Altos Research Real Estate Insights

When we first stuck our toe into the blog waters back in October of 2005, the Real Estate blogging community was a bit sparse. We humbly tried to add our voice and help raise a community. It wasn't much later, however, that we discovered some New Yorkers at a blog called Sellsius that outclassed us on every dimension in the blogosphere. Prolific and creative and witty and opinionated. Since then, we've met Rudy and Joe and prodded numerous times, "What the hell is Sellsius actually going to do?" Well today the world (finally) knows.

SellsiusRealEstate.com launches today as the Enhanced Real Estate Classifieds site.

Joe and Rudy have been building this project for a long time. In that time a TON of competition has emerged. But Sellsius has one thing going for them that the others don't: These guys know real estate. In this hyper-competitive space, that could be the x-factor that pays off. Here's why:

Current generic classifieds sites include Craigslist, Oodle, Vast, among many others. Zillow and Trulia have their property listings too of course. This group represents well over $100 million in venture capital and a truly impressive passle of entrepreneurs. (For evidence of the latter, see Vast founder Naval Ravikant's magnificent VentureHacks blog.) Of that bunch, only Trulia is really usable for real estate searching. Craigslist is is optimal for apartments and other random projects, but it's second rate for real estate purchases.

Conventional Silicon Valley wisdom says build the most massive database first and the people and their needs will follow. For a house hunt, though, that approach may not solve my problem. When I search for homes for sale in say, Sunnyvale, California, I do NOT want to see 34,000 properties with the "best match" being in San Jose. Ugh.

So despite all the rivers of money flowing into these firms, there is clearly opportunity for Sellsius.

The "Enhanced" part of Sellsius' classifieds is that they have developed not generically for the world nor just for homes for sale, but for the real estate ecosphere. Sellsius brings understanding of all the participants, from architects, to appraisers, to mold removal that you can't find in any of the existing sites. You might be able to find a mold guy on Craigslist, but who knows what you might come up with. The "Niche Search" feature on Sellsius has real promise.

The biggest hurdle for Sellsius will be filling the database. They've come to market with a compelling framework, but it's still a bit empty. The conventional wisdom became convention for a reason. If users try it and find nothing there, they may not come back. Sellsius charges a fee so the hurdle is even higher than other sites. The firm is riding on the boundless energy and massive personal network of Joe and Rudy, if anyone has the reach to build their advertisers to a critical mass, these guys do. (Remember Craigslist was empty once too...) But that's the key, guys. Maybe you can team with a Vast and put a decent front-end on their big list of properties.

How ever you do it, I'm looking forward to seeing the project grow and morph and solve some real problems for people.

Our friends at SFNewsletter have published a blog dedicated to their Tour De San Francisco. This is a series of articles, one on each nano-market in the city. Lots of pictures, a highlighted neighborhood map, and commentary on the homes currently on the market. Just outstanding. I'd encourage our realtor friends in all cities to undertake this kind of approach. Alex at SFNewsletter is really building the definitive San Francisco neighborhood tour with this site.

This week's post is about little west-side Merced Manor. Here's a taste of some of the images.

Merced Manor San Francisco

Homes in Merced Manor San Francisco

And as a bonus for our readers, here's the latest pricing charts for that part of the city.

Home prices in San Francisco 94132 as of April 2007. Click for the San Francisco market reports.

The best part of taking a real time approach to market analytics is when the market hits an inflection point.

The AltosResearch.com home page uses this chart, which illustrates one of the catalyst insights for us to form our company. When we first saw our analytics platform illustrating these insight, we realized we had to bring the technology to the world. (Give, give, give. We're all about altruism.)

2005 Price Trends for San Jose.

And, in case you missed it, the San Francisco Bay Area housing market has reached a new inflection point. The first news media reports started emerging last week that Bay Area home prices started climbing again in the first quarter of 2007.

Of course, if you were an Altos Research client, you would have seen the inflection four months ago. Check it:

Bay Area home prices started showing a turnaround in December.

We've been discussing this market change on the blog a bit. We'll continue to do so. The better news is we'll also be rolling out some new products soon that will help our subscribers identify these regional trends.

If you're interested in previewing some regional insights, make sure you drop me a line and let me know which part of the county you're in. If you leave a Meebo message when we're off line, make sure you include your email address.

A couple of months ago we pointed out a firm called REX & Co who are offering a unique approach for refinancing your home.

For anyone considering this kind of equity investment financing, here's a marvelous analysis posted in the comments to that post.

The bottom line is that the fees and deal terms are significantly high enough to make the option profitable as a hedge against declining home values. Akin to selling a call option on your home, you get the cash immediately and if the property value declines, you get to keep the cash (minus fees.) Of course, if just want access to cash but aren't hedging against a downturn, take a HELOC. The interest payments will be significantly lower than the fees and cut that you give to Rex.

