Altos Research Real Estate Insights

A quick heads up for a great post by Ammon over at SEOmoz. He writes today about his perfect client:

A client who buys because they do understand what you are going to do
is a far stronger partner than one who buys because they do not know,
and want to shift all responsibility for understanding. Conventional
business wisdom will say that the ignorant client has more dependency,
and thus represents a locked-in client. Conventional business wisdom
has had its head up its ass through most of the online revolution.

He happens to be talking about search engine optimization clients. He might as well be talking about Realtors working with home buyers and sellers. And fundamentally, this is why Altos Research exists.

Believe it or not I actually had a Realtor say this to me recently:

All these Internet services, I hate them. The more information buyers have, the worse it gets for our business. That's why we have so many discounters! It was the same when I used to sell semiconductor equipment.

I wanted to ask him what they were doing selling steppers in the Pleistocene. But I refrained. I'll just blog about it instead.

Tell you what, I'll focus on keeping my clients incredibly informed. You focus on keeping yours in the dark. See you at the finish line.

It's amazing the insights customer conversations drive. I've had more than one inquiry lately about the price swings we're recording in places like Palo Alto. Why are prices climbing when all the headlines declare the bubble exploding? Here, loyal readers, appears to be a reason:

We've previously cited anecdotes on how homes are purchased in this area with stock capital gains. This is the first time we've gotten around to charting the correlation.

We see similar, though not as strong, correlation with Menlo Park, Cupertino, Saratoga, Monte Sereno, etc. The correlation breaks down in more diverse areas such as San Jose (diverse? well, compared to Palo Alto it is.)

Is there any doubt what drives the housing market in Silicon Valley? Same thing that drives everything else, I suppose.

UPDATE 12/01/06: Kevin Boer has stretched this analysis back 8 more years.

(thanks to Kevin and Greg, among others, for asking...)

Talking with a new client in Seattle this week had me digging into the Kirkland real estate market. I thought I'd share a bit with you. The homes for sale in Kirkland are median priced at just under $800k this week. That's a little deceptive since half the homes for sale in Kirkland are basically new construction, bigger and better. The less expensive half of the market are smaller properties, built in the '70s. Here's our real time profile for Kirkland Washington.

Note the recent price trend arrow. Properties, especially those newer ones at the high end of the market eased down all summer long, but in the last few weeks we've seen that downtrend flatten and even bounce up a bit. Notice our Market Action Index illustrates enough demand to bump us up into Seller's territory this week. But it ain't strong. Like a retriever with his nostrils above water paddling as hard as he can.

Unfortunately for home owners in Kirkland, we don't see a lot of evidence that this trend will continue. Notably, the time it takes to sell a place continues to climb, especially at the low end of the market. In the chart below, the light blue line is the average Days on Market for the cheapest 25% of the properties for sale. This chart shows a 90-day rolling average, and the weekly sample has us at about 49 days currently.

Looks to us like the Kirkland real estate market has stabilized for the autumn, but the leading indicators have not shown strength. So buyers will will continue to have their options and the time to make the best decisions.

The housing bubble prognosticators are out in full force this week. Gary Shilling as cited in John Mauldin's newsletter with a massive report titled "The Coming Collapse in Housing." The report is a collection, indeed well assembled, of the usual housing bubble suspects: an over-accommodative Fed, nefarious lending, speculators, etc. When you read it in these terms, it is compelling argument. Shilling has been on the Bubble bandwagon for several years now. I particularly like this chart of the relative pricing of homes when adjusted for quality improvements. This chart is standard fare for another great housing bubbler, Robert Shiller.

Meanwhile, The Wall Street Journal released a survey today of 49 economists, two-thirds of whom say that the worst is behind us.

"We're nearing the end of the slowdown for most markets," said Ethan S. Harris at Lehman Brothers. Prices still have some ways to fall before they'll stabilize, but there are signs that most drastic parts of the
downturn – marked by a sharp pullback in demand and new construction – have run their course.

This headline is misleading however, since generally the economists surveyed think prices will (continue to) decline in the coming year. The relative optimism in this crowd seems to be organized around statements like this:

Richard DeKaser, an economist at National City Corp., a big mortgage provider, said he thinks the worst is over. "We're starting to see inventories topping out and possible declining," he said. Mr. DeKaser forecast a 4.4% increase in prices this year and a 1.8% decline next.

Our guess is that the group surveyed by the Journal for this article was looking at the July-September data, which, as we've previously cited, saw an uptick in demand, and subsequent flattening of price declines, in response to surprising drops in mortgage rates. Get-it-while-you-can phenomenon.

Both of these crowds have structural problems with their arguments. The Shiller/Shilling crowd uses historical data to project future results. It went up, it must go down. The Journal's group is using concurrent indicators, inventories, to project future results. When we look at our own data for leading indicators, we see weak but not yet horrible results.

Our Market Action Index measuring demand levels relative to the inventories remains generally at multi year lows, but not at run-for-the-hills levels - especially not in great locations and the accessible price ranges. Good properties at the right prices are moving just fine. Money is cheap.

