Silicon Valley real estate

We're have an internal game here at Altos - Guess the San Jose Market Bottom. It's quite clear that you can't predict the market bottom by looking at the price chart alone, but what else should you look at? Inventory provides a clue. Check this out:

The seasonal cycles are pretty clear, no? Usually there's a summer plateau in the number of homes for sale, then properties drop off through the winter.

The question is, Is that the first inkling of a summer plateau this year?

If inventory levels flatten out this sumer then maybe, just maybe, the worst of the carnage would be over. That inventory could work its way out over the next couple years. What do you think? Is the recession going to make this chart jump even higher this fall?

Here's where you can keep an eye on the live San Jose real estate data.

Here's a funny Meebo-IM chat I had with a home buyer yesterday. This guy is looking for a negotiating angle with home sellers. Smart!

[15:37] meeboguest: hi

[15:37] mikesimonsen: hi

[15:38] meeboguest: will prices in Milpitas Area continue to fall?

[15:38] mikesimonsen:

[15:39] meeboguest: seriously....how do I negotiate with seller to factor another 10% reduction in price?

[15:40] mikesimonsen: well, you can bring our Milpitas report with you and use it to illustrate not only prices, but demand levels and days on market trends

[15:41] mikesimonsen: you can say, "Look at this, you've got easily another few months before this thing moves and I'm willing to buy now!"

[15:41] mikesimonsen: In the reports it even breaks up the data by price range in that zip code

[15:42] mikesimonsen: so you can say, "The market is even worse for sellers of homes like this. So you're lucky you found me!"

[15:42] meeboguest: thanks...I am even luckier if that report is free

[15:43] mikesimonsen: for $19 you're getting a bargain!

[15:43] mikesimonsen: I'll expect a thank-you bottle of wine when you get your price

15:43] meeboguest: how do i get the report?

[15:44] mikesimonsen: go to this page, register, and buy the basic report: http://www.altosresearh.com/research/CA/MILPITAS

[15:44] meeboguest: thanx

[15:45] mikesimonsen: you bet! good luck!

What do you think the chances are that the Seller's Agent is prepared with market data to counter-negotiate? My guess is that they'll get blindsided by this aggressive buyer's approach. Maybe, just maybe, we can motivate the seller's agent to prepare better in the future...

Some posts just write themselves.

Can't. Help. It. Must. Write. More.

Ugly? You betcha. Do these tell the whole story? Not a chance. In Silicon Valley, San Jose is the dominant market, of course. San Jose is a diverse community, with lots of sub-prime and other crazy loans in the past few years. But also some really great neighborhoods with prosperous, fully employed folks. Lots of big, but not-risky loans too. Here's how the market in a desirable part of town, Willow Glen, is holding up. I've done the price chart in Quartiles so you can see the trends at each price point in the market.

Link: San Jose Housing Market.

Client, friend, and indefatigable blogger Kevin Boer has a really slick map mashup of our AltosCharts housing price charts for the Bay Area, using our price quartile data. Kevin uses Zeesource and the result is prettier than our own map mashup (though ours covers all our markets and has a zoom-in-to-the-zip-codes feature.)

Our AltosCharts service is up for the Most Innovative Technology award at the Inman Connect conference this week. It's partners like Kevin that really illustrate the power of using market analytics to inform. We're proud to count him as a client. I'm not sure how the winners are selected for these awards, but maybe fans of Kevin's work will stuff the ballot box for us.

And while I'm patting myself on the back, here are a couple of other Altos clients that use AltosCharts really well to bring value to their readers, and boost their own marketing return:

The Harper Team in the East Bay

Pat Kapowich in Sunnyvale

SeattleHome.com

(BTW - I don't mean to exclude any other clients and your sites. There are too many to mention. Feel free to add your site to the comments of this blog if you want to show off your AltosCharts work. I'll work up a post highlighting other sites soon.)

Drew Meyers from Zillow called up last week and interviewed me about last week's Carnival of Real Estate. If for some reason you don't get enough of my pontificating in written form in this blog, you can hear Drew and I chatter on about Altos Research, the contributors and articles in last week's Carnival of Real Estate, blogging in general, and the state of the real estate market.

We've been talking for a while about how the market strength in the Bay Area's housing market has been focused on the economic centers, San Francisco and down the Peninsula, with the market notably cooling the farther you reach into the exurbs.

Thanks to the folks at FortiusOne, who launched GeoCommons at O'Reilly's Where2.0 conference last week, we finally got around to illustrating the heat map of this phenomenon.

In the following snapshot we've created a heatmap of price reductions. Specifically this is our percent-price-reduction stat--for a given zip code, the percent of properties that have had their asking prices reduced. We have some color tweaking to do still, but you can see the picture pretty clearly. The brighter red, the higher the percentage (and the weaker the market).

If we zoom into the San Francisco, San Mateo County Peninsula and the north end of Santa Clara County, you can see the strength in Mountain View, up through Palo Alto, and in the San Mateo/Burlingame areas. Also, demand levels in the City have stayed strong.

You can get details of the markets in Burlingame, San Mateo, Palo Alto, Mountain View etc. on our free research page. From that page, you can go to our map view and look at price trends for each zip code. (Heatmap not yet included.)

We got a cool email from a subscriber today.

