Altos Research Real Estate Insights

Alex Clark bursts onto the San Francisco blogoscene this week with the launch of the blog edition of SFNewsletter.

Alex is the founder and publisher of the weekly SFNewsletter service for San Francisco realtors. Each week he authors an email newsletter in and about San Francisco and the San Francisco real estate market. You get to leverage his wit and uber-hip city knowledge to reach your clients. Rock on.

[full disclosure: SFNewsletter is an Altos Research client for real-time market analytics. So, yes, we're biased. You'll like his work anyway. We promise.]

Alex has already rounded up a group of distinctive contributors for the blog. With catchy features like, "Ask an Expert," and "Maximum Overbid of the Week," and "Pocket Listings" he gets to use the blog to extend and elaborate on topics that don't fit the column inches of the email newsletter. This is a guy with a lot to say.

And don't let the utilitarian name fool you, Alex's prose is colorful, insightful, and funny. If you dig San Francisco real estate, you should read SFNewsletter. Here's a small sample from a recent tour the newsletter took through the Outer Sunset district:

The Outer Sunset is a liiiittle bit more desirable than the
Outer Parkside, simply because people "feel" closer to the city. Homes can be a tiiiiny bit more expensive, and there are a few more shops and restaurants to choose from, but we have news for you. If you're looking for a home in the Outer Sunset, can't find "the one", and are afraid to "go out" to the Outer Parkside... get over it. Why do you think last week we said most people refer to the Outer Parkside as the Sunset? Because they are, in fact, that similar. But the difference between Outer and Inner (kind of like a belly button) is a little more glaring, and we'll get to that next week.

Welcome to the Blogosphere Alex.

Inman News is running a marvelous series this week on real estate blogging. If you're like a lot of real estate folks we work with and still debating about your personal blogging strategy, do yourself a favor and check out this series. Matt Carter is doing an excellent job characterizing the ins-n-outs and ups-n-downs of the blogging experience. The articles capture insights from the RE.net's most prolific writers including Teresa Boardman, Greg Swann, Jonathan Miller, and Kris Berg.

The creators of these blogs say they not only generate business but in many cases have raised their professional profiles and stature. As members of a blogging community, they have access to knowledge and connections their competitors lack.

...

"It has helped raise my profile, because I'm afforded respect for being willing to lay it on the line every day, whether people agree or disagree," Miller said. "I wouldn't say the blog is the only reason (for invitations to appear on TV), but it certainly hasn't hurt."

...

Although some real estate bloggers have figured the game out, there's always room for more.

"There are no secrets," Berg said. "The more the merrier. Being early has its advantages, but eventually everyone's going to be doing it. It's all been done. Any agent's goal in marketing themselves is to take what's been done and improve upon it. The minute someone takes what I've done and improves on it, I'm going to take what they do and improve on that."

Beyond the continued news coverage, the Inman Blog has itself recently picked up the pace by adding additional contributors. Further, in the throes of several real estate wikis that launched in the last few months, Inman's stands out in it's quality and depth.

In all, Inman News continues to distance itself from other players in the real estate technology market. Hats off to Brad Inman, Jessica Swesey and the whole team over there.

This week's real estate blog carnival is up at RealEstateZebra. We don't have any articles in this week, but there's a couple of things we'd like to highlight: first is a good data-geeking post by the guys at Zillow. The shrinking American family vs. the growing American home. Dig it. Also RealEstateZebra uses the fabulous Wordpress Template called Cutline. Remarkable how readable that style is.

We did get picked up at the Real Estate Investment carnival, which we believe emerged because there is just so much good real estate blog content out there. Hosted this week at unabashedly-named theMillionairesblog.com, our post on Flipping Homes in a Down Market made got a highlight. As we mentioned in the post, we're big fans of buying-fixing-selling. There are some great articles at theMillionairesblog on his fix and flip exploits.

I just completed a segment with Rhonda Schaffler on Bloomberg Television The Bloomberg Report this afternoon. Topic was the subprime mortgage market shakeout and it's implications on the housing market. Bottom line is this: The subprime crash hits the low income and low-end of the housing market. As of today, the crash has not impacted pricing in the broader housing market. But we see the ripple effect extending several years into the future as the first time home buys are squeezed out now don't become trade-up buyers in the future.

