March 10, 2007

All RE Is Local, Mania Unabated

(c) copyright View from Silicon Valley, 2007.  All rights reserved.



We just had to bang this one out.  You may notice this is relatively short in length but, after you read it, we think you'll see why we rushed.

There is no shortage of Silicon Valley partisans convinced we are uniquely-immune to the laws of economics (i.e., our real estate only goes up!). The cheerleaders are convinced sales prices can far exceed the return on rents --forever.

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

After a few months' hiatus, this is the fourth edition of what we hope you find an interesting series.  Prior editions were:
All RE Is Local, http://www.viewfromsiliconvalley.com/id253.html
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
All RE Is Local (Nov'06 edition), http://www.viewfromsiliconvalley.com/id282.html

Let's jump right in:

A few blocks away from us is a 4/2 with 1,803 square feet, a two-car garage built in 1964 listed at $1,258,000 ($698 per square foot).

Zillow shows the house was built in 1964 and, apparently, had the same owner for 43 years.  The tax assessment is only $179K, suggesting a tax bill of less than $2K for this million-and-a-quarter property. 

A back of the napkin estimate suggests the house was probably purchased for $25K to $30K in 1964.  (So maybe a twice, or less, what a California teacher earned in those days.)

Zillow's "Zestimate" for this mansion is only $970,548, or -$287K below the asking price.

Zillow lists a comparable sale three doors down from this house.  This "comp" was 2,222 square and feet sold for $1,227,028 ($552 per square foot).  It likewise was built in 1964 and has a single owner for the same 43-year duration.

As an aside, it should be pointed out both of the houses could have had multiple owners.  California permits not only a property, but also the a property's tax assessment, to be passed down from one generation to the next. 

During the last election, it was particularly galling to hear repeated radio commercials from a local politician "proving" he was a long-term resident by bragging he still lived in the same house where his parents raised him.  In other words, we're supposed to elect him AND pay his share of local property taxes for him.

Back to the point at hand, the most recent DQ stats for this zip show a median price of $620,000 and $492 per square foot.  (Yes, the median house is only 1,260 square feet.)

As these facts became apparent, it seemed this $1.258M listing would be a good test of the idea that local real estate was, or was not, still in a mania.

After all, the agent's research appeared to consist only of looking at the last nearby sale and marking it up another $30K while ignoring this house is -419 square feet (or -19%!) smaller.  Her 5% commission would be a check for $62.9K at the closing.  Nice work if you can get it.

The local paper published, "Your Guide To Buying  A Home," a special section this week.  There were two front-page articles:"Buy Or Wait," with a sub-title suggesting that if you do buy, you should expect to live in the house a long time , followed by an admission that the days of exotic mortgages were over.

When the cheerleaders start admitting there may a problem, doesn't this scream prices are flattening?

In summary, this a 43-year-old house.  It's listed at 203% of the local zip's median price and 142% of the local zip's price per square foot.  It's $300K over Zillow's routinely-inflated estimated value and over 26% more per square foot than the neighbor who cashed out a few months ago. 

Surely this is over the top. 

Surely the local paper admitting there may a problem coupled with the recent scare in the stock market on the heels of umpteen sub-prime mortgage brokers going out of business will prove there is some actual limit to what people will (or can) pay around here?

OK, we'll stop calling you Shirley.

We were astonished today to see this listing is already "pending sale!"

Somebody presumably ran the numbers and deduced either the price would never go down and/or they could flip it.  (We hope even zealots will now admit going the landlord route simply cannot cover costs.  Renting out these often miserable shacks resulted in negative cash flow 2+ years ago when they tended to run "only" $1.0M and mortgage money was much cheaper.)

Or maybe, as an upcoming missive will describe in more detail, they will tear it down and rebuild a 3,000+-square-foot house in it's place.  After, this route would clear a profit when it "inevitably" sells for $2M+.

The fly in this last calculation may be another re-build recently hitting the market with 2,450 square feet at "only" $1.748M (i.e., less than this guy's cost if he only builds 2,500 square feet).

Conclusion:  For the record, we wouldn't spend our own money when these junkie houses were "only" $1.0M two years ago.  At $1.25M, renting is half the cost of owning. 

Every day it becomes more apparent that we know NOTHING about real estate!

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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.  Invest at your own risk. (As we do ourselves.)