Rajul Vora put together a Google Maps MyMaps mashup of our AltosCharts for the markets where he's shopping for his home.

Our own map mashup is here with charts available for all our markets around the country, and info on our free AltosCharts is here. Rajul took advantage of Google's new MyMaps feature, crammed lots of AltosCharts on to his specific zip codes, and doesn't have to host any software. Rock on.

The Merc has a story today citing last month's cute ASU/NYU study (aka data-dumpster-diving) of CEO home purchases which concludes that when a public company CEO buys a mega mansion, the firm's stock tanks. Correlation? Understandable. Causation? Ummm, maybe not so much. From the study:

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?

This may come as a surprise to many of our readers, but this spring is shaping up to be a pretty hot market in the Bay Area (especially the Peninsula, with the more desirable spots in the East Bay and South Bay trailing, not far behind). We have plenty of anecdotal evidence coming in from our Realtor clients and friends: multiple offers, three-day sales cycles, etc.

So the question is, where in the stats can one turn to measure this transition? Obviously we see the price charts start to march upward with greater demand. But that's not enough, because prices are influenced by lots of exogenous factors and may lag the actual demand a bit. So we decided to explore a different measurement: Days on Market. In a cool market, many properties sit around for a long time. We watched Days on Market climb upward all last year. Now however, if lot of homes are selling quickly with multiple offers, we should see that fact immediately in the Days on Market indicator.

Specifically, when watching a transition from cool to hot, we should see median DoM drop first while the mean DoM stays high. (Remember that median implies half the homes on the market are on for less that this number. And mean is the average of all properties, so a handful of homes that have been for sale for, say, 12 months keeps the average high.)

For example, our client Bart Marchioni recently sold a place in Willow Glen San Jose in 7 days when the average home has been on the market for over 100 days! Good, fresh properties come available and get sold right away, but the stale ones are still sitting around. That's your transition.

So we dove into the Bay Area housing market data to see where the hottest markets are emerging. We looked for zip codes with greater than 15 single family homes for sale, then we looked for those with the greatest percentage difference between the median days on market and the average DoM. What we found confirms what we're hearing from clients are the hottest markets. Here are the 10 hottest Bay Area housing markets ranked by percent difference in median and mean days on market:

City (click any city name for the free research page)	Zip	Median Price	Median Time on Market (approx)*	Mean Time on Market (approx)*
San Jose	95130	$810,000	newly listed	8 weeks
San Carlos	94070	$1,098,000	less than 1 month	12 weeks
San Leandro	94579	$598,888	less than 3 weeks	8 weeks
Los Altos	94024	$1,649,000	less than 1 month	11 weeks
San Francisco	94110	$849,000	less than 3 weeks	7 weeks
Palo Alto	94301	$2,599,000	less than 5 weeks	13 weeks
San Mateo	94402	$1,388,000	less than 6 weeks	15 weeks
Oakland	94618	$1,124,000	less than 1 month	9 weeks
Sunnyvale	94086	$758,900	less than 3 weeks	7 weeks
San Ramon	94582	$1,098,000	less than 5 weeks	11 weeks

* Days on Market rounded to nearest week. See also this post on recent DoM methodology changes we did.

So in West San Jose (Cupertino and Saratoga schools!) half the properties on the market are newly listed. But the average property has been on the market for two months. Sales rates have stayed high so this is not driven by a buildup of new inventory.

Note the theme we've been talking about for a while here: ALL of these markets are close in. These top ten zip codes are from a sample of several hundred in 12 Bay Area counties. Four of these are Peninsula towns, two in the South Bay and three in the East Bay. If the trend holds, and the number of buyers continues to grow, expect the market strength to bleed further out from the Bay Area's geographic heart. If it does, you'll be the first to know.

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.

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.

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.

Since today we're on the topic of powerful real estate marketings tools I thought I'd point out Alain Pinel realtor Kevin Boer's excellent post using video to show a property on his blog.

Kevin's video is hosted by WellcomeMat.com (Yes, that two LLs). A slick YouTube optimized for real estate. Incidentally Phil from WellcomeMat has a great blog post up today about The Fear that some face in the adoption of new technology whether that's real time market research or real estate video.

Kevin, by the way, knows no fear.

Here's the video of that cool property in Palo Alto.

I agree, btw, on the bamboo - have it in our bathroom. Also the de riguer barcelona chair, natch.

Here's a cool trend: We've been noticing a consistent local pricing up-tick across the Bay Area as we've entered 2007.

I grabbed these charts for a client the other day and was surprised how similar they all look. Though the phenomenon is primarily a function of seasonal inventory changes, at least it is evidence that a big cyclical downturn (read: bubble burst) hasn't overwhelmed the market.

Down from the peak, to be sure, but positive signs nonetheless.

If you're paying close attention, you'll notice the San Jose chart in the right hand column of this blog has not yet turned the corner and is still aiming down. If you're paying really close attention, you'll notice the weekly price number under the San Jose chart has actually been flat-and-climbing in the last few weeks. (That stat feature uses our AltosStats API, pretty cool huh?) What gives with the discrepency? The chart is illustrating a 90-day rolling average. The number is this week's sample. So while we're still below the rolling average, the flattening trends are taking shape in San Jose too.