August 22 , 2006

ALL RE is local

(c) copyright View from Silicon Valley, 2006. All rights reserved.

Even those with only moderate acquaintance with our work quickly surmise we hold a bearish view of current RE values. Even so, we concede there is some truth to the, "All real estate is local," argument.

Among the things omitted in the bulls' use of this argument is any explanation of why so many "local" markets have rocketed upwards together? If they're all so different, why have so many moved up all at once ?

Before we descend any further into comments you can read elsewhere, let's instead review a few properties just in our own Silicon Valley neighborhood:

1) Right around the corner is a 1,906-square foot, 4 (or 5) /2(or 3). ( The attached garage was converted to living space which could be the 5th bedroom, 3rd bath and adds to the square footage.) It sits maybe 80 yards from the local expressway. It's listed at $1,699,999 (~$892 /square foot.) They recently painted the exterior but no other remodeling is evident .

The agent took this weekend off after holding the house open on both Saturday and Sunday for about the last three weekends plus a weekday or two along the way. (The long-time owners already vacated.) This is a very well-known agency but we've never heard of this agent during our two years resident in this neighborhood.

2) Two blocks over is a house that sat empty looking for a renter for at least four or five months last summer and fall. Except for the obvious patches on the shingle roof (most homes around here use shakes) and the TV antenna, it is a very unremarkable house on an unremarkable lot sitting ~60 yards from the same expressway. It eventually acquired a tenant but about two weeks ago the realtor sign returned as the house was being painted.

Having no idea the size or condition of the house, we called to inquire. Our Saturday morning phone message was returned Monday. The caller made no effort to describe the property and just asked, "Do you want to rent or buy?" Naturally, "It depends on the price."

He responded they were "thinking of selling if for $1,288,000." About the third time I asked, he stated it was 1,030 square feet.

"Wow!, That's over $1,000 per square foot! ($1,250, actually). Is the market really that strong?"

"Well it might be 1,100 square feet." he scrambled to reply.

"OK, we'll keep that in mind," I said, trying not to laugh out loud a second time.

"Yes, well, keep in mind it's 1,100 square feet," he replied, apparently imagining this might preserve some chance to make this sale.

Oh, puh-lease! How does an honest person make this particular mistake? Never mind the price is then still over $1,000 per square foot.

3) Along a nearby major road we saw a house go up for rent about the same time we started negotiating to extend our current lease. It was shabby looking and we didn't like the location but we called the number on the "For Rent" sign to at least gather market data. We learned, presumably from the new owner himself answering our call, "the rent is $3,500 per month." He didn't try to describe the house or even ask how long we might lease.

Long-time readers recall $3,500 has been the magic number for flippers/landlords. Apparently, an unremarkable property like this (using the kindest possible description) must occasionally rent at such a ridiculous price. There must be (or must have been) a few with so much cash AND desperation that they would pay up to live in this area.

A few weeks after the initial sign went up, we saw it on Craigslist listed at $3,300 rent. Probably six weeks after the rent reduction, we saw it was still empty and there was a professional realtor (not FSBO) sign in the yard. Another week or two passed and there were finally fliers. We now see it's 1,646 square feet, 3 /2.5 /2 and "room for RV parking," but no air conditioning.

The price was $1,369,800 ($832 /square foot).

This is now a real-time experiment! The flipper is (apparently forced into?) skipping straight to the (hoped for) flip. It will be extremely interesting to learn if there is a greater fool who wants to live there for $1.37? Or maybe (try to) flip it again.

4) Along another busy street we often travel is a newly-rebuilt 2,900-square foot 5 /3 /2 with central A/C. It's a different, but still excellent, school district and is the only one of these four with two floors. Despite the re-build, when we saw it go up for sale, it "felt" like long-time owners cashing out. This initial impression is somewhat supported by the fact it's been on the market since at least October, 2005. By ~January, 2006 it was reduced from $1,899,000 to $1,750,000 and this week we found it reduced to $1,680,000 ($579 /square foot).

It's easily the biggest, the newest and selling for the least per square foot in the group and it's been on the market NINE MONTHS!

These $1M+ properties are hardly outliers. All four are priced below the median for their zip code. The first three are also above the median price per square foot.

Obviously, four houses represent just ~0.025% (0.00026) of the current listings in Santa Clara County. However, they represent over 25% of the 15 houses sold in our zip code within the last 30 days!

Conclusion:

Just within our zip code, we see flippers putting inventory back onto the market. These houses are competing with long-time owners moving, and cashing, out. Therefore, we anticipate total listings will continue to increase. With listings increasing, the effect on prices is inevitable.

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The above is not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Buy and sell at your own risk (just like we do.)