After reading about REX here, I was curious about the terms so I contacted them and asked for more details. REX has two similar products: one is for purchasing a new home, and the other is for taking equity out of a home you already own. The home must be your primary residence. I mostly asked about the second product. Here's an abbreviated version of what I learned:

REX will pay you up to 13% of your property's current appraised value in exchange for you signing a contract that gives them their money back when you sell the property plus a 3.5% interest in the change in value (up or down) for every 1% that they paid you. There is also a fee of 18% (!!!) of REX's money due when you sell the property. The up-front costs include you paying for an appraisal, and I think some other small fees, probably comparable to a normal refi, but I didn't get specific numbers. Apparently you have to use third-party appraiser selected by REX.

Here's an example: say your home is worth $1 million today and you want to use REX to take out 10% ($100,000) of the equity. At some later date you sell the house for $1.5 million. The appreciation since the REX transaction is $500,000. At closing, REX will receive 35% (10% x 3.5) of the appreciation, $175,000 plus their original $100,000, plus the 18% fee (18% x $100,000 = $18,000) for a total of $293,000.

If the property went down in value, and you were only able to sell for $900,000, I believe REX would receive their original $100,000 minus 35% of the depreciation ($1 million - $900,00 = $100,000 depreciation, 35% of which is $35,000), plus the 18% fee, for a total of $83,000.

If you improve your property after the REX transaction, you can ask for an appraisal when you sell the property to determine the value of the improvements, and REX will not receive a percentage of the appraised value added by those improvements. You can buy out the contract by getting a current appraisal and paying REX the same amount as they would receive if you were to sell the property for the appraised price.
The 18% fee is going to be much worse for you than just paying interest on a home equity loan unless you hold the property for at least several years after the transaction, and that is without even considering the large percentage of any increase in value that you are signing over to REX.

In the example transaction above, you end up paying REX $193,000 in addition to paying back them back the money they paid you. If you took out an interest-only home equity loan of $100,000 at 8% it would take over 24 years for the interest payments to add up to $193,000. Of course, you would have to be making those interest payments every year. And if the loan had an adjustable rate, you'd be subject to interest rate risk. If you are retired and don't have sufficient cash flow to make the interest payments, perhaps REX is an interesting alternative to a reverse mortgage. Also, if you think your home will stay flat or decrease in value, and you are going to own it for many more years, maybe this is an interesting product.

To accommodate our growing firm, this week Altos Research made the move into brand spankin' new (to us) offices! Our new address is 280 Hope Street, Mountain View.

The building is in a great location, right downtown, just a block off Castro Street, and home to a number of cool startups including Mint, Drumtable, and Mobibucks.

We looked at a few similar spaces designed for housing startups like ours- all we need are fast internet connections, coupla desks and chairs, short-term subleases, server racks, esspresso machine, and a vibrant atmosphere of success. Here's a round-up of a couple we saw before we settled here:

• LookSmart's Building in San Francisco. A killer South of Market location at 2nd and Brannan, just a walk from the ballpark. Swanky lofty feel, exposed brick walls. Our friends at My-Currency and Mashery, among a bunch of others, call this building home. Exactly the place we'd go if we still lived in the City. Alas, we've largely abandoned the hip urban lifestyle for BBQ's, SUV's, and kid-seats. How the hell did that happen?
• Amidzad Partners, the guys who own the building on University in Palo Alto that famously housed Google, PayPal, and others in their early years, have opened a huge space in Sunnyvale to keep the karma flowing. The Plug and Play Tech Center is totally decked out with a fully stocked cafeteria, a big data center, even business support infrastructure. Too bad it's in a desolate section of Sunnyvale whose dominant feature is the Lowe's Home Center. Ironically, the place feels almost over-invested to me, a flashback to the dot-com bubble data centers with huge EMC storage arrays and Sun servers stacked up for an expansion that never came. At any rate, they're super nice and the place is positively buzzing with activity with 86(!) tech startups. Even though it didn't quite work for us, it's a marvelous symbol of Silicon Valley.

When a CEO buys real estate, future company performance is inversely related to the CEO's liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption.

I particularly like the "conspicuous consumption" reference. No preconceptions here!

The Merc shows why the rule of thumb is a silly predictor of stock price performance as it inspects our local Silicon Valley heroes, where the breaks down a bit. Steve Jobs' purchase of his spread in Woodside coincided with Apple's stock price rocketship of the past few years. And John Thompson's (of Symantec) purchase of his place, also in Woodside, happened to coincide with his company's mulit-billion-dollar purchase of rival software firm Veritas.

It turns out that since 1991, federal law says the CEO compensation must be tied to stock price performance. (aside: did you know this? All the hubub about overpaid CEOs is actually a direct result of regulation aimed at CEO pay. Doh! I have an idea: How about we let companies decide how and how much to comp their CEOs?)

And that's the key. As a company's stock price rises, all sorts of consequences are triggered. One consequence is that company, with it's richly valued stock, does things that cause the price to drop, like buying rivals. Another consequence is that the CEO has a good year and buys a home. Which do you think is the cause of a stock price drop?

The guys at SpeculativeBubble.com did a great plot of Shillers' US housing price chart on the Roller Coaster ride. Dig it!