Silicon Valley's Quasi-Case-Shiller

December 02, 2007

Silicon Valley "~Case-Shiller"

We got another real estate flier in the mail today referencing the same street we used in "Our Case-Shiller" published July, 26, 2007 (http://www.viewfromsiliconvalley.com/id346.html). For those of you not familiar with the Case-Shiller Index, "First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs."* In other words, they measure price changes by looking at the current and previous sale prices of the same house. Given a large sample population, this approach can yield useful information.

Since day jobs still pay the bills, we don't have quite the bandwidth to dig up data like the pros. However, we did create our own "~Case-Shiller" index by extracting the history data from Zillow for an entire street in a nearby municipality. The houses were all built at the same time, by the same builder, with the main variation among them a few square feet of interior space.

Interestingly, our research found literally zero sales on this street, or within a few houses up and down adjacent streets, between November, 1999 and May, 2002?!?! In our view, the first ~half of those 29 months came up empty because nobody was willing to sell. The last ~half of those 29 months came up empty because nobody was willing to buy.

Unfortunately, only our staff sees this "doughnut" in sales and thinks there is a clear message. (i.e., Buyer psychology can change on a dime. Sellers can't wait until after the peak, as the real estate shills seem to recommend, and still expect to make big profits...)

Back to the agent's flier received yesterday, she claimed to represent a seller on the same street we studied. The flier said the seller received multiple offers and "sold significantly over list price."

Hmmm, is this a new one? Or a tout for the same place we prattled on about last July?

For those who may not recall our July, 2007 missive, the agent described the property and neighborhood as:

"This area of XXX is always a fairly hot market. Both from the location perspective as well as schools. We did have a significant amount of activity. We had two agents write offers the first day on the market, but held them off and listened to offers after a weekend of open houses. We ended up with 3 offers and went significantly above asking. I can not disclose the sale price, but it will be published soon. We had a fast escrow so we'll be closing on Tuesday, July 31st."

For the record, the asking price was $689K ($533 /square foot) and the sale price was reported as $740K ($573 /sq ft).

Our own perspective is these are all cookie-cutter three-story townhomes with one-car garages, located across the street from a busy Cal-Train station. Buyers get to listen to trains rumble in and about every 30 minutes all day, every day.

Since we need to park two cars, and need to sleep soundly, we never considered any of these places, regardless of the price.

Even so, we went crazy on Zillow for an hour or so this weekend and built up a list of the most recent sales for each townhouse on this entire street. When we sorted it by date of last sale, we noticed a couple interesting points:

1) Original buyers are paying less than half the taxes of 2007 buyers even though both parties theoretically use exactly the same amount of government services. (Thank you , Prop13.)

2) Given 100 -150% appreciation since 1997 and California's property tax code with a provision where you can pass the house --and the tax basis -- to your heirs, many of these properties may never again go on the market. (Was it Prop 89 that enabled tax break inheritance?) Circa-1997 buyers can extract the entire original purchase price, rent out the place at positive cash flow and use the extracted cash as down payment on another house. It's the Silicon Valley way...

3) Most interestingly, as is evident in our ~Case-Shiller chart below, 2007 buyers are paying on 2 -4% more per square foot than 2004 buyers. That's a 1%, or less, gain per year during what are alleged to have been the strongest Silicon Valley real estate market in at least a generation.

Hmmm...

As an aside, these townhouses are touted as not too far from the Googleplex and we assume there is a steady stream of their employees interested. They have to live with daily train noise even though they would not actually use the train to get to work.

Remember, these places rent for maybe $2,400 per month. Such cash flow only covers a purchase price of less than 60% of recent purchase prices (using very generous assumptions about finance costs, maintenance, occupancy and opportunity cost). Therefore it seems buyers either are blindly willing to paying ~150% to 170% the cost of rent, or they are banking on future appreciation.

Conclusion:

Circa-1997 buyers are sitting pretty. Circa-2004 buyers don't have much top-line growth to show for their three years of mortgage servitude. Circa-2007 buyers are paying very high valuations into a trend-less market.

We'll ask exactly the same question we asked in July:

Do you feel comfortable spending three quarters of a million dollars(!) for one of these cookie-cutter townhouses on the assumption a positive trend will finally emerge?

*= http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html