They stream the live TV but I haven't found links to the recorded shows. Let me know if you can find it. The segment broadcast from about 3:10 - 3:20 Pacific time today.

Peter Coy at Business Week's Hot Property is wondering whether Flipping is still a good business.


Here's the news Peter: Flipping, well executed, can indeed still be a great opportunity, even in this market. (When we say "flip" we'll generally mean fixer-uppers where the investor adds value by improving the property. This is different from pure speculative flipping where you just buy and hold for a few months because the market is roaring. I'm a huge fan of the former and don't have nearly the huevos required to participate in the latter.)

Consider these stats and some simple math that we measured this week for the Palo Alto real estate market:

• The median price per square foot is over $800.
• A diligent fix-and-flipper can knock down some walls, add square footage at maybe $300 per. In a few months you can literally double your investment with some room to cushion against market risk.
• Properties at the low end of the market in Palo Alto this week are around $1 million and about 45 years old. These are your fix-and-flip candidates depending of course on lots of variables, like neighborhood.
• We classify about 8% of the properties on the market in Palo Alto this week as Flips.

So this is a no-brainer right? Not so fast. In a market like Palo Alto, your primary challenge is that a zillion spec developers know these economics already and they're likely to beat you to the property. The best opportunities are gone in a flash, even in this market. (Maybe especially in this market.) In most markets of course the opportunity is less evident because prices are closer to construction costs.

We look at other factors too, for example, what percentage of a property values in a local market is tied to the lot size (which you're stuck with)? Look further south in Morgan Hill and you'll notice that price per square foot is just over $400. Still room to profit. However, is there room to take a bottom of the market property, improve it, and sell it as top-of-the-market prices?

You can get into a property in Morgan Hill for around $650k. The top quartile of homes for sale in Morgan Hill are $1.5 million. Notice though that the lot size in Morgan Hill is a compelling influence on the price. Flipping opportunities in Morgan Hill are significantly more scarce than Palo Alto.

How long can it last?

In fact the gaping difference between construction costs and sales prices is one of the most compelling arguments supporting the Housing Bubble. In many areas it is still incredibly profitable to build. Economic nature abhors an arbitrage gap. So build we shall, until the gap is no more. Either prices fall or construction costs rise. Or Both.

We're confident that the value of the fix and flip will always be an important part of the real estate cycle though profitability of the the flip may ebb and flow. What we know for sure is that there continue to be flip opportunities to the diligent, the clever, and the lucky.

We're quoted in BusinessWeek today discussing the potential ripple effects of the sub-prime mortgage meltdown into the broader housing market.

"The majority of the subprime business is with first-time buyers. So it may take several years to shake out," Simonsen says. "But when it comes
time to sell and trade up we may find that the low end has been squeezed out." In other words, a meltdown in the subprime market could affect the supply of future buyers for years to come.

Based on the evidence we're seeing currently, troubles in the subprime market have not percolated into the rest of housing market. And have not, generally speaking, impacted prices even at the low end. It would appear that current economic strength continues to isolate the housing market from problems in the low-end mortgage world. In fact, in lots of the areas we measure, we're seeing surprising strength of housing demand and price resilience. (More on this phenomenon soon.)

That's why it may take several years for the impact of this change to play out. I used the legs of a stool metaphor with Justin at BusinessWeek. Even though we're seeing one leg weakened, the housing market is currently steadied with a strong economy, still-low interest rates, great employment prospects, and a strong stock market. If in 18 months, we see an economic downturn, that's when we could get hit by the ugly stick.

Bonus subprime mortgage links: Dan Green covers the subprime crisis better than anyone out there. And CalculatedRisk diligently calculates the risks on every nuance of the meltdown.

We've been talking a lot about online real estate marketing tools and strategies in this blog lately. Tomato Jim's article of the other day really nails another angle that we discuss all the time with our clients - a powerful, integrated marketing strategy includes elements offline and online.

But what are the really successful offline strategies to drive traffic online? This one image drives the imagination wild with marketing possibilities. As a resident of suburbia, I have never, ever received a Realtor neighborhood handout as compelling as this one. It's value proposition is clear. It's call-to-action is strong. Discuss? Really?! I get to share my opinions? The realtor's name and picture are no where to be found, yet the benefit accrues all to you.

