Picking Winners in the Next Housing Cycle
This post first appeared in the June edition of: Cirios Trends Special Edition: Mid-Year Review – Will Housing Slide Again?
The next leg down in the housing market is going to take a lot of people by surprise. Make no
mistake, the downturn is underway and data is beginning to verify what has been known at the ground level for months; namely that demand is drying up and supply is increasing.
The surprise is going to be the nature of this next down cycle, not the slide in prices itself.
From 2007-2009, US property values fell across the board. Severity varied by region, city, neighborhood and even street, but correlations went to one: Everything was going down.
To assume that during the next downturn depreciation will be similarly uniform is a mistake. But don’t take our word for it, let’s look at the raw numbers.
The graph below compares three parts of the Bay Area. The red line is the prestigious Silver Creek Valley part of San Jose, where large homes and exclusive communities dot rolling hills just steps from Silicon Valley. The blue line is Morgan Hill, a suburb of San Jose which is a desirable town but still a decent commute from job centers. Lastly, the black line is Hunter’s Point, San Francisco’s roughest neighborhood near, Candlestick park.
As the market crumbled, all three areas fell – albeit at different rates. Each one actually found support around the same time, Spring 2009, but since have taken decidedly different paths.
Silver Creek has steadily rebounded, as stock market gains lined the pockets of Silicon Valley executives. With prices off more than 25%, buyers took advantage of what was perceived to be a great buying opportunity to move up into one of San Jose’s most exclusive neighborhoods.
Morgan Hill, on the other hand, has meandered along, as aspirational buyers were forced into short sale and foreclosure, dragging down prices. Demand remains strong, but overhanging supply looms, keeping appreciation in check.
Hunter’s Point on the other hand, saw a ramp up in prices as investors moved in, anticipating a new 49ers’ stadium and the approval of redevelopment plans. When it became clear that Santa Clara would be the likely new home for the team, a lack of fundamental homebuyer demand has pushed prices back down to new lows.
What is described above is known as “differentiation,” the process by which markets recover in a healthy manner. Specifically, when you begin to see market segments detach from the broader trends and begin to move based on underlying fundamentals, this is a sign that natural
market forces are slowly returning after a downturn.
This is a concept often used to identify buying opportunities for stocks, as price movements begin to move independently from the broad market.
The message here is clear: Looking at broad home price indices is a great way to miss opportunities.