June 10, 2007
Declining "Worth"
(c) View From Silicon Valley, 2007. All rights reserved.
My daughter and I traveled
out on several more Sundays to explore the near and far reaches of our neighborhood. With no particular plan
in mind, we survey flipper
projects, real
estate fliers and walk
through open houses.
We thought a brief overview might
be of interest:
During
our inaugural April 13 jaunt, we counted eight
different houses in varying stages of rebuild in less
than 30 minutes. Subsequent trips up and down different side streets raise
the observed total north of 20, all reachable in less than a 30-minute meandering bike ride from our house.
A few of the projects are
in earlier stages than the original eight but most look no more than ~6 months from completion. As you
might expect, all 20 are currently empty. The completion of each "flipper project" adds another
house to local inventory (and we believe they're all flips).
Since January, our zip code recorded
between 12 and 25 sales per month. Adding a large fraction of 20 "new" houses in the coming months figures to have
some effect on prices --or maybe not, given the continued hysteria...
On April 13 we found
a $1.72M listing reduced to $1.62M (1,720 square feet), but the realtor didn't bother to print up new fliers.
Maybe it's a marketing tactic to show the price reduction? Otherwise, you might expect a realtor about to collect $98K
in commission could at least pop for ~$20 to print new fliers. (The current market is clearly supporting these
kinds of prices but, after walking through, I estimated it might be "worth" 50% of the (lower) listing price to
our family.)
On that same day, we saw a 50-year old house listed as "price reduced" at $1.257M for "1,500 square feet." This place stuck out
not only due to the price reduction but also because the owners didn't bother to paint it, stage furniture or
even move out an old window air conditioner. (BTW, Zillow says it's only 1,223 square feet.) Even so, it was
marked sold (later reported at $1.3M) by April 20 and still
sits empty. This house is destined to be torn down to make way for another flipper project. ("Market
value" not withstanding, after seeing it in person, to say it's "worth" even 50% might be too generous.)
As an aside, two
doors down from this property is a nearly-complete flipper project which started out as a 3/2 with 1,950 square
feet sold for $1.268M in August, 2005. Judging by the two stories and high-end landscaping, we expect a $2M+
asking price to hit the streets within the next few weeks.
Across the street from these
two projects is a similar house where the owners tacked up a sheet of tar paper over the roof rather than repair it.
(In other words, they scrimped to save ~$150 in a house they might sell for $1.3M+.)
On May 15, we stopped by an open
house for an obvious flip, 3/3, ~2,300 square feet listed at $1.95, reduced to $1.85M. "The owners planned to live
in it but had to move." I'm told this is the standard dodge buyers use to get permits from the local zoning
board. Everything seemed brand new but the living space was impractical and the bedrooms and closets were
all small. (Continuing the theme, this place might be "worth" 50% of the asking price to us since we wouldn't
have to replace much.)
In general, the open houses we
visited had two or three or four families walking around. This open house happened to be momentarily empty
except for us, which was quite unusual. However, the lull left the realtor spare bandwidth to ask what houses
we considered or where?
Most people around here seem
to be ashamed to admit it, and even lie about it, but I openly told her we were renters. Tensing
for the counter-arguments, I explained we felt current prices were disconnected from values.
Being in sales, I tend to
recognize "selling opportunities" and so did this realtor. She confidently replied, "Studies show Silicon
Valley is not even in the 30 most expensive places to live globally." I strangled an outright laugh as I tried
to pick my jaw up off the ground. She seized that moment of silence to follow up with, "Lots of
people with money are relocating here." I got the sense she genuinely believes this propaganda.
Kicking back into sales manager
mode, I asked to see the study. She couldn't remember who conducted it or where the results might be found.
When asked to name places more expensive to live than Silicon Valley, she could only
come up with London. (Off the top of my head, I conceded Manhattan and Tokyo.)
When asked for examples of
who was actually moving into the area, her face really lit up. She quickly explained the $1.725M property
a few doors down (referenced March 10, 2007 in "All RE Is Local, Mania Unabated," http://www.viewfromsiliconvalley.com/id312.html) was bought by a doctor moving into the area.
She then proudly explained the
4,000 square feet at $3.194M mentioned in "Lazing on A Sunday Afternoon" sold during the broker tour-- to two(!)
doctors moving into the area!
Since this
flip is now sold, do you suppose she found another doctor?
One June 3 we walked
through an open house for which the realtor ran out of fliers. I jotted down the $1.395M asking price and his
claim of 2,000 square feet. This was the first house we walked through which I could ever see as a home.
Given its $1,568 in 2006 RE taxes ($131,500 assessment on Zillow), it was clearly not a flip. On the other
hand, there were old appliance and a "do-it-yourself" book next to some kind of saw rig on the garage floor.
Any concerns finding this might engender were amplified by the realtor's comment, "this house has potential."
Was this the most positive comment
he could imagine? Obviously, I don't "get it," but at $1.4M a house should have more than just potential! (I initially
estimated it was "worth" 67% of the ask but, after hearing the realtor's comment, dropped to 40%.)
My current favorite was found June 9.
The beautiful three-page color flier printed on heavy stock paper starts out, "completely level and useable property
- a rare opportunity in this desirable, close-in neighborhood."
The flier doesn't actually mention the 3/2 house (and 1/1
cottage) until the second page! The 1,650-square foot house (plus cottage) is listed at $1.999M. This asking
price is clearly meant to find a developer, not a new resident. (Our guesstimate is it might be "worth" 33%
of the asking price, maybe as little as 25%.)
Conclusion:
We wandered around a bit worse
than usual today, so let's lay out the percentages assigned to houses personally toured within the last 60 days:
1) April 13 -$1.62M, $844/square
feet at 50%
2) April 13 -$1.27M, $850
sq ft @ 50%
3) May 15 -$1.85M, $804/sq ft @
50%
4) June 03 -$1.395M, $698/sq
ft @ 40%
5) June 09 -$1.999M, $1,211 /sq
ft @ 33% (or less)
Yes, we do "get it." All
these propoerties are, of course, "worth" whatever people (or developers) will pay for them.
In short, data from DataQuick (DQ) and Santa Clara
County Association of realtors (SCCAOR) are widely interpreted to show local prices are still going up. If our estimations of the relative over-pricing are
roughly correct, it tends to confirm the DQ and SCCAOR data. However, this is mis-leading.
The real message is the relative
"worth" or "value" of listed properties is declining. Said another way, worse and junkier junk is selling at prices where
"better" properties were available a few months ago...
In none of the above cases,
was a local resident buying a house to live in.
