How bad was it?
A look at how much prices have declined (and recovered) in local real estate.
As part of the new format for my monthly newsletter, I've been comparing 2010 home sales price per square foot with the same month in 2005, generally if sometimes wrongly considered local real estate's peak, and 2009, generally and quite rightly considered a generally lousy year for local real estate.
The chart below, taken from the April newsletter, is graphic proof of how relatively unaffected most of local real estate's sub-markets were by the downturn.
Kinda amazing, isn't it, at least if your perception of the current state of real estate comes from thrilling headlines and spine-tingling teasers, although lately even the media seems to have noticed that things are getting better. Yes, the scary stories are true and hugely unfortunate, but as the chart shows, in this area they come largely from the relative handful of neighborhoods where risky lending was for a few years all too common.
While the chart shows you the relative positions of prices in 2010, 2009 and 2005, it doesn't tell you the percentage by which they fell from 2005 to 2009, and by how much they've risen since. The table below, arranged by price range in descending order, does that.
| sub-market | March 2005 to March 2009 | March 2009 to March 2010 |
| mid-Peninsula top-end SFR | <12%> | 3% |
| mid-Peninsula midrange SFR | <9%> | 2% |
| San Mateo/BG upper midrange | <1%> | 2% |
| South Bay upper midrange | <1%> | 3% |
| San Mateo/BG midrange | <9%> | 0% |
| mid-Peninsula townhomes | <11%> | 6% |
| mid-Peninsula condos | <12%> | 5% |
| South Bay midrange SFR | <17%> | 9% |
| South Bay condos/townhomes | <18%> | 7% |
| mid-Peninsula affordable SFR | <46%> | 6% |
| South Bay affordable SFR | <44%> | 18% |
Two points. First, there's a neat pattern here: each extreme in the local price range took the biggest hit, but particularly the affordable end, because no one bought top-end homes with nothing down. Not that that kept some top-end homeowners from refinancing into a world of hurt, but if you're active in the market (as opposed to, say, a complete-collapse-of-civilization-as-we-know-it aficionado standing mesmerized on the sidelines) you know that as neighborhoods get more expensive, bank-owned homes and short sales become a smaller and soon negligible part of inventory. And, to put it simplistically, it's bank-owned homes and short sales that destabilize prices (unless it's cratering stock prices hitting the top end).
Second, local real estate isn't back to early 2005 levels, either in price or by any other market indicator, especially when you consider that home prices will have to rise by a far higher percentage than they fell before they return to March 2005 levels. (Just as stock prices, despite their dramatic run-up in 2009, have lots more ground to cover before they're back to October 2007 levels.) For example, when the average sales price/sq.ft. of South Bay affordable SFRs plummets 44% from $427 to $239, it has to rise 79% to get back to $427. An 18% gain is good—in fact, it's great, especially for the horde of no-fear investors and first-time buyers who bought at what turned out to be the market's bottom—but it's going to take time for prices in the hardest-hit neighborhoods to fully recover. How much time? "Forever" is the quick answer in some quarters, but I'll give the answer everyone should be giving: I don't know. But I am reasonably confident that it'll be sooner than most people expect.
Of course, that's the kind of mindless optimism agents are known for and, for that matter, "How bad was it?" implies that the worst is over, at least for this cycle, but then again, I've been here before. In December 2001 everyone—even mindlessly optimistic agents, many of whom, as I soon learned, turn into cringing pessimists whenever sales decline two months in a row—was sure, absolutely sure, that Silicon Valley was finished kaput for years and maybe forever. Plenty of reasonably bright people in and out of real estate convinced themselves of that, and were earnestly trying to convince others.
That's when I learned that misery (or more accurately, fear) loves company.
And the next month sales and prices shot back up. And we had a pretty darn good run. Very little of it due to the smoke and mirrors we now call "risky lending".
Oh sure, no two recoveries (or busts) are the same and, oh sure, there's still plenty out there to scare away anyone with no particular interest in buying anyway and, by the way, there's nothing wrong with not wanting to buy, but I've heard it all before and what used to sound like insider knowledge of impending doom sounds today more like habitual pessimism and maybe the ancient need to "know" the unknowable future and maybe even the equally ancient need to have a handy excuse..."and when the last ounce of badness has been wrung out of the future, then I'll act."
Sounds like paradise to me. Meanwhile, back here on Earth...