November 29, 2006

All RE is local (Nov'06 edition)

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



Silicon Valley partisans are convinced we will remain uniquely-immune to the laws of economics (i.e., our real estate only goes up!). Our cheerleaders are convinced sales prices can far exceed the return on rents --forever.

Yes indeed, "All real estate is local."  Especially here.

This is the third edition of what we hope you find an interesting series.  Prior editions were:
All RE is local, http://www.viewfromsiliconvalley.com/id253.html -and-
All RE is local (Sep'06 edition), http://www.viewfromsiliconvalley.com/id265.html
ALL RE is local (Oct'06 edition), http://www.viewfromsiliconvalley.com/id275.html

Let's jump right in and update our neighborhood:

1) Right around the corner is a 1,906-square foot, 4/2.  Their original $1,699,999 price was lowered to $1,588,888 last month and then closed at $1,450,000, a $250,000 (OK, a $249,999 or -15%) discount.

It was previously purchased August, 2004 at $1.135M, suggesting a flipper grossed $315K.

Subtract 5% realtor commission ( $72.5K) and 24 months of negative cash flow (est. $60K/20 months' rent  minus -$0/ principal -$110K/interest -$25K/taxes -$3K/insurance -$12K/maintenance =) -$90K for a bottom line of ~$153K over two years.

2) Two blocks over is a 2/1 with 1,030-square feet which sat empty four or five months in the summer and fall of 2005.  It went on the market summer, 2006 at $1,288,000 and the successful buyer would also receive drawings (but not permits!) for a 3,300 square foot house on the property.  Somebody ponied up $1,200,000 but kept the same tenant, suggesting they will not throw up the 3,300-square-foot replacement house over-night.

It was previously purchased late-2004 at $1.026M suggesting a flipper grossed $174K. 

The same math says 5% realtor commission ($60K) and 24 months of negative cash flow (~$45K/18 months rental income  minus -$0/ principal -$97K/interest -$22K/taxes -$3K/insurance -$12K/maintenance =) -$89K for a bottom line of ~$85K over two years.

Assuming no hidden expenses, the arrival of greater fools made these two flips a success.  How happy will these two new suckers (er, buyers) be two years from now?

3) A nearby shabby-looking 3/2 at 1,646 square feet went up for rent but sat empty two or three months in the summer at a rent which didn't cover costs.  The new owner eventually hired a realtor who listed it at $1,369.8M but then rented it out, choosing to lose money slowly rather than quickly.

This house remains off the market.

4) A newly-rebuilt 2,900-square foot 5/3/2-car garage with central A/C listed at $1.9M ~October, 2005, was lowered to $1.75M in ~January and lowered again to $1.68M over the summer.

This month a third realtor was hired, listing the newly-landscaped and re-painted house at $1,599M.  Lo and behold, the proporty now sports a "SOLD" sign after 12 months and -$301K off the original asking price.

It will be interesting to uncover the details on this sale after it closes.

Bottom line, ALL FOUR of the August listings are now off the market!  The sales were -$250K (-15%), -$88K (-7%) and -$301K (-16%) off list but still profitable for the flippers/sellers.

Next let's peek at the add-ons from two months ago:

5) It's only 2/2 but 3,400 square feet (counting basement), a lap pool but no garage and no a/c. It listed in the spring at $1.79M. By July it was lowered to $1.649M.

The realtor sign came down maybe eight weeks ago but an FSBO sign remains.

6) Our other "new" listing is 4/2, 2-car garage, pool/spa, no a/c, 2,019 square feet on a flag lot, listed at $1.448M then reduced $1.348M and now off the market.

We are checking to see if it sold or was pulled back by the seller.

Again, $1M+ properties are common around here.  The median for our area in this week's paper is -17% over the last three months but still +14% y-o-y.  The current median is higher than all the houses described above.  Sales volume in our zip code over the last month was again 17 (now -35% y-o-y).

Single-family listings in Santa Clara County show up as:

              DQ    MLS
September 7 3,401  4,201
October 5   3,389  3,899
November 7  3,070  3,496
November 29        3,292


Conclusion: Although average and below-average houses continue to sell for outrageous amounts, we are very comfortable continuing to wait for lower prices.

With only a single FSBO remaining from six researched listings, we need to either start over, or take a break.  I vote for taking a break.  Depending on reader interest, we may resume this feature in the spring.  (Feel free to let us know your opinion...)

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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.)