Is this how it starts?

August 10, 2005

View from Silicon Valley- Is this how it starts?

If there is a Silicon Valley housing bubble, how could you tell? If this alleged bubble was about to "pop" how would it start?

Logically, you would want to understand the local market before claiming to recognize changes in it. Silicon Valley is centered in Santa Clara County, where June's median price for resale homes was $700,250. (At $463 per square foot, your 700 grand only buys 1,512 square feet). Pricing was up +18.7% y-o-y while volume was down -11.6% y-o-y. In general, as long as prices are rising faster than volume is falling, it's tough to argue the current numbers indicate a "problem" for the Santa Clara County markets. (In each of the last five weeks of numbers for San Mateo County, however, y-o-y volume is declining faster than prices are rising. Hmmm...)

Realtors insist decreased volume is only a result of fewer listings which they tout as a sign of price strength. Apparently with a straight face, realtors in turn claim limited supply, rather than emerging dis-interest or financial incapacity on the part of buyers, is the culprit behind any sales volume decline. Unless, or until, prices actually decline, or y-o-y volume reaches parity, however, nobody can "prove" a point either way.

Santa Clara County reports sales results from literally 52 different zip codes and at least that many sub-markets. Maybe we can glean a better insight if we drill down into a couple local markets? Just for fun we picked two:

Mountain View (three zip codes) had a June, 2005 median price of $714,000 (for ~1,400 square feet), up 14% y-o-y. Sales volume was down -21% y-o-y.

Los Altos (two zip codes) recorded a June median price of $1,400,000 (for ~2,015 square feet), up 3.8% y-o-y. Sales volume was down -7% y-o-y.

Right off the bat you see both have y-o-y volume declining faster than y-o-y prices are rising

Clearly, these are both above-median price markets. You pay more money, sometimes for less house, in exchange for a location central to many Silicon Valley employers along with, mostly, good public schools. (A couple of the Mountain View schools are considered questionable.)

Drilling further down, let's talk about three houses in our own neighborhood. They range from a few doors to a few blocks away from our house. They are all zoned for the same public schools. After that, there is a world of difference:

House #1 is 1,050 square feet listed for $986,000 ($939 /square foot!). It's two bedrooms, one bath with a two-car garage and a driveway which requires you to back out into a busy street. The 8,000 square foot lot is described as "spacious" and ideal for add-ons. The interior has marble counter-tops and other amenities typical of recent re-modeling, suggesting the seller did not see this as a tear-down. (Unlike in the rest of the world, you can't tell something around here is a tear-down just from the price...)

As an aside, some houses are sold "with permits" to tear it down and re-build, although this one was not. Typical tear-down math might be $1M for "dirt" plus $250 -$300 per square foot to build, putting a buyer at $1.6M -$1.7M spent for 2,400 square feet. With similar houses recently selling for ~$1.9M+, this can be seen as a "reasonable" investment, assuming you have somewhere else to live for 18 -24+ months and can float such financing for two years. This scenario also assumes the city and county approve all your plans promptly, and your new neighbors do not object, none of which are sure things.

Back to House #1, we saw a contract pending sign but then it was taken down while the "For Sale" sign remained. The real estate agent explained the prospective buyer's contingency fell through, canceling the contract. He urged us to hurry with our offer since he expected this buyer would be back soon. After about a month, the "sale pending" sign is back up and we look forward to hearing the price for this new transaction-- assuming it goes through this time.

House #2 is ~2,200 square feet list at $1,445,000 (~$657/square foot). It's a 3/2 with two-car garage on the corner at the head of a cul-de-sac. Directly across the street from the front door is the fence marking the shoulder of Foothill Expressway. This house sat on the market for probably three months. A few weeks ago they lowered their asking price to $1,395,000 and then about a week later it was off the market.

We never saw a sold sign, but saw movers putting furniture into the house a day or two after the sign came down. Since we now see some of the same cars in their driveway we have seen over the past year, we deduce the seller pulled the listing. The movers were moving out "staging" furniture moving in the seller's own.

House #3 was discovered this morning, listed as 2,050 square feet for $1,169,000 ($570 /square foot) It's 3/2 with a two-car garage and a pool, in a much(!) quieter and less-trafficked area. The outside appearance and brochure's pictures of the inside suggest a remodel within the last decade or so. (Which is pretty decent given the houses we've seen with "original" fixtures and roof from when they were built in the 1950's...)

Is this a bargain at a 39% discount to House#1 and a 13% discount to House #2? Perhaps not. We expect the agent is low-balling this price, expecting to institute a bidding war. We assume the agent's failure to correctly spell the address on "Fallen Laef Lane" and "dinning room" on the color brochure are not indicative of an inability to manipulate prospective buyers. Just like on eBay, we expect there is a "reserve price." After watching property ladder, we shocked, (really shocked!?!?) to learn realtors will insist you have to raise your bid even when none of the other bidders are higher.

So what can we conclude from these little vignettes? Besides amitting we spend too much time worrying about stuff we can't control, it seems apparent houses are no longer flying off the shelf. The timing of these listings and prices per square foot might imply prices are softening.

At a minimum, location, size and condition may be starting to matter. By extension, buyers may finally be on the verge of refusing to pay ridiculously-inflated prices for run-down houses during a time when local jobs and salaries are flat (or worse) and it is much cheaper to rent.

Conclusion: If the Silicon Valley real estate market was about to turn down, this is how it would start.

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The above is strictly for entertainment purposes and should not be construed as advise to buy, hold or sell any security, property or financial product.