But we see no evidence that "the worst is behind us." That is, we see very few scenarios where we've hit the bottom of a trough in demand or pricing. In fact, there are lots of scenarios where demand drops like a rock (recession, higher interest rates, etc.) There are very few reasons for prices to have strong bullish years ahead. Add gut-feel to the sauce that notes this: very few people have felt ANY pain from this bear market yet. And bear markets need some pain to generate fear before the opportunists can come in a spark the reverse. That pain is either going to come in the form of the deep-V that Shilling projects, or in the form of a multi-year-U that just tires people out.

But in many ways, the national or even regional generalizations are meaningless. Some folks made money in the NASDAQ in 2002. There are always local exceptions. Keep you eye out for those.

Rarely can one individual's work be directly tied to the prosperity of billions. Milton Friedman, who died today in San Francisco, was one such individual. His pioneering work taught the world how to fight inflation which effectively spared us of decades of the "cruelest tax."

Beyond raw economics, Friedman was one of the world's most passionate defenders of individual liberty. A thinker right up there with Locke, Franklin, and Jefferson in terms of preserving freedom. In this sense, I've always found his accessible writing style to be inspiring. With his wife Rose he authored such great (actually readable!) books Capitalism and Freedom and Free to Choose, where among other things he laid the foundation for one of the most ambitious plans to improve America's educational system for all the country's children. Friedman is one of those writers that I turn to when I need a creative boost or an injection of optimism for mankind.

Like many of the greats, he had a sharp wit too. Here are some of my favorite Friedman quips:

• Underlying most arguments against the free market is a lack of belief in freedom itself.
• If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.
• The most important single central fact about a free market is that no exchange takes place unless both parties benefit.
• The great advances of civilization, whether in architecture or
  painting, in science or literature, in industry or agriculture, have never come from centralized government. Columbus did not set out to seek a new route to China in response to a majority directive of a parliament, though he was partly financed by an absolute monarch. Newton and Liebnitz; Einstein and Bohr; Shakespeare, Milton, and Pasternak; Whitney, McCormick, Edison, and Ford; Jane Addams, Florence Nightingale, and Albert Scweitzer; no one of these opened new frontiers in human knowledge and understanding, in literature, in technical possibilities, or in the relief of human misery in response to governmental directives. Their achievements were the product of individual genius, of strongly held minority views, of a social climate permitting variety and diversity.
  

More on Milton Friedman can be found at the foundation that bears his name.

This week's Real Estate Blog Carnival is up at True Gotham, one of a handful of really great blogs about that city. (My absolute favorite, though not really a blog, is Overheard In New York.)

Our post on the Web 2.0 conference is highlighted along with a truly insightful comparison by Realty Thoughts on the differences between the NAR conference and the Inman conference. I hadn't put my finger on it before, but I've never even remotely felt compelled to go to a NAR conference and feel like business is passing me by if I miss Inman. Unfortunately, these guys have me on the Cusp of Old.

When you go to a panel on “Top money making strategies in online marketing” at NAR there is no one sitting on the panel that was born after 1970. When you go to a similar session at Inman you rarely find a person on the panel born before 1970.

Also of note: Two (count 'em!) Altos Research clients, Kevin Boer and Andrew Maury, have their posts highlighted this week! We like to think we're significantly responsible for encouraging their blogging, if only partially responsible for the millions of dollars in commission checks that these guys are wallowing in.

From the New York Times today we have this story on how some Western US cities, San Francisco, Portland, and Seattle in particular, have swung the pendulum from requiring X parking spaces per new condo way past common sense neutral all the way to capping the number of spaces that developers are allowed to build.

This shouldn't come as a surprise, I suppose. The regulators in these towns don't like you and your profligate, fossil-fuel-burning ways. Never did. It's probably a BMW anyway, so even more reason to make you park it on the street in the name of "sustainable development".

One bit of the regulation which, while still silly regulation, happens to correspond with good marketing: unbundling the deed of the condo from that of the parking space.

Under San Francisco’s new parking maximums, downtown developers are also required to “unbundle” the price of parking from the price of the condo. “Buyers aren’t obligated to buy a parking space, and developers don’t have the incentive to build spaces they can’t sell,” Mr. Switzky said.

Build as many spaces as you can sell, sell as many as you can build. Much more efficient allocation of capital.

The fact is that places like New York and Chicago it is relatively easy to be carless. In San Francisco, this is not the case. Outside of the busiest neighborhoods, you can't get a taxi. Lots of folks in the Bay Area take public transportation for their commute. Coming in on BART from the East Bay is indeed a wise move. The reverse commute is an agonizing other story.

Frankly, more power to you if you can pull it off. In Chicago, I could go weeks without moving my car. In San Francisco I couldn't even go to dinner in the Haight without driving.

My recommendation to you if you're considering one of these condos (even if you don't own a car): Buy a space. Two if you can leverage it. A spare, deeded parking space over the past twenty years may have been the single most profitable real estate investment in many US big cities, with cap rates exceeding 10%
commonly (high demand, no maintenance!)