Picture the blog site set up for this property:

Some posts of narrative text, a few pages of photos, the video, another post by the listing agent describing her favorite feature of the place. The nuanced details. The market stats to help counter the prevailing wisdom. And the kicker: The conversation. Engaging the visitors who didn't have time to stop by the home. Chatting with those who did. Hearing feedback. Making friends. Neighbor-to-neighbor gossip. And oh by the way, this brilliant site brought to you by...

And they all find the site from the humble door knob flyer. Beautiful stuff.

I was interviewed by Michelle Quinn of the LA Times last week. The article, which ran the other day in the paper, is about cities and their free WiFi programs, not about the real estate market. I happen to be an authority on free WiFi as it is the communications infrastructure upon which our company is built.

My take on city-sponsored WiFi? Don't do it.

When the City of San Francisco plans to offer "free" Wifi, it ain't free. The city's tax payers fund my company's communications against their will. At the same time, the city dis-incents innovative business who do chose to fund my communications in exchange for my patronage. I spend a lot of money at cafes that offer me a fast, free internet connection.

In Mountain View: it's the Red Rock or Tapioca for me. The Google wifi works OK, but it's pretty weak inside buildings and you have to sign in to Google to use it, so it's only a last resort.

In the city I really dig the Arc Cafe, which happens to be right around the corner from the Trulia offices, in case you find yourself in the Mission. If Google were to foot the bill and blanket San Francisco with Wifi, my guess is that I'd try it a few times and then go looking for my standbys.

Finally, I appreciate Starbucks. Though not free, it's always fast, always reliable and you can find one in every strip mall in America. Rock on.

Ken Fisher, columnist at Forbes and money manager famously of Woodside California, is usually a great read. This week his column takes a curious turn. Maybe for a lack of column inches, Fisher gives us a grabber headline, but not much meat to back it up.

You can see right through the housing crash story by looking at the prices of housing stocks. The market knows what the economic worrywarts do not, which is that the housing sector is already making a comeback. In the last six months housing stocks are up 24%, well ahead of the overall market. If housing were destined to fall apart in 2007 these stocks wouldn't be so strong now.

Housing equities are up, therefore the market must know that homebuilders are doing fine. Fisher makes the common mistake of confusing one segment for the vast housing market as a whole.

Ultimately Fisher's point here may be a valid one, which I've discussed previously and I'll paraphrase here:

Housing is a follower in this economy being held up by progress elsewhere, not the leader dragging us down.

He says to buy Toll Brothers and Pulte. That argument may also be valid, but it doesn't point to anything like a Housing Boom.

Just for kicks, here's what the market looks like in Fisher's home town of Woodside, a San Francisco Peninsula town of a few thousand, mostly very wealthy folks. Though Woodside is now known for it's clubby venture capitalist scene, there are still a few hippy holdouts way up in the hills - and those hills can be a looong way up (that of course is the part of this town where prices get considerably cheaper). Bottom line Ken, there's not much of a boom happening in Woodside. Though, like most markets we're watching, nothing is falling through the floor yet. To whit:

The high-end of the Woodside market is where you can see the most pain. Note that these properties are rapidly approaching an average of one year on the market. Good news for Ken: Inventory of available properties in Woodside is not particularly high. And relative levels of demand for those homes in January perked up for the first time in over a year.

Boom indeed.

The Sunday New York Times today ran it's latest work on the Internet Real Estate renaissance today.

Actually a collection of several excellent articles, the one closest to our hearts and the hearts of most of our blog readers is the one by Rebbecca Fairley Raney titled, "Forget the Gimmicks, Buyers Want the Numbers"

Offering packages of detailed data is becoming a new method for brokers to build their clientele and a way for general Web sites to feed consumers’ interests.

...

When Barbara G. Cox trains real estate brokers, she says, she encourages them to go beyond listings and use the Web to position themselves as specialists. For example, a specialist in horse properties can use a site to demonstrate knowledge about stabling,
feeding and grooming.

“I’m telling them, in positioning, you have to distinguish yourself,” said Ms. Cox

We couldn't have written it better ourselves. Well, yes we could have. We would have led with all the great work that Altos' Realtor subscribers are doing providing real-time market research to their clients at a depth never before available. Our only challenge would have been which of our very cool clients to highlight for them. But that's just us. We're a bit biased.

Alas, the email requesting to interview Altos must have been trapped by our spam filter and the Times had to settle for Zillow and Trulia and Realtor.com.

