Hey, how's the market in Fargo, N.D.?

Hey, how's the market in Fargo, N.D.?

More proof that all real estate is local.

Regular readers (both of them) know that I haven't sugar-coated what's happened to local real estate over the past few years. When the low end began retreating in mid 2006, you heard it here. When the retreat turned into a rout in late 2007, I was there, giving you a blow-by-blow description. And when the midrange and top end started taking direct hits from the stock market in late 2008, yes, there I was again, reporting from the front lines.

Always following the firing. Just call me the Martha Raddatz of real estate.

So it's not like I've been "What real estate bust? I don't see a real estate bust. Do you see a real estate bust?". I have occasionally—okay, incessantly—pointed out that, contrary to what the usual broad-brush reporting implies, the magnitude of real estate catastrophe happening in places like Las Vegas, Stockton and Detroit is not the scene I know and document in Palo Alto and most other local cities. In other words, the message has been: all real estate is local. But it's a message that faces an uphill fight, because it contradicts what's been drilled into the head of every "well-informed" citizen.

So you may not have noticed the tip-offs, slipped in during infrequent breaks in the headline barrage of catastrophic price declines and foreclosure epidemics sweeping the nation, suggesting that catastrophic price declines and foreclosure epidemics aren't necessarily sweeping the nation. Two examples:

According to a March 3rd article, "Most foreclosures pack into a few counties", in USA Today, "more than half the nation's foreclosures last year took place in 35 counties...Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures...In more than 650 counties—about a fifth of the nation—the number of foreclosure actions actually dropped since 2006 (italics mine)".
And while 2008 saw home price declines become the rule rather than the exception, even in the bubble-resistant heartland, as the recession followed the subprime crisis with its own full-on assault on real estate, the latest National Association of Realtors® metro area market report says that, believe it or not, 18 of the 153 metropolitan statistical areas covered saw home prices go up during the fourth quarter of 2008. Of course, they're all places you've likely never heard of or never been within five hundred miles of, like the Amarillo and Beaumont-Port Arthur metros in Texas, Bloomington-Normal in Illinois and Boise City-Nampa in Idaho. But a quick look through the list shows that most national metros lost far less in 2008 than California's 40%. Fargo, N.D., for example, lost just 1.1%, and Fargo's not an isolated instance. 33 metros lost less than 5% last year, while another 30 lost between 5.1 and 9.9%. And anecdotal evidence from the hinterlands outside the largest 150 or so metros—a market that apparently no one bothers to track—suggests the damage has been far less than the headlines imply.

Of course, we sophisticates here in Silicon Valley don't much care what's happening in Fargo real estate, and the fact that Fargo (average January temperature: 16 degrees) held its own in 2008 will be of little solace to the East Palo Alto, east San Jose and Stockton neighborhoods that really are reeling from catastrophic price declines and a foreclosure epidemic. But when the media paints a picture of unrelieved gloom, as is its wont no matter what the crisis, it's heartening to see so many real estate markets across the country get through last year with little or no crisis.

Not only does this reinforce the idea that all real estate is local. It's also a lesson in how the media reports a trend, particularly a scary trend, whether it's in Detroit or Pakistan.

Whether or not the media is missing the nuances to the Pakistan story in 2009 just as it missed the nuances to the Iraq story in late 2002, the nuances of domestic real estate are plain to those who care to look. For example, did you know that:

As late as the fourth quarter of 2007, four months into the subprime mortgage crisis and well over a year into what the media was calling a national housing downturn, 73 of the 150 metros then monitored by NAR showed rising median home prices, that 11 of those price rises were in double digits, and another 12 were 6% or more?
That for every Anaheim-Santa Ana metro that lost 30.8% from Q4 2007 to Q4 2008, there's a Buffalo-Niagara Falls metro that held steady at 0.8%? Not that news producers will be pulling resources from that bellwether marketplace, Victorville, to cover Buffalo's breathtakingly flat real estate market.