This will continue to be the case, even if the housing bubble collapses. People will always need a place to put their car. The city in their idealism isn't going to change the fact that you want to zip up to Tahoe for the weekend. Or Napa. Or Marin for a morning mountain bike ride. Or to Ikea. By limiting parking-space growth, these towns are locking in your investment.

Maybe I'll put a REIT together to invest in the unbundled parking spaces and lease them back to the idealistic cyclists when they get a job in Foster City.

This week O'Reilly Media held their "invite-only" Web 2.0 conference in San Francisco. Big Shots galore- venture guys swarming like locusts, alpha geeks, all the Internet media luminaries, basically all of the rock star entrepreneurs-du-jour. My invite must have been lost in the mail, so I crashed it for a bit. (Turns out to be a great place to get together with those types you've been bouncing around the calendar for months.)

What does all this Web 2.0 hype have to do with the daily grind of marketing real estate? Recognize that these so-called New Rules are basically purely distilled versions of successful marketing tactics packaged in fluffy, don't-want-to-seem-crass-commercialist terms. Fortunately for you, I have no qualms about commercialism, so I'll translate.

Building a Community - in Web 2.0, the term "community" is everywhere. It implies lifting your website visitors beyond surferdom and engaging with them. Having a conversation. Here's the secret for Realtors your community is exactly something you've been doing ever since you started in this biz. It's your network. Your sphere-of-influence. Online. It's difficult to build your network by standing in the corner saying the same thing to everyone who stops in front of you. Likewise, a static website that says the same thing every time someone shows up is unlikely to help you build your online network. That's why a blog is often the first step in your community engagement.

Your community online is important for the same reason it is offline. Who are you? Do I like you? Are you at the top of my mind when it's time to do business? You are much more likely to do business with a friend than you are with a total stranger. If business comes from online, then make friends online. Period.

And of course business does come from online. So increase your search advertising budget.

Mary Meeker, the lone Wall Street analyst to survive the era-formerly- known-as-THE-bubble, had some salient points for Realtors in her comments on the financial side of Web 2.0. Internet demographics, local targeting, and unmatched tracking technology means the return on Internet ad dollars is far higher than the offline comparables. BUT Internet advertising spending is still a baby at 25% per household of Newspapers. This spells opportunity, folks. Better return in a less competitive market. Are you taking it? Meeker's slides are here.

Note the combination of the above - Community takes time but not cash. Search marketing takes cash but not time. Doesn't this mix sound like your offline marketing plan? Ignore either at your peril.

Bonus tip from the conference. You can safely ignore InternetRealEstate.com - This company sponsored the name-tag lanyards. I was probably the only one in attendance who's interest was piqued - who are these guys? Turns out, they market Internet Real Estate (read: they're domain name squatters) rather than marketing real estate via the Internet. Go Figure. (aside: can this possibly be a good marketing investment? How do you measure return on lanyard investment?)

Some sites I've been reading lately that deserve a look, if you're not already familiar with them:

• BiggerPockets.com, is a frenetic real estate investor site. I like their blog because they're actively tracking the news of a weakening housing market without the unabashed shedenfreud of the most aggressive bubblistas.
• Grow-a-brain is without a doubt the most eclectic real estate blog. So eclectic in fact that it's often difficult to tell the subject is real estate at all. Given our narrow little niche here at Altos, we find that refreshing. Plus, anyone with a Big Lebowski archive set is on our must-read list. (BTW: My favorite Lebowski tribute is here. Hilarious and incredibly profane.)
• The Kirk Report is an influential site managed by a day trader. If all our personal cash wasn't, ahem, safely invested in building our company, we'd love to trade along side this guy. Clear, direct, transparent. Free and Free of Ads. A link from one of Kirk's link-fest posts to one of our posts got nearly as many referrals as a nicely prominent mention of Altos Research in TheStreet.com that happened the same week. Kirk is one guy in Minnesota. I just love the power of the blog.
• Here's Barry Ritholtz at The Big Picture hitting the bulls-eye on NAR's marketing campaign.

I want to call your attention this week to Andrew Maury. Andrew is a new client of ours and a newly minted blogger. He's a Realtor in the new-condo-crazed South of Market district in San Francisco. We're seeing a lot of attention from this neck of the woods, from REALTORS and from condo buyers and sellers alike. Everyone want to know what's going on in that market. I recommend you keep an eye on Andrew's blog

if you're on the lookout for South of Market condo market trends and projections.

The Housing Derivatives blog has this month's Case Shiller Index numbers. (The CSI, you'll remember, is the repeat-sales index upon which the Merc housing futures market is based.)

Winners this month: Chicago and Las Vegas. (Denver was up slightly.) These showed surprising strength, so the futures market overnight pushed futures prices higher to compensate for the latest data. Our model highlighted demand strength in late summer due to lower-than-expected interest rates. So maybe it's not so surprising, if we do say so ourselves.

Losers this month (no surprise here): Washington DC and San Diego.

Los Angeles and the Bay Area were down the least of the coastal markets.