[Warning: (more) Shameless Self Promotional Statements Follow]

So if you read that Times article and said to yourself, "Thats exactly what I've been thinking I need to build my real estate business." Then you, my friend, are reading the right blog. Why haven't you contacted us yet?

[End of shameless self promotion]

The rest of the Real Estate section today includes more great stuff for Realtors developing their Internet marketing strategies. From "Making Every Pixel Count":

“Good photos will grab people’s attention and help you sell a home,” said Jacky Teplitzky, an executive vice president of Prudential Douglas Elliman Real Estate in New York. “Bad pictures will absolutely give you trouble, because you won’t have any calls on it, and nobody will come to see it.”

Eighty percent of people across the country who bought a new home last year used the Internet while house hunting, and they rated photographs as the most useful tool in their search

...

But there is little point in having good photographs or beautifully written prose describing a home if you don’t have a Web site that is easy to find and easy to use — and this holds true whether you’re using a broker who will list your home on an agency Web site or you’re trying to sell your home yourself and are creating your own Web site or listing your home on a site like Craigslist.

Words to live by.

Some readers have asked lately about a recent jump in our Days on Market statistic. I thought it makes sense to explain it here. We recently did a methodology change where we increased the look-back window for watching properties.

By making this change, we more accurately reflect the actual total time on market, even for properties that have come on and off the market, especially including those that have been off the market for 30 days before being relisted.

What we found was that in some markets, we can find a significant chunk of properties that have really been on the market for long periods and these properties were previously under-reported in our stats. We've seen a notable decline in the number of properties relisted (with the sole intention of "refreshing" a listing) in Silicon Valley since last fall when the local MLS changed its rules. In San Jose California we've observed a drop from nearly 25% of homes on the market having been relisted down to 9%. That's real progress.

Those rules however do not impact a property that for example was on the market all last summer, was pulled off over the holidays and put back on the market in January. A soon-to-be-announced Altos partner calls these properties "stale fish." We've adjusted our nets to catch more stale fish. We're still dolphin-safe though.

This change effected our the trend charts in most communities a little bit. In some areas, though, you might notice a big jump in the DoM stat that week in January 2007. This change is the reason for the jump. Inset is a snapshot of the current Days on Market trend for San Jose Homes.

A hotshot Silicon Valley investor friend pointed out a remarkable firm to me the other day. You have got to check this out.

Many of our readers face a similar scenario. The only way to tap into the grand asset of California real estate is to sell the home or take a loan against it. The home equity loan option is always frustrating: it's my house, my equity! Why do I have to pay interest?! Why isn't there some kind of non-debt financing like there is in every other part of the business world?

Well now there is a new option available. And it looks fascinating.

Rex & Co. (Real estate Equity eXchange) will actually invest in you and your home. They hand you cash in exchange for up to 15% of your equity. This arrangement is not a loan, it's more akin to an investment in your company. They participate in the upside when property values go up and share in the loss should they go down.

Let me repeat: this is not a loan or a reverse mortgage. There is no interest, no debt, no monthly payments. It's an equity investment. When you sell, Rex is entitled to a share of the gain or loss.

REX & Co. is an innovative home finance company that has developed a way for homeowners to receive cash with no interest charges or monthly payments. Our patent-pending product is revolutionizing home finance. Now that homeowners can get cash without the burden of monthly payments, they can improve the quality of their lives in ways they may never have thought possible. For example, they can eliminate debt, buy a home with less, pay college expenses, extend and improve retirement, buy life or long-term care insurance, make charitable donations etc.


For most homeowners today the equity in their home is their largest single asset. That's great, but if they want to use it, they either have to sell their home or take out a loan. Those are not great choices if they need a place to live or don't want the burden of monthly payments and additional debt.

The Rex web site identifies a number of uses for their product. Mortgage elimination. More home for less payments. But in my opinion, the real beauty here is the hedge.

This is the first pure-play hedge that I've seen in the real estate world. You can, in essence, lock in your gains today. Rex let's you take real cash off the table. Like any hedge, you give up some speculative potential future upside in order to lock in gains today.

The hedge is particularly important in the housing bubble era we're in. Lots of folks are worried that their home value is going to fall significantly. But, they say, We're not going to sell the house and move to an apartment somewhere. So we'll just have to ride this wave back down.

