This post first appeared in the April edition of: Cirios Trends: In Search of Real Estate Opportunities.

As long time readers of this newsletter know, we at Cirios rail against the concept that “it’s a great time to buy,” irrespective of market condition. There is just too much that goes into the homebuying decision to make this sort of blanket statement. We urge clients and non-clients alike to be wary of Realtors bearing such oversimplifications, as if with some fancy chart or graphic they can assess the whole of the real estate market and the collective whims of all buyers therein. So, without further ado here are some charts and fancy graphics from which we will attempt to extrapolate the condition of the whole of the housing market.

In this month’s Zip Code Spotlight, we examined two areas of San Jose and tried to explain why neighborhoods with similar price points could have witnessed such divergent price trends. It all comes down to fundamentals, understanding why buyers are buying and why sellers are selling. The following two graphs attempt to break out one of those fundamental demand factors: The stock market. The stock market is most certainly not a rising tide that lifts all boats. First consider 94301, the well-to-do enclave of Palo Alto where Silicon Valley’s wealthy move to raise their children. Top notch schools and neighbors like Steve Jobs and Steve Young draw executives from around the Bay Area to settle in and settle down. It’s safe to say that the so-called “wealth effect” of rising (or falling) stock prices is strong in Palo Alto. The data above concur, as a home price spike in 2000-2001 matched the peak of the dotcom mania. Further, as stocks made all-time highs in 2007 even as the broader housing market had begun to roll over, 94301 home prices rose seemingly without worry.

———————————————————————————————————————-

So now that we know rising stock prices are a reasonable determinant of rising home prices, let’s apply the analysis to a very different part of the Bay Area. Antioch, a small suburban community an hour east of San Francisco, is hanging onto the Bay Area at the fringe, just beyond the reaches of BART. Formerly an agricultural and industrial community, Antioch is known to be frequented by gangs and homebuilders alike. A quick glance at the chart above, tracking the same time period and movement in equity prices shows how important fundamentals are to understanding home price trends. To have bought a home in Antioch in 1996 with the expectation of price gains due to stock market gains would have shown a lack of understanding of what moved home prices in the area. As can be seen, all it took to move prices up was a bubble of a different kind.

———————————————————————————————————————-

As the housing market began to roll over in 2006, the most frothy, speculative markets were the first to be hit: Phoenix, Vegas, Florida and the California Central Valley were the first to fall. Then last year, as government-backed foreclosure prevention initiatives began to squeeze inventories, some of those same distressed markets began to stabilize. But true stabilization and any eventual rebound will depend not on government programs, but underlying economic factors that support strong buying demand. By both looking at the data and examining actual transactions, it is becoming clear that cities further away from job centers are starting to falter. In fringe markets like Livermore, where economies were hit harder with layoffs, buying demand is starting to wane. Looking above, while prices stopped falling last year, gains are yet to materialize. In Fairfield, Livermore, Petaluma, Gilroy, and other far out suburbs we are starting to see cracks in the recovery. And as foreclosures are kicked down the road and more short sellers enter the market, expect more local market trends to start to mirror the one above — a long march sideways, at best.

———————————————————————————————————————-

Hillsborough is one of the Bay Area’s most exclusive communities. With grand estates nestled in the hills, the wealthy and reclusive flock to this unique town. Here, despite the allure of hobnobbing with the elite, buying demand remains weak. In particular, the area’s largest homes appear to be in least demand. Even as affordable neighbors such as South San Francisco and Daly City see tight markets and strong demand, there is a dearth of buying activity in Hillsborough’s high end. In looking at the top 50% of sales as measured by home size, prices are still slipping. In particular, look at how many sales are happening below the trend line – a precursor of lower prices to come.

This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux

<< PREVIOUS

Since we just spent the last ten pages laboriously scratching the surface of complex macroeconomic trends with a few over-simplified charts, we will now analyze every single US housing market by looking at sales data in two cities.

As we wrote in April 2009, “The bifurcation of the real estate market continues, as troubles in the high end are picking up the slack while low-end markets grope for a bottom.” This trend has persisted for months, and as foreclosures creep into higher end markets, we believe the trend will persist for the foreseeable future.

Below are sales transactions for the past ten years in East Palo Alto. East Palo Alto, which in 1992 had the dubious distinction of being “murder capital, USA” by tallying the highest murder-per-capita rate in the entire country, has undergone a renaissance of sorts. Sort of.

As Silicon Valley wealth swelled during the dot-com boom, so too did housing prices. One of the last bastions of affordability on the Peninsula, real estate speculators flocked to this rough town for high risk, high reward development. The town experienced a decade of gentrification on steroids, as home prices became completely unhinged with the economic prospects of the area’s residents.

This story was repeated in cities across the country, each with it’s own unique flare. Vegas condos went through the roof. Track homes in Phoenix were flipped monthly by amateur and professional real estate speculators alike. Waterfront homes in the quiet town of Cape Coral, FL approached $1 million apiece.

But now, as prices in these markets have returned to earth, buyers are wading back in, armed with government loans, tax credits and a newfound fear of the stock market. Inventory is being constricted by ongoing foreclosure moratoria and in certain markets, prices have begun to stabilize.

The arrow below points out the steep price declines from 2007-2008 on few sales transactions. The shaded circle shows buyers stepping back in and prices groping for a bottom.

(click to enlarge image)

On the other side of Highway 101, the city of Palo Alto exists in precise contradiction to its neighbor to the east. Quiet streets, large lots and excellent schools make Palo Alto one of the most desirable places to raise a family in the entire country. Home prices, as one would expect, are very, very high.

Palo Alto residents have had decades of prosperity to accumulate wealth, and a few bad months in the stock market or the loss of a job doesn’t necessarily spell financial ruin. Fewer mortgage defaults, less dependence on credit cards and a general affluence meant that the bubble popped here later, and with less vigor. In other words, the “Price Discovery” (ie, a precipitous drop in prices resulting from a void of buyers, only to be stabilized as buyers step back into the market looking for bargains) that has occurred in East Palo Alto is yet to come to well-to-do areas like Palo Alto.

As can be seen from the green shaded oval below, Palo Alto experienced a mini-bubble on the tail end of the dot-com boom. Prices have now fallen to around where they were back in 2004, but only just below the maniacal glory days of Pets.com and WebVan. And, as foreclosures infiltrate these luxury markets, forced sales are becoming more common. This is beginning to drive down prices, as can be seen in the recent dip that picked up steam earlier in the year.

Luxury markets around the country have seen a similar trend in home prices: A later peak and less dramatic fall, but prices that are yet to be supported by opportunistic investors. But all is not bleak in other Palo Altos around the country.

These high-end markets have benefitted from the strong stock market of the past 9 months. If the economy can avoid another tumble and markets can remain resilient as the government gradually withdraws its stimulus, high end markets may find support sooner than many skeptics think.

(click to enlarge image)

NEXT >>