Anatomy of a market in distress.
Silicon Valley has at least two real estate markets these days, just as Silicon Valley society has at least two strata.
Given the high price of a home—any home—in this area, you can't pigeon-hole Silicon Valley home buyers in handy categories like "haves" and "have nots" or "working class" and "middle class". When it takes $600k or so just to buy a small, worn-out rancher in a marginal neighborhood, the usual definitions don't apply.
No, for our favored and favorite corner of paradise, the more appropriate homebuyer categories would be "affluent" and "really affluent". And even "really affluent" only gets you a mid-range house. To crack the top-end market you need to fall into either the "plutocrat" or "captain of industry" category.
So it's all relative here. But there's no doubt that in 2007 the Silicon Valley real estate sweepstakes is taking two widely divergent directions.
Let's use overviews of the real estate markets in two local cities to contrast and compare these directions.
At first glance, Palo Alto and Santa Clara have much in common. Both are about the same size. Both are university towns. Both even own their own electric and gas utilities. Both were largely built out by the 1960s. Their post-war housing stock is virtually identical, and not infrequently built by the same builders. So it's no surprise that their post-war neighborhoods look much the same. In fact, I wouldn't dissent if you asserted that, on the whole, Santa Clara's post-war neighborhoods are better maintained than Palo Alto's.
Two peas in a pod, right? Two real estate markets marching to the same drum and off the same cliff.
No, two markets taking two very different roads.
I won't go into why a Santa Clara home sells for only fifty to sixty percent of the price of an identical Palo Alto home. Follow the links if you're curious. For now, let's just say that there must be a whole lot more to Palo Alto than meets the eye.
So how are these two cities, so seemingly similar but so obviously not, weathering a headline real estate storm of desperate sellers battling foreclosure and plummeting prices?
Let's look at Palo Alto first, because it won't take long. I've seen one bank-owned property come on the market this year. One. Not coincidentally, inventory is at historical lows while demand remains high. Multiple offers are common, and prices continue to rise in "affordable" neighborhoods where $1.4M might get you something decent if you're not expecting much.
Well, that wasn't much of an overview. How about if I give you an overview of another sought-after mid-range city, Cupertino, where houses are snapped up as quickly as they dribble onto the market, except in its most affordable enclave, Rancho Rinconada?
Or how about nearby Sunnyvale, where houses are snapped up as quickly as they dribble onto the market unless they're a) on a busy street, or b) in north Sunnyvale, which is affordable Sunnyvale.
By now you've probably detected a trend, which segues us nicely into Santa Clara, one of the most affordable cities in Silicon Valley.
Santa Clara takes a little more explanation. Santa Clara is, as the doctors would say, an interesting case.
At 420 homes, Q3 2007 inventory of Santa Clara SFR (single family residences) was higher than it's been for any Q3 in ten years. Most previous Q3s had SFR inventory in the mid 300s.
That's not a good sign for a real estate market.
The "failure rate", the number of homes taken off the market unsold, exceeds the number of homes sold, by 150 to 133.
Also not a good sign. In fact, a very bad sign.
The number of days it takes to sell a home has doubled, from 18 days Q3 2005 to 36 days Q3 2007.
36 days on market would be great in Detroit, a mere twinkling of the eye. Here it's an eternity, and another bad sign.
I should also mention that 26 of the 180 active Santa Clara SFR listings as of 11/1/07 are "short sales", sellers behind in their mortgage payments who are trying to get tentative approval from their lenders to sell their homes for less than what they owe on their loans. These sellers are sometimes one small step ahead of foreclosure, and dependant on the tender mercies of Big Banking. Add the two active listings already bank-owned, and that's 16 percent of all active listings, which may be why Q3 2007 inventory is 17 percent higher than it was Q3 2006.
That 16 percent of sellers who need to sell right now doesn't include the 12 percent of listings that use some variation on "motivated seller" in their remarks. Or the 4 percent offering credits to buyers, a marketing tool we haven't seen for awhile. Or the seller offering that signature of the soft real estate market, the lease-option.
Or the two sellers offering more than 3 percent commission to the buyer's agent. And I see that the 3 percent commission is a lot more common than it used to be in Santa Clara, where not long ago 2.5 percent was thought to be as much as any buyer's agent needed and occasionally more than he deserved.
Apparently some lenders still don't believe in spoiling buyers' agents, because more than a few short sales are advising that "commission is subject to lender approval". In other words, the listing may say you get 3 percent, Mr. Buyer's Agent, but the lender may have other ideas. Yes sir, the boss says we got to keep those non-performing loan loses to a minimum.
In fact, one listing agent warns that "per lender not more than 4% total commission". Now, isn't this a heart-warming example of a socially responsible lender working valiantly with a distressed borrower to stave off foreclosure? Inventory at an all-time high, plenty of selection, most sellers offering 3 percent to the buyer's agent, and here one lender is asking the listing and buyer's agent to share 4 percent! Add the stories about under-staffed short sale departments (maybe they should re-hire and re-train all those loan processors they laid off) taking a month to respond to any offer a short seller is lucky enough to get, and the expression "cold as a banker's heart" takes on new meaning.
Here's something else that might make even Pollyanna just a wee bit cynical: a house listed at $569k, down from $575k, "appraised at $703k in November 2006". Now how does that happen? Santa Clara prices sure didn't go down 19 percent in less than a year.
Which brings up an interesting point: the average sales price of a Santa Clara SFR has gone up almost 10 percent Q3 2006 to Q3 2007.
Of course, this factoid needs to be taken with a large grain of salt. Because "everyone knows" that average prices have gone up because the top end of the market is selling better than the low end. Except that, strictly speaking, Santa Clara doesn't have a top end. You'd be amazed at how many Mercedes you don't see on Santa Clara broker's tour. This is a meat-and-potatoes town.
But it is true that the average size of Santa Clara homes sold also jumped Q3 2007, along with price, by almost 11 percent to 1636 sq.ft., after years stuck in the low-1400 sq.ft. range. That's about the same percentage average that sales price jumped, so there's your answer. Maybe Santa Clara doesn't have a top end, but some of its neighborhoods do have bigger homes, and these neighborhoods are selling better than average.
Except that that's not the answer either. There's no direct relationship between bigger house and bigger price, because land value is such a big part of home price in this area. And the average size of a Santa Clara SFR didn't decline when out-of-control sub-prime financing was supposedly fueling sales of smaller homes at the low end of the market back in Q3 2004 and Q3 2005.
So what's really going on?
What's happening is that some Santa Clara neighborhoods, mostly those with highly-regarded Cupertino schools, are still red hot. These neighborhoods are far more expensive than the average Santa Clara neighborhood.
Other neighborhoods near the top of the Santa Clara price range, those with homes that are newer-than-average and larger-than-average, are doing fairly well.
Older neighborhoods, the "starter" or first-time buyer neighborhoods with small, humble, obsolete and inexpensive homes, are doing less well. These are the neighborhoods where sub-prime and/or 100 percent financing played a significant role over the past few years.
Now the chickens have come home to roost. But unless our local economy pulls a pratfall, those chickens won't be hanging out in every neighborhood.