Here, the mortgage crisis is bottom-heavy.

In an ongoing, mostly lonely and admittedly futile attempt to restore sanity to the real estate discussion, I’ve often pointed out that scary headlines don’t begin to explain what’s really happening here on the mid-Peninsula and in the South Bay.

Once more into the breach!

“The plunge in the price of homes gets worse…Prices are still dropping everywhere and at record rates…’I would say what’s happening is a freefall’…the San Francisco metropolitan area…is the sixth worst-performing region in the country…prices fell 22.9 percent in May compared to a year ago…’I don’t want to undermine the fact that…San Francisco is not doing well; prices are in sharp decline'” etc. etc. says or quotes the July 30 San Francisco Chronicle, right on page one.

More reasons for first-time buyers to sit on the fence. More affirmation for clueless doomsayers. More paranoia for consumers. More Chronicles sold—maybe. More sfgate Web site traffic—maybe.

Okay, cue the charts. Folks, here’s how it is. And since I’ve dealt solely with single-family homes up ’til now, this time let’s look at a few representative condo-and-townhouse (“Common Interest Development”) sub-markets in this area.

First, we’ll look at two CID sub-markets in San Jose, since San Jose condos are often the most affordable homes in our area (although their affordability varies greatly depending on age and neighborhood). For this part of the article I’ll divide San Jose CID into two groups. One is San Jose CID with 1 or 1.5 baths, since these are almost always the older, smaller condos that make up the most affordable of the most affordable. Then, to contrast and compare CID performance by price range within the same city, I’ve extracted San Jose CID with 2 or more baths, since these are typically newer, larger, more luxurious and more expensive condos and townhouses, located in different neighborhoods and bought by a more affluent buyer. Still further up the price range, and nearing the nexus of Silicon Valley wealth, I’ve selected Mountain View CID with any number of baths. Finally, atop the pinnacle of local price, prestige and pecking order are the CID of the upper-middle class communities of Palo Alto, Menlo Park and Los Altos.

Then let’s do what the Chronicle does and compare average sales price for these sub-markets between May 2007 and May 2008. And just to make sure we’re comparing apples to apples, let’s adjust average sales price for each sub-market to the same square footage for both periods, so that we eliminate the often sizeable variation in average price caused by variations in average home size.


There it is, in all its gory. Prices up 1.2 percent—essentially flat—at the top end. Better than a kick in the head, as grandpa used to say, and certainly not the 22.9 percent decline the Chronicle blares. Further down the price range in Mountain View, average sales price dipped 5.4 percent between May 2007 and May 2008, and I hope you’ve noticed that 5.4 percent is also not 22.9 percent. Next step down and, okay, now there’s visible damage: average sales price fell 16.1 percent for better San Jose CID May over May. One more step down and watch that step: low-end San Jose CID has lost about 32 percent.

So there’s the story the Chronicle reported, plus one helpful nuance: instead of screaming we’re all gonna die, my presentation of the facts shows that the downward slope of this real estate cycle has varied in its impact, depending on price range, city and neighborhood. Now, of course, the Chronicle is a Bay Area paper, and the Chron can’t be expected to always say “things are better in Palo Alto than these regional statistics indicate”. But the story’s reporter, Carolyn Said, is the Chron’s real estate reporter, and you’d think that a major newspaper’s real estate reporter would 1) know that the impact has varied depending on city and price range and, 2) feel an obligation to tell her readers this, at least briefly. Maybe she did, and it didn’t make it past the editor. If the Chron still has editors, after those massive staff cuts.
Who will uphold Truth and Virtue once the newspapers are gone?

Now I think it’ll be helpful to see how prices in these four sub-markets have fared in a broader and more recent context, Q4 2007 to Q2 2008.


Somehow three of those trend lines don’t look like “freefall” to me, but maybe my monitor needs adjusting. Sales prices in two of the four sub-markets have declined moderately since Q4 2007, down 5.8 percent for Mountain View CID and 7.6 percent for San Jose CID with 2 or more baths. This news won’t be as welcome to homeowners as price increases of 5.8 and 7.6 percent, but it’s a long way from we’re all gonna die. And, all hysteria aside, it’s normal for home prices to go down during the downward slope of a real estate cycle (see 2001, and the early 1990s, and…). Downward slopes of real estate cycles are normal. Some of the damage we’re seeing is normal—not pleasant, but normal—and some of it isn’t, and we’ll get to that in a moment.

