Altos Research Real Estate Insights

and the bubble (comma stupid) - including the #1 grand prize:

Grand Prize Winner, Dumbest Moment of 2005

Bubble Trouble

"If you grew up in Danvers, and you remember it as the spooky place on the hill, it might not be the right place to live."

William McLaughlin, an executive with AvalonBay Communities, which
is converting boarded-up Massachusetts mental institution Danvers State
Hospital into a 497-unit complex of high-end apartments and condos.
That sound you hear? Not the ghosts of mental patients, but loud
hissing from the wildly inflated housing bubble.

In an ironic twist, the article is proudly sponsored by HouseValues.com's recent ad campaign. And the accompanying print magazine special offer illustrated with this cover shot:

I guess some folks just have a vested interest in this little bubble of ours...

Today I'm taking a look at Marin County. Let's see how things are shaping up as we roll into the new year.

In San Rafael, the biggest town in Marin County, demand has been seasonably weak recently, with 108 homes on the market and and a handful of sales. We'll keep an eye on this as the spring rolls around.

In Corte Madera, while there was no sales action this week, there has been a reasonable amount of turnover in the past few weeks with out a lot of inventory, again given the season. The sales activity of the winter months don't seem to hold much negative prices pressures as we move into spring.

Just for fun, let's also check out tiny Stinson Beach (pop ~800). In terms of properties available per capita, this premium beach town has a lot of inventory. This could be a forecast of price declines or extended selling periods while buyers look for the best deals to happen.

Could it be that home builders are well tuned into the coming year's housing demand? Could it be that they're not going to drive the train into the wall, building and building in hopes that demand will follow the trend of the last few years? There's starting to be evidence that the builders are adjusting well. From the Census Bureau today:

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 1,933,000. This is 8.9 percent (±8.6%) below the revised November estimate of 2,121,000 and is 5.7 percent (±8.1%)* below the December 2004 rate of
2,050,000.

A trick in the data, tho, is that big range of uncertainty in the numbers. We could be looking at no actual change at all, or maybe 17.5% lower, which would be a significant shift. My gut says it's closer to the latter. You don't see evidence of any of the home builders saying they're going to charge into '06 on the pace they've been for the past few years.

From the WSJ

...builders appeared
poised to dial back on new projects -- permits for future building sank
4.4% in December to a 2.068 million annual rate, Thursday's data
showed...

"With the inventory of new homes for sale high and
rising relative to sales, a period of weakness in starts is to be
expected," Ian Shepherdson, chief U.S. economist at consulting firm
High Frequency Economics, wrote in a note. "What really matters,
though, is whether sales will fall fast enough to turn a softening into
a collapse.

After posting the highest price towns the other day, I thought I'd look at what it takes to get yourself a starter home in some of these super expensive towns and see if that's changed over the year. Here's a sampling of the two highest priced towns in Santa Clara County: Los Altos Hills and Monte Sereno.

Looks like when the deals come available in Los Altos Hills, they don't stay there for long. I commented sometime back about the investor potential in that town. Likely, that's why the "cheap" ones are snapped up. I'll spend more time on Monte Sereno some time soon...

comes in this week at $4,995,000 median price. Of course Ross is more of a hamlet than a city and with an inventory of three its a bit hard to draw a decent trendline.

Atherton checks in merely four thousand bucks cheaper at $4,991,000 and a cornucopia of selection with 22 homes listed for sale. You can get into Atherton for just under $1.4mil.

Belvedere rounds out the top three with a median price of $4,895,000. Belvedere skews the highest of the three with a minimum price of $1,995,000 and top priced listed at just over $20mil. Hope that one's got a heck of a view.

The blogosphere is full of people predicting the demise of the real estate market in 2006. Some of them are deeply thoughtful. Others, less so. Usually, the less thoughtful the commentary, the more colored it is by schedenfreud. (I confess to tuning in frequently for a smile to blogs like this one.) And for some reason, internet
entrepreneurs seem to think they have a special insight here.

This week's Outside the Box email letter from John Mauldin prompted my thinking here. In OtB, Mauldin distributes an article written by financial analysts that takes an unusual view on the market. Thus the name. This week's view was from economic analyst A. Gary Schilling: Surprise! There's a real estate bubble.

The letter is, as always, deep and compelling but this one seems firmly inside the box to me...

I've had a couple of requests for a look at the East Bay so here's a snapshot of where we stand at the beginning of 2006. I started with a look at Danville (all stats here are for single family homes for sale):

A couple of things pop out on this chart. First is that property age isn't a factor in the price. This makes sense and reflects the East Bay's 20-year building boom. There are a lot fewer tear-downs than across the water. The second is a valuation characteristic I'll call the "commute discount."

Mark Thoma has a number of excellent posts over the last few days discussing general economic
impacts of a bubble burst. Thoma takes a pragmatic view of the broader impacts
of a bubble burst.

The main risk arises when people start losing jobs in a recession and are
forced to liquidate because at that time they may not be able to cover
commitments. This is the type of risk that is the most worrisome, the risk of an
overall slowdown …and the pressure that will put on households who find
themselves unemployed and unable to meet their financial commitments. But so
long as you have the same job and the same income you had before, and you live
in the same house, a housing crash will not change your month to month financial
picture (abstracting from property taxes, etc.).

I don't mean to downplay the business cycle risk from a housing
slowdown…The financial difficulties that could result from higher unemployment
and falling income in a recession are real and need our attention. There are
many on the margin who are vulnerable, and there are those who may have been
induced to take on excessive risk. My point is different and directed narrowly
at some of what I've read indicating that households with the same house, the
same job(s), etc. will be put into financial jeopardy by a housing crash.

He’s also got a few comments  (here and here) on Krugman’s column (which mentioned in comments to my
previous post.)

An interesting article in the Times a couple of days ago about the significant improvements in the average American's ability to afford a home.

Despite a widespread sense that real estate has never been more
expensive, families in the vast majority of the country can still buy a
house for a smaller share of their income than they could have a
generation ago.

A sharp fall in mortgage rates since the early 1980's, a decline in
mortgage fees and a rise in incomes have more than made up for rising
house prices in almost every place outside of New York, Washington,
Miami and along the coast in California.

Over 20 years, affordability has definitely improved because interest
rates are much lower," said Kenneth T. Rosen, chairman of the Fisher
Center for Real Estate and Urban Economic Research at the University of
California, Berkeley. Houses have also grown bigger during that time,
he said, so people are getting more for their money.

I noted in a previous post the effects of the declining mortgage costs as a function of home prices. Coastal California, of course, has a much lower affordability rate than most of the country, where official affordability rates have not improved as they have in the rest of the country. There are two possible reasons to attribute this condition, that I see: