A great deal of money, energy and anxiety is invested to predict the future direction of Silicon Valley housing prices.
We have a strong opinion but the new year is a great time to examine opinions vs. actual facts on the ground.
For households worth $5M+, or less than $50K, maybe home price trends aren't a vital issue. For everyone in between, however,
it's critical to "keep up." One of the better tools for keeping up is the local paper's Saturday real estate section. You
study it if you're in the market, or think you may be soon. On January 1, the table summary was:
Median Price Dec.15'04 from'03 $/SqFt Volume from'03 All homes
$575,000 17.6% $388 2,743 10.3% Total resale houses $615,000
18.3% $408 1,768 4.2% Total condominiums $410,000 15.8%
$354 644 11.8% Total new homes $652,000 3.1%
331 54.7%
Most statistics can be used to support your agenda, regardless if are a buyer, a seller or just like to antagonize
innocent bystanders. Even pleading guilty to membership in this last category, a few points caught my eye.
"Total new homes" volume up is +54.7% y-o-y showing housing prices have clearly been rising long enough to attract new
supply into the market. Classically, this suggests prices should be topping out. However, the Silicon Valley housing
market has defied classic economics for a long time.
After all, Santa Clara County housing continued to rise in 2004 even though the county experienced zero(!) net new jobs and the total workforce declined -22,000(-2.6%).
Conversely, real estate agents tell us they see "new blood" moving into the valley. News reports claim to see more out-of-state
license plates on the roads. Rather than get back on my soapbox about the opinion of "optimists," let's just point out
this "new blood" does not have "new" jobs. Or maybe just not the kind which show up in payroll statistics. (Which is exactly
the claims of local VC's.)
A flat job market and declining workforce did not hold back housing in 2004.
On the other hand, if you worked for, or invested in, Google (+227%) or Yahoo (+67%) or eBay (+81%), you made money in
2004. Many such winners are undoubtedly in the market to buy or upgrade their housing. Overall, however, Silicon Valley's
2004 stock performance was -2%. If you worked for, or held the stocks of, the other 147 (out of 150) Silicon
Valley companies, you were down a lot more than -2%.
The overall Silicon Valley stock market did not correlate with housing prices in 2004.
The most often-cited candidate for correlation with housing prices is interest rates. Yes, 10-year bonds were steady, even
down a few basis points in 2004. Short rates were up, however, so the credit spigot opened by switching to ARMs is gradually
being turned off.
Interest rates are no longer falling, suggesting this avenue to further increases in housing prices is not in play.
What's left?
I received some input claiming foreign buyers are leveraging up their real estate holdings but the obvious
explanation was a nugget from Doug Noland at Prudent Bear. To wit, "Real Estate loans are up $306.2 billion y-t-d, or 14.3%
annualized." Is this a coincidence? Add 14.3% on top of 3.4% y-o-y CPI inflation and you can explain a +17.6%
price increase pretty nicely.
In a high-priced market like Silicon Valley, you figure the average was greater than the 14.3% national figure. Such
numbers strongly suggest a zero sum game. Real estate prices minus increased mortgages and inflation net out to a flat
market in 2004?!? Home buyers almost exactly replaced sellers' equity with their own debt.
Can sellers gain another 17% in 2005? I had already bet 17% was impossible in 2004, suggesting my advice has limited usefulness...
Switching back to overall housing statistics, Santa Clara County reported the November, 2004 median at $600,000. The paper's weekly figures are volatile but perhaps this week's $575,000
median price is "news"?
On the other hand, real estate agents tell you to ignore drops in November or December due to holiday slowness. ( Increases,
of course, are always "news," regardless of the season.) Judging by the news flow here, a -4% drop at the end of 2004's +17.6%
run-up is not setting off alarm bells.
As an aside, a median $388/square-foot works out to a 1,482 square-foot median house. If you want 2,000 square feet, figure
on spending ~$776,000+...
The real "news" in the above table is it shows "new homes" prices are only up +3.1% y-o-y and "resale houses" volume
is only up +10.3%. (2004 volume was 18%+ over 2003 through October.) Prices for new houses are flattening. Resale volume
is slowing. Again, "classic" signs of a "top."
On a related note, the back page of the Saturday real estate section was filled with color ads for apartment rentals. Among
the seventeen ads published this week, eight advertise free rent and two more show "reduced" rent or "manager's specials."
Of the remaining seven, three are senior citizen apartments and/or "Income limits apply" (i.e., rents are subsidized by the
state).
Only four of seventeen (23.5%) advertising apartment complexes have not (yet) resorted to discounts or government subsidies
to attract tenants and fill vacancies.
Maybe the laws of economics are about to apply to housing in Silicon Valley after all?