But while we’re here, you’ll notice that at the top end, the average sales price of Palo Alto, Menlo Park and Los Altos CID rose 4.4 percent over the past three quarters, another indication that the well-off live in their own economy and are sophisticated enough to not let the media’s hyped-up dumbed-down coverage affect whether they get out of bed in the morning.

You’ll also notice that the most affordable of the affordable, low-end San Jose CID, really is in price freefall, with average sales price dropping a thumping 19 percent since Q4 2007. So let’s see: is there a trend here? Yes, yes, I think I spot one: the top end continues to do well; the midrange or, in this case the affordable end of the midrange (since condos and townhouses are almost always the affordable housing stock of any community) has seen significant but weatherable declines; and the ultra-low end sinks like a stone.

Just to highlight how price- and neighborhood-sensitive the real estate downturn is, even among CID in the same affordable city, I’ve divided San Jose’s CIDs once again, this time into units currently listed at $225,000 or less—the most affordable of the most affordable of the most affordable—and units priced at $700,000 or above, the top end of San Jose’s top end. I’ve kept the Mountain View and Palo Alto/Los Altos/Menlo Park sub-markets, then compared all four as to their percentage of “short sales” (what might be called “pre-foreclosures”), bank-owned properties (called “REOs”) and lastly, other, non-short sales and non-REOs comprising each sub-market’s inventory on July 30, 2008.

The results are nothing less than astounding.


Yes, when it comes to San Jose CID listed at $225,000 or less, a buyer these days has basically two choices: short sale (which is no choice, since lenders rarely let short sales sell) and bank-owned. Of the 194 San Jose condos on the market listed at $225,000 or less, only three count ’em three are just plain old sellers gamely trying to sell in what must be one of the most buyer-biased markets in the history of real estate since Hammurabi codified private property rights. These folks deserve a medal and a brass band, and then maybe a straightjacket.

But look at the top end of the San Jose CID market: virtually no (1 in 45) short sales, and no REOs. Remember, same city—but different neighborhoods and a different price range and, therefore, different buyers. Short sales and REOs have hit less-expensive north, east and south San Jose disproportionately, while central San Jose CID, newer and in a revitalized downtown, and west San Jose CID, often larger and in sought-after school districts, remain relatively unscathed. Mountain View, you’ll note, is a bit of both worlds, reflecting the fact that Mountain View isn’t all Googlers. Palo Alto, Los Altos and Menlo Park comprise another world entirely.

Finally, let’s look at sales.


May 2008 sales were down from the previous May across the board although, as with price, the top end’s difference is statistically negligible, down just 2.9 percent. The rest show declines of 23 to 31 percent. The MLS credits San Jose CID ≤ 1.5 baths with 60 sales this May, but since 14 of these are short sales that are still pending and may never close, I’ve subtracted them and used the remaining 46 as a more realistic sales number.

Sounds pretty dire—and it is, at least for agents who were depending on those missing commission checks—but a broader overview shows a more encouraging picture.


Sales in all four sub-markets have trended upward over the past three quarters.

And speaking of silver linings, I’m encouraged that short sales, as a percentage of listings, has finally plateaued at the ultra-low end, San Jose CID listed for $225,000 or less, the price range most affected by the subprime crisis.


It’s still ugly, no doubt about it, but at least San Jose’s most affordable CID seem to be nearing the point one of San Jose’s most affordable single-family markets, central San Jose, reached this June, with the onslaught of short sales showing the earliest sign of relenting. Today’s short sale is tomorrow’s REO and, as such, a leading indicator of a market in distress, and a market in distress keeps editors busy writing scary headlines. As soon as short sales plateau, REOs will start to outnumber short sales, banks will smoothly and efficiently sell the homes they own—well, they’ll sell their homes—and we’ll be near or at the market’s bottom.

Then the reporters and editors will be back covering the stuff they like a little more and understand a little more and feel a little more comfortable dramatizing, and the real estate industry will be back on the back page and be grateful. This celebrity stuff has its downside.

copyright © John Fyten 2008

Leave a Reply