Optimism is riding high in the financial markets, even as the world tries to get a collective grasp on what a widespread pandemic could mean for, among other things, the world economy. That the stock market can rally, and real estate “experts” can loudly avow that the worst is behind us against this backdrop is a testament to the power of positive sentiment.

Over the next few months, the lifting of a series of foreclosure moratoria enacted at the end of last year will put the true strength of the recent improvement in housing market data to the test. The much-awaited release of the results of the bank “Stress Tests” are due out next week, and a 4th delay in announcing the findings isn’t exactly inspiring confidence in the Treasury Department.

Back here in the Bay Area, middle and high-end markets are unfreezing, however slowly, as buyers gingerly wade back into the market. This renewed activity, however, could have the perverse effect of accelerating declines as true market prices are discovered.

Lastly, we at Cirios pride ourselves on our ability to evaluate properties and neighborhoods from both a macro and micro level. No home price index can capture activity at the street level, but ignoring broad, high level trends would be to ignore the economic reality in which we live. That being said, more than our accuracy in valuing properties, we pride ourselves in our integrity. If we are wrong, we will say so. We have nothing to hide.

In the first edition of Cirios Trends, we chose 2 homes as our house(s) of the month, both located in Menlo Park, CA. One, 777 Hermosa Way, was listed at a level we felt was considerably optimistic. The home sold April 8 for $3,600,000, and while below the asking price of $3,975,000, it was also considerably above our value of $2,700,000. We were wrong. We still firmly believe prices in the high end of the market will drop for the foreseeable future, but we may be, as we tend to be, a bit ahead of the curve.

This post first appeared in the February 2009 edition of Cirios Trends.

This being the inaugural edition of Cirios Trends, we’re giving our loyal readers two houses for the price of one. Let’s travel about 30 minutes south from San Francisco to Google Park – err, Menlo Park – where the tree-lined streets are paved with Internet gold.

The two houses below are on Hermosa Way, across the street from one another. We believe both owners are a touch too optimistic about finding a buyer at their current asking prices. The homes were listed during the same week back in September, and now appear engaged in a my-overpriced-house-is-less-overpriced-than-your-overpriced-house price war. Hard to imagine either owner is going across the street to borrow a cup of sugar. Here we have a microcosm of the current housing market – too much supply, each seller trying to undercut his neighbor.

Neighborhood Overview: Menlo Park is a very desirable location because of its great schools and proximity to major Silicon Valley job centers (including Google’s massive campus in nearby Mountain view). These factors, coupled with its mild climate, have ushered in an era of unprecedented prosperity for this once middle class town.

Property values began to falter in 2001 as the dotcom bubble burst, but the emergence of Google almost single handedly reversed the market’s fortune. Many freshly made millionaires bought older homes, tore them down and erected McMansions of their own. Now, with many residents seeing their paper wealth evaporating on Wall Street, Menlo Park property values are starting to come back to earth.

House #1: 800 Hermosa Way, Menlo Park, CA 94025

Original List Price: $4,250,000
List Date: 9/7/08
Current List Price: $3,675,000
Previous Sale: $2,900,000
Previous Sale Date: 3/12/2004
Estimated Down Payment: $735,000
Estimated Monthly Payment: $22,622*
Bedrooms: 5; Bathrooms: 4+
Liv. Area: 5,350 sqft; Lot Size: 21,816 sqft (0.5 acres)
Positives:
+ Large house, more living area than most comps
+ Upgrades nearly throughout (except kitchen)
+ Close to all amenities, schools, shopping, freeways
Negatives:
- No sales >$3 million in the area in the last 3 months
- Many high end homes listed, lots of competition
- 5,000 square may be too much house for some buyers
Value Analysis:
The world of potential buyers for this house is very limited, he or she would need to have the income and job security to afford a $22,000 monthly payment. Many comparable, if not quite as large, homes are available for as much as $1million less. The comp sale below is inferior, but a better indication of demand in the area.

HOUSE #1 CIRIOS VALUE: $2,950,000
Over-listed Amount: $725,000 (24.6%)
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Comparable Sale: 345 Vine St, Menlo Park, CA 94025
Sale Price: $2,420,000
Sale Date: 12/16/2008
Bedrooms: 5; Bathrooms: 4
Liv. Area: 3,220 sqft; Lot Size: 8,350 sqft (0.2 acres)
Comparison to Subject: Inferior

House #2: 777 Hermosa Way, Menlo Park, CA 94025

Original List Price: $4,495,000
List Date: 9/5/08
Current List Price: $3,975,000
Previous Sale: $2,295,000
Previous Sale Date: 6/19/2002
Estimated Down Payment: $795,000
Estimated Monthly Payment: $24,469*
Bedrooms: 4; Bathrooms: 3;
Liv. Area: 3,302 sqft; Lot Size: 21,708 sqft (0.5 acres)
Positives:
+ Excellent condition, inside and out
+ Updated kitchen
+ Reasonably sized home that conforms to the area
Negatives:
- No sales >$3 million in the area in the last 3 months
- No exceptional features, except the kitchen and lot
- Significantly over-listed, smaller than its listed neighbor
Value Analysis:
The world of potential buyers for this house is also very limited. House #1 is larger and newly upgraded, and should sell for more than the subject. The subject’s conformity and smaller size could attract more buyers looking for an easier home to maintain. The comp sale is inferior, but more similar to the subject than House #1.

HOUSE #2 CIRIOS VALUE: $2,700,000
Over-listed Amount: $1,275,000 (47.2%)
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OVERALL COMMENTS:
Both owners are faced with a similar dilemma: Do I lower my asking price until I get an offer, or take my home off the market and hope for a rebound? Ultimately, both sellers need to be more realistic with their expectations of how much their homes are worth.

* Mortgage payments are based on the house being bought at the list price with 20% down and a 7.0% 30yr fixed loan, monthly tax cost included.