A report from Zillow tells us what we probably already know: over the past ten years, Peninsula and South Bay real estate has bounced back (and how!) better from the downturn than any other metro nationally.
But what Zillow doesn’t tell us–because Zillow isn’t an experienced local real estate agent–is that different sub-markets within our local markets have recovered vastly differently over those ten years. That’s good intel for a local home buyer. And the laggards teach us just as much as the leaders. Because therein lies a cautionary tale.
To illustrate, a brief history lesson on the variability of local real estate. Then we’ll break for recess.
What was real estate like here, ten years ago? In late 2007 I had a client looking for a single-family home in Santa Clara. A search of Santa Clara listings on the MLS showed me something I’d never seen before, “short sales”, and something I’d rarely seen before, bank-owned homes.
Pretty soon the trickle of “distressed sellers” was a torrent, and by the end of 2008 short sales and bank-owned were plentiful at the affordable end of the price range–yes, Santa Clara was affordable back then. Here’s another memory I have of that period: doing an MLS search of San Jose condos priced at the bottom end of the range, and finding that of the more than 100 results, all but two were short sales or bank-owned.
That’s not a real estate downturn, that’s Custer at Little Big Horn.
But calamity didn’t strike equally in Silicon Valley real estate back in late 2008 and 2009. Distressed sellers were rare in places like Menlo Park west of 101, Palo Alto, Los Altos and Cupertino, but even these market stalwarts had slipped into the doldrums.
But by January 2010 they’d snapped back with a vengeance. I remember one Cupertino buyer marveling at the competition she was facing that spring and asking “what’s it like in a hot market?” I said, “This is a hot market”.
But even as midrange communities roared back, prices in affordable places such as Campbell were still declining as late as early 2011. And the Central Valley, for years an oasis of affordability for investors and homebuyers priced out of the Bay Area? Prices had tanked 50 or 60 percent, and the media was calling Stockton “the foreclosure capital of the U.S.”.
By 2013 all the markets I typically work in had recovered fully and were ultra-competitive. But go just a little further, to, say, the Evergreen area of San Jose, and you still found short sales. Travel even further, to the Central Coast, and it was 2008 version 5.0, with short sales and bank-owned homes plentiful.
My point: a rising tide does raise all boats, but not equally. Not nationally, not locally. And an ebbing tide leaves some boats wrecked on the rocks. Because markets aren’t as consistent as tides, and what drives them up or down doesn’t intuitively make sense. “If home prices in X are going up, then home prices in Y have to go up too!”
It’s not that simple. Because one size does not fit all markets.
I’m reminded of this as I look at the five national markets that have rebounded most strongly over the past ten years. Aside from San Jose and San Francisco, they include two other California metros with a strong tech element and sun-drenched weather: Los Angeles and San Diego. And although Seattle isn’t known for its sunny days, you probably won’t be surprised that it too made the top-five list. These post-apocalypse appreciation leaders have enduring charms and bigly momentum.
I’m also reminded of the variability among real estate markets when I look at the metros that have recovered the least value since the downturn. In fact, they’re still selling for significantly less than peak sales prices. Okay, they’re just discounted merchandise on the sale table, right? No harm, no foul.
What I find more worrisome is that all–Indianapolis, St. Louis, Cleveland, Pittsburgh and Cincinnati–are touted these days as affordable refuges for millennials priced out of blue chip housing markets.
All five uber-laggards got fifteen minutes of fame competing for Amazon’s HQ 2. Two made the short list. None have or had a snowball’s chance, no matter what they promise. Momentum isn’t on their side. Their challenge isn’t just that they don’t have 50,000 techies in place to fill those jobs. Their challenge is that they’d have a hard time coaxing 50,000 techies to come. Heck, I doubt that there are 50,000 techies who could find these cities on a map.
But when you buy in a top-five metro like San Jose, you buy a strong brand, the right kind of momentum and a talent magnet. Sure, the metro has had its ups and downs, and like any large market with a range of prices, not all its neighborhoods have held their value equally as well, or bounced back equally as strongly. But the momentum in the San Jose metro over the past 10, 20, even 70 years is largely positive.
Moral: You pay a premium for premium goods. And you get a discount for risking a metro with a long history of negative momentum. That’s fair, but no bargain.
© John Fyten 2018