All RE is local (Sep'06 edition)

September 26, 2006

All RE is local (Sep'06 edition)

There is no shortage of Silicon Valley partisans convinced we are uniquely-immune to the laws or economics. The cheerleaders are convinced sales prices can far exceed the return on rents --forever. Yes, "All real estate is local." Especially here.

Our own opinion is this condition may not, in fact, be permanent. For better or for worse, we keep monitoring local conditions.

First up, let's review the properties from our own neighborhood mentioned last month:

1) Right around the corner is a 1,906-square foot, 4/2(or 5/3 when you count the converted garage). It's still listed for sale but the $1,699,999 (~$892 /square foot) price was lowered to $1,588,888. (so, -$111,111 dollars, now $833/sq ft).

The agent now only shows it on Sundays and took this weekend off entirely.

2) Two blocks over is a 1,030-square foot house which sat empty looking for a renter for at least four or five months last summer and fall. Last month, the realtor wanted $1,288,000 ($12,50 /square foot!, unless we wanted to rent it instead).

Earlier this month, the realtor updated their price to say a buyer would also get a copy of plans to build a 3,300 square foot house on that property. Unfortunately, no, the seller does not have permits to tear down the existing house nor permits for those plans.

Last week, we saw the realtor sign was gone and we now see the same car in the driveway we have seen for the last year or so (you wouldn't get a garage for $1.29M). Apparently, the tenant renewed and the house is off the market.

3) Along a nearby major road, a shabby-looking house went up for rent but sat empty for two or three months. As reported last month, the owner hired a realtor who listed it at $1,369,800 for 1,646 sq ft ($832 /square foot).

A couple weeks after last month's missive, the realtor sign was removed. The realtor told us the house was rented, but claimed not to know for how much or how long. Since the last rent listed put the property at a negative cash flow, we figure the owner couldn't get $1.37M and decided to lose money slowly rather than quickly.

4) Along another busy street we often travel is a newly-rebuilt 2,900-square foot 5/3/2-car garage with central A/C. It listed at $1.9M ~October, 2005, lowered to $1.75M in ~January and $1.68M ($579/sq ft) a few months ago.

This is the only property among last month's four with no change. Of course, in a few weeks, it will have been on the market a full year.

With two of our original four samples off the market, let's add more.

Pointing down side roads from the same busy road as #3, we counted eight open house signs this Sunday afternoon. We randomly picked:

5) It's only 2/2 but 3,400 square feet (counting basement), a lap pool but no garage and no air conditioning. It's been on the market ~6 months, originally at $1.79M ($526/square foot). By July it was lowered to $1.649M ($485/sq ft) where it sits today.

6) Our other "new" listing is 4/2, 2-car garage, pool/spa, no a/c, 2,019 square feet listed at $1.448M ($717/sq ft). This property is set back from a different main road, along what looks like an alley. Even though its' 48 years old, the house and property are in pretty good shape. Compared to these other dogs, this almost feels like a bargain?!?

Stand back for a minute and wonder who would ever pay $1.29M for #2 or $1.38M for #3 above if they could remotely swing $1.45M in the same neighborhood? Did #2 and #3 come off the market due to --gasp! --competition??

As mentioned last month, $1M+ properties are hardly outliers in this area. The median fell -19% since last month's missive but still exceeds four of these six houses. Sales volume last month was 14 and has swing between 12 and 19 units since our the first "local" missive.

There are now 3,401 (per DQ) or 4,081 (per MLS) single-family listings in Santa Clara County. These six represent only 0.18% (0.00176) or 0.15% (0.00147) of the total listings. However, they represent between 33% and 50% of the houses sold in our zip code within the last 30 days!

Conclusion: Long-time owners are dropping prices, presumably because they have enough equity to still make a profit at lower prices. Flippers may not have the same luxury and so are renting out in hopes the market will recover.

However, total listings are steadily increasing. Despite the housing cheerleaders' claims, the effect on prices is exactly what you would expect.

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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.)