move in synch not with other CID but with the midrange single-family home market. Yes, you do find entry-level CID housing in some parts of The Zone—primarily south Palo Alto and Mountain View—but you'll also need to look further south, in Sunnyvale, Cupertino, Santa Clara, Campbell and parts of West San Jose, to see what our first-time buyer market is doing.
Prices in that market have also been flat, with July 2005's average of $564,000 virtually identical to June's $570,000 and just 3 percent higher than July 2005's $549,000. The 31 percent absorption rate is well off the ten-year July average of 37 percent, indicating decent activity but a slight tilt toward buyers. But that's been your local CID market for almost a year, since September 2005, and the fact that it's no slower now than it was then suggests that things have stabilized.
Here's a little more historical perspective: our CID market's average sales price was $388,000 both in July 2000 (tech boom) and July 2001 (tech bust). That stability doesn't fit the urban legends of high-flying boom and ruinous bust. Entry-level CID doesn't gain value as quickly as single-family, but it doesn't lose value as quickly either. Why? First, this is a big market with lots of players. If one player falters, another steps up. Second, CIDs don't have "dirt", so the deeply-rooted emotional appeal of land is absent. In fact, this is the rational, unemotional market the Valley's analytical types keep waiting for.
Bottom line?
Yes, real estate is slower today than it was last year, but the local market is still healthy. No one knows what it'll be like tomorrow or next year. Not the agents, even though their native optimism makes them inadvertently right more often than not in a market that's recovered so completely so often. Not the academics, or the media that parrots them; their record proves that an isolated ivory tower is a poor substitute for experience in the marketplace. Not the bloggers, most of who sound like they've never been in an agent's car.
Here's what I do know. Interest rates are still low, and that's always a good thing. I'm beginning to see the lead scouts for a new young group of buyers cautiously entering the market, after lying low the past few years. Many are still months if not years away from buying, and the fact that they spent the last few years on the sidelines suggests that they'll be conservative buyers. But they're buyers nonetheless, which means that the lights will still be on in real estate offices in a year or two, albeit in fewer of them.
Then add the wave of people brought here by new jobs, reminiscent of the mid-1990s hiring boom that set the stage for the late-1990s real estate boom. Add also the homeowners who've cashed out recently at what they think is the top of the market, and plan to return to homeownership in a few years.
Plug all these trends into the equation, and predictions of real estate catastrophe here in The Zone seem as farfetched as they've always been.