Ever wondered what the next real estate downturn will look like? Ever wondered why they say it’s unwise to try to time a market? Read on.
I’m going to let you in on a little secret: late last year, home prices in many local markets went down. But don’t tell anyone. Besides, prices went up in a few markets, but we’ll ignore that for now.
Why they went down doesn’t concern us here, which is good because no one really knows why. My guess is election jitters, historically an influence on markets, but that’s just a guess. Anyone who’s absolutely positively sure they know why prices went down late last year is walking on thin ice, a topic we’ll return to shortly.
The charts below, extrapolated from recently updated price trends posted on the authoritative website johnfyten.com, show percent home price movements from the second half of 2016 to the first half of 2017, first, for Santa Clara County:
CID stands for Common Interest Development, legalese for condos and townhomes, while SFR stands for Single-family Residence, aka “real houses”.
Anything noteworthy here? For the most part, the more a market gave back in late 2016, the more it gained back in early 2017. Which means that the status is still mostly quo. At the end of the day, there haven’t been any big winners or losers, despite the big price movements.
And those movements were undeniably big. When you’re talking about markets with an average transaction price of $1M or more–often much more–price swings of 5 to 15 percent make for eye-opening volatility. Anyone who bought late last year picked up at least a few points of equity this January without even trying, and often more than a few points.
Also note that those two perennial buyer favorites, Cupertino SFR and “entry-level” Palo Alto SFR (basically south Palo Alto) actually gained a few points in value late last year, although they had less-than-average appreciation this spring.
Now, southern San Mateo County:
Once you leave the Zone of Gracious Living, which includes Menlo Park and Atherton, southern San Mateo County SFR prices had a muted downside late last year, compared to Santa Clara County, but an equally noisy upside this spring.
All very interesting, especially if we take last year’s brief decline as a portent of what the next longer-term downturn will look like. The last two downturns differed from each other. The dot-bust hammered the top end, where so much dot-com money went, hit the midrange fairly hard but not catastrophically and for a relatively short period of time, and left the entry level largely unscathed. The subprime crisis of 2007-2009 hammered the entry level, where virtually all the “nonprime” lending went, hit the midrange fairly hard but not catastrophically and for a relatively short period of time (detect a trend here?) and ditto the top end, although its recovery has been more nuanced.
Based on late 2016’s downturn, the eventual end of this boom may look something like this:
- Santa Clara County may see greater volatility than southern San Mateo County
- the ultra-top end–neighborhoods like North Palo Alto, cities like Atherton–may be hit the earliest and hardest, due less to unsustainable price increases and more to the thinness of the market for $6.5M teardowns, although lower prices may put them back on the radar of foreign investors priced out over the past few years, creating a cushion against drastic depreciation
- entry-level SFR neighborhoods may be the most resilient, or at least the least volatile, as long as lending standards remain high
- perennial favorites like Cupertino and South Palo Alto, which offer an optimal blend of relative affordability and quality of life, may go down last and come back first–much as they did during the last downturn
- unlike previous downturns, the CID market may prove less volatile than the SFR market, although this would be a remarkable shift, since CID buyers have historically been the most sensitive to real or perceived headwinds to the real estate market
- and sellers as a group may not feel any particular urgency to sell, particularly those whose large down payments have left their mortgage payments relatively manageable
Can you take any of this to the bank? No. I’m just thinking out loud here. But that won’t keep the market-timers from mentally filing away this intel.
Folks, the last nineteen years have shown that the best way to beat the Silicon Valley real estate market is to join it. As I mentioned, late last year turned out to be a good, even great, time to buy a home in Silicon Valley. Yet–and this is no coincidence–it was also a challenging time to buy, against a backdrop of uncertainty and negative buzz, and with sellers still not desperate and still not willing to give buyers screaming deals. A significant number of buyers were certain the boom was over, and another significant group just lost interest–momentarily, as it turned out–in buying a home.
Then, in early January of this year, enough buyers poured back into the market to pump up prices, in many cases higher than they’d been in early 2016 before the late-year slowdown. It happened suddenly-bam!–without warning, and without giving the market-timers a grace period to ease back into the market on their own terms. Suddenly, a balanced market willing to give buyers a few unaccustomed breaks swung back hard to an extreme seller’s market.
Just like January 2012, when this boom began.
When it comes to the direction local real estate is taking, I stopped trusting my gut a long time ago–in January 2002, to be exact, when a market that everyone “knew” would take years to recover from the dot-bust and 9/11 suddenly roared back.
It’s a lesson many of us have to learn, often the hard way.
copyright © John Fyten 2017