Is their market your market?

Home values fell in the Bay Area...in the fourth quarter—that's nothing new..."This is the beginning of the end," said Stan Humphries, Zillow chief economist.  "We're seeing more depreciation in most markets, which means the ultimate end (to the declines) will come sooner rather than later."  For the nine-county Bay Area, Zillow shows a median home value in the fourth quarter of $463,246, down 3.6 percent compared with a year earlier, and down 31.8 percent from a peak of $679,159 in April 2006.

                                    Carolyn Said, Chronicle Staff Writer, Wednesday, February 9, 2011

They're spooking the buyers and sellers again—that's nothing new.  Who's "they"?  The economists and their running dogs, the reporters.

But there's a problem with the analysis I've quoted above:  the market it describes doesn't exist.  Not unless you're a buyer looking in all nine Bay Area counties, cross-shopping Fairfield and Atherton and San Francisco's SOMA, anywhere between $50k and $50M.  And if you are, don't contact me.

I can prove that "the Bay Area real estate market" exists only for the convenience of reporters and economists and their one-size-fits-all real estate analysis.  How?  I'll get all mystical on you and say that every Bay Area market can be identified by its fingerprints.  Yes, each local market has its unique fingerprints, just as surely as we do, but their fingerprints aren't swirling lines, they're the zigzags of charts and the linearity of milestone dates.  By their peaks and valleys ye shall know them.  And not just by how much value each has gained or shed, but when.  Know those two personality characteristics and you unlock a market's individuality.  And if you know that each market has its own personality—that each market is an individual—you'll be less willing to accept sweeping and misleading characterizations of "the Bay Area market".

Let's unlock the uniqueness of ten local markets by comparing their performance to that of "the Bay Area market".  Let's start by comparing Q4 09 and Q4 10 sales prices, as the article does, and let's compare them as accurately as we can, using the method I always use:  start with the raw MLS data everyone uses, then knock off the anomalies at both ends of the price range so that a few very high or very low sales prices don't skew the results, then adjust the average square feet of one time period to match the other, so that a 100 sq.ft. difference between periods doesn't understate or overstate any dips or rises in home values.  (Can you tell I enjoy this?)  By doing this we get as close as we can to tracking the change in value of the same house between two time periods, in this case Q4 09 and Q4 10.

Remember, according to Zillow and the Chronicle, "the Bay Area market" lost 3.6 percent from Q4 09 to Q4 10—and "that's nothing new".  Now let's see if our ten local markets also lost 3.6 percent.

Gosh, half of them gained value.  Ten local markets, ten distinct personalities with a wide range of results.

Next let's see if our ten local markets really lost 31.8 percent between "the peak", April 2006, and Q 10.  In fact, let's see if these markets really peaked in April 2006, or if they peaked a full two years later.

Four of the ten local markets increased in value between Zillow's April 2006 "peak" and April 2008, three of them substantially.  And that 31.8 percent decline Zillow and the Chronicle claim for "the Bay Area market"?  Three local markets lost more than 31.8 percent, but four lost less than 10 percent.

Okay, that's all pretty interesting, even fascinating, but what does it prove?  I think it strongly suggests that if you're a local buyer or seller, Zillow and the Chronicle aren't describing your market.  And if you're a local buyer or seller who figures you can take the Chronicle's article to the bank, you might have a problem.    

What kind of problem?  This one:  no where does the article say, "We don't really know what's happening in your neighborhood.  We're just taking the easy way out, tracking median price for an area so large it's meaningless to any buyer or seller.  Your local market may have fared better, or worse.  In fact, it probably did.  In fact, your local market may have little or nothing in common with 'the Bay Area market'.  So don't be so sure you're in an extreme buyer's market.  Your market may be balanced, or may even be a seller's market.  Prices in your neighborhood may be declining, but then again they may have bottomed already and be near a rebound.  But you'll never hear that from us." 

I'll restate the problem:  local buyers and sellers see "Bay Area home values down 3.6 percent" and other claims such as:

• "accelerated declines [in home values] are likely to bring the real estate market to a bottom later this year"
• "markets should hit bottom this year"
• "but that doesn't mean values will start rising anytime soon"
• "most markets will remain in malaise for an extended period of time"
• "the foreclosure pipeline is still clogged with properties"
• "home values in the Bay Area experienced a 'double dip'" because of the appearance, then disappearance, of tax credits"

and local buyers think, "Golly!  I better wait until the market hits bottom before I buy, and even then my home won't appreciate for years, so I better make a lowball offer on any home I like".  And local sellers think, "There's no way I'm putting my house on the market this year."  Even though:

• their market may not have seen an "accelerated decline", and perhaps seen no decline at all
• their market may already have hit bottom, and even be poised for a comeback
• their community is far more sought-after than the average Bay Area community (How many of you know where Fairfield is?  Brentwood?  How many of you care?  How many of you think this might be why they and cities like them got hammered during the bust?) so while they're waiting for prices to crater, a large pool of motivated and well-qualified buyers stands ready to support home prices in that community, now and in the future
• foreclosures may never have been a factor in their market, and never will be unless Silicon Valley goes the way of the British ship-building industry
• and tax credits never caused a double dip in their market because they were never a factor in their market:  any buyer in the higher price ranges had too much income to get much benefit

But here's the real problem:  one of the few bits of useful information in the article is its description of the multiple-offer market in Solano County.  Yes, real estate revives in backwater Solano County, the Bay Area's most affordable county and undoubtedly for good reason.  And I've got a pretty good idea that if things are starting to sizzle in Solano County, they're starting to simmer in traditionally more sought-after counties like San Mateo and Santa Clara.  And if I didn't know about sizzling Solano County, the busy open houses I've seen and held in both local counties would tip me off that something's afoot.  Which suggests that all the buyers waiting for a voice from a burning bush to tell them it's okay to buy are going to find themselves, sooner or later and I'm guessing sooner, in a very different market from the buyer's market they've been coasting through for the past year or two.  Lots of those buyers have never seen a boom market.  Lots of those buyers aren't going to enjoy trying to buy in one. 

Not that I expect to get buyers off the fence all by myself.  Even if this site got ten times the hits it gets, I'd still be facing two headwinds.  The first is a widespread inability to conceive that tomorrow may be different from today.  The second I've been quoting.  The local buyer who devotes a full fifteen seconds to scanning the Chronicle's article sees all the old familiar red flags, so alarming, yet so oddly comforting, delivered in a breezy authoritative style that admits no contradiction even if the reader felt so inclined.  Decline!  Foreclosure!  Double dip!  Prices must go down!  And yet that local buyer may be the same one who admits to me with chagrin, "No, prices haven't declined here as much as I expected".

Where's the disconnect?  You buy and sell in the real world.  The economists, and the reporters who spread their gospel, tell you everything you need to know about an imaginary world—and "that's nothing new".

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