But it just so happens that, thanks to NAR's in-depth online metro market reports, available free to members, I can tell you all you want to know about the Buffalo-Niagara Falls market...and the Fargo, N.D. real estate market...and the Indianapolis real estate market...and the Omaha area real estate market...and lots of other real estate markets across this nation, in the heartland and on the coasts, in the Sun Belt and in the Rust Belt. I'll spare you the details, but let's find out what's really going on across the country by taking a quick look at one- and three-year price appreciation in hastily- if not exactly randomly-selected metros divided into these five categories:

Heartland: Fargo, Kansas City, Omaha, Peoria
Rustbelt: Indianapolis, Grand Rapids, Cleveland-Elyria-Mentor
Starbucks: Seattle-Tacoma-Bellevue, Portland-Vancouver-Beaverton, Boston-Cambridge-Quincy
Crisis Central: Orlando, Anaheim-Santa Ana, Los Angeles-Long Beach-Santa Ana, Riverside-San Bernardino-Ontario, Sacramento-Arden-Arcadia-Roseville
Local: San Francisco-Oakland-Fremont, San Jose-Sunnyvale-Santa Clara, Burlingame, Palo Alto, Sunnyvale, Santa Clara

For comparison, I'll include the U.S. trend for one- and three-year appreciation with each category. And for all but the last category, I'll give you the averages for the metros in each chart.

First, here's what's happening way out in the dear old heartland:

Hey, Fargo's done well compared to the national trend, and so has Peoria. In fact, every heartland metro here has except Kansas City. And none of them are foreclosure hotbeds. Obviously, clean living pays off.

Next, the Rust Belt:

Oy! Serious real estate damage, most of it apparently due to local and regional economic problems rather than the subprime crisis, although note that even here, Indianapolis, one of the most affordable metros in the country, has held up fairly well.

Now those pricey Starbucks metros:

Better appreciation (or less depreciation) than the U.S. average over the past three years, but their performance hasn't been as good over the past year, suggesting that the slump came late to these coastal metros.

Now, Crisis Central, metros notorious for their catastrophic price declines and foreclosure epidemics:

Lots of heartbreak and economic dislocation here, early and often. Lots of headlines, too.

And finally, closer to home. Here I've separated two nearby cities, Santa Clara and Sunnyvale, lumped in with the San Jose metro, and in addition included our own local Starbucks mini-category: the highly-sought after top-end city at the north end of the same county, Palo Alto and, a few miles further north in San Mateo County, the delightful (and pricy) city of Burlingame.

The chart tells us the San Francisco-Oakland and San Jose-Sunnyvale-Santa Clara metros have taken a real beating during the downturn, especially over the past year. But the chart doesn't tell us the whole truth. Because while it's beyond dispute that home prices in these two metros have declined, much of the horrendous decline shown on the chart comes from the low end, by far the strongest-selling price range lately and dominated by bank-owned homes, while sales in the midrange, where prices have been more resilient, limp along and top end sales have all but disappeared except as trace elements. As proof, see how much better the mostly midrange Santa Clara and Sunnyvale components of the San Jose metro market have performed compared to the metro as a whole. Note also that these two cities, plus Palo Alto and Burlingame, have fared better than the national average over the past three years, although 2008 wasn't kind to them. Interestingly, 2008 was equally not kind to all four cities charted, regardless of price range, indicating that our local midrange and top-end markets got through 2006 and 2007 fairly well and, in the case of Palo Alto, extremely well, but crumpled in late 2008 under the weight of the stock market crash. And there's a segment of the Palo Alto market—the most entry-level of homes in the most sought-after of neighborhoods—that's shown no discernible decline in value since late 2007.

So there it is: proof that all real estate is local, right down to the city and even neighborhood level. And yet another reason to buy in "The City Without an Official Motto on its Website", Fargo, N.D.