The hedge will be a success in several scenarios:

• Property prices fall.
• Property prices increase a little bit, but you use the money to pay off expensive mortgage debt.
  
• You have some other investment opportunity available now, that will appreciate at a greater rate than real estate.

Again, like any hedge, the deal looks not so great in the longer term if property prices go through the roof. You've swapped that risk to Rex in exchange for cash today.

Also, fees and other terms play an important role in how profitable the deal ultimately is. Assuming the terms are not onerous, I think Rex is onto something big.

I'd like to hear from my mortgage blogger favs Xbroker and Dan Green to hear their thoughts. Guys? What's your take?

I'm an unapologetic marketeer. I embrace, investigate, and analyze the marketing all around me. I am constantly analyzing potential ROI of campaigns and techniques. (I'm also a grand bore at cocktail parties.) Does '24' sell Cisco routers more efficiently than an ad in NetworkWorld? How much life insurance does KFed have to move to make that commercial a success? Even though I don't personally dig the "Airborne: Developed by a School Teacher" pitch, my reaction is purely, "Good for them. They've sold a TON of that stuff."

I have to admit, though, that I never understood, maybe even scoffed at, the real estate marketing technique of the grocery cart advert. I couldn't imagine how slapping your picture under a pile of bananas and a clamoring 3-year-old leads to more real estate business.

Until now.

Yesterday we received a call from a Realtor to become a new client of ours. I get his name and website...hmmm...sounds familiar...where do I know that name? I type in the URL and BAM! Instant brand recognition. I realized the impression I had already formed about this person. I already had a relationship with him. I had (positive) conclusions about his abilities. From his grocery cart ad. In the cascade of preconceptions I also recognized the advantage of that brand when it comes time for me to buy or sell my home. Remarkable.

Every day, Altos Research helps Realtors build their brands, reach new customers, establish their relationships. The nature of the Altos Research service for Realtors means that all of our clients are active and creative marketers. Brand builders. The lesson of the day (a lesson that I need to learn over and over again) is that brand development emerges from all kinds of channels. Real estate is a business developed in the community. If your community is on-line, then you should be there for them. If your community goes to the Safeway, it turns out, you can find effective channels there too.

What does one get for a million bucks these days? That's the question on our mind as we went spelunking through the database today. We grabbed 5 more or less random markets in the Bay Area, San Diego, Los Angeles, Seattle, and Chicago that have a quartile of the market with a median price at $1 million this week. Here's what you can expect if you wanted to drop a mil on a home in those markets.

City	Zip	Quartile	Avg. Square Ft	Lot Size	Era Built	Median Price Per Square foot
Carlsbad	92009	2nd (mid-high in this zip)	3369	quarter acre	Mid-Nineties	$306
Huntington Beach	92649	3rd mid-low	2291	eighth acre	Early Seventies	$469
Santa Rosa	95404	2nd	2940	1+ acres	Late Nineties	$361
Chicago	60614	4th (bottom of this zip)	1662	postage stamp	Early Nineties	$606
Seattle	98198	1st (top of the market)	2706	quarter acre	Early Nineties	$258

Some fun things to note:

• The properties in these market chunks all average approximately 4 beds / 3 baths.
• The Chicago zip code 60614 is Lincoln Park, a part of town that has always been among the ritziest. So for around a million bucks, you could live in a very cool single family (detatched) home, in a killer location. Any part of this zip code that wasn't always tony went through massive gentrification in the late '80s and early '90s. I particularly like this place. That's where I'd go if I transplanted my Bay Area mortgage back to Chicago. $1million is the bottom of this zip code.
• For a million bucks in Huntington Beach, however, you'd get a place built in the '70s. This is the lowish side of the market too. So anything scraped and rebuilt in the last 15 years in Huntington is significantly more pricey that our sample for the day. 'Course it is February and that's gotta be worth a premium over Chicago today.
• The Des Moines section of Seattle on the other hand has a wide range of properties. But the nice long stretch on the water provides some great opportunities for the high-end of the market here on the south side of town.
• Santa Rosa is the most exurban of the zips in our sample today. Over 50 miles from San Francisco, the area provides some good opportunity to build on big lots at reasonable (for the Bay Area) prices. Which is great if you work in the wine business or don't mind a mega-commute.