Which local cities and areas lead in annual price appreciation?

Everyone has their Top 10.  Top 10 Places to Live!  Top 10 Places to Retire!  Top 10 Mistakes In Website Design!  (I wonder how many of those I nailed.)

So naturally, JohnFyten.com (Top 10 Bay Area Real Estate Website!) has its own Top 10 list.  Make that three Top 10 lists.  And since no Top 10 list would be complete without its complementary Bottom 10 list, in two weeks we'll have three of those for your edification and amusement.

Ever wondered which local city or area is your best investment bet?  Where you'll get maximum bang for your buck in the next five, ten or fifteen years or next five, ten or fifteen minutes?  Sure you have!  Don't sit there looking innocent!  Even though I've told you time and again not to focus on alleged investment value.  Just find a house you like and can afford, in an area you like and can afford, and call it a job well done. 

Because no one can predict which cities and areas will hold their value best.  No one knows which drivers will pump up prices in which areas, then deflate prices when those drivers vanish into thin air.  Are trophy properties in Woodside and Portola Valley hot bets?  Some people thought so, during the dot-com era, and when that bubble burst those properties lost half their value—zillions of dollars—overnight.  Is California real estate a safe bet, no matter how far from real jobs or how deficient the neighborhood infrastructure?  Lots of people thought so, back when lenders found it convenient to put blinders on their underwriters, and some of those properties lost half their value or more—hundreds of thousands of dollars—almost overnight.  Notice the symmetry?  Ultra-top end or ultra-affordable, each took a shellacking, each from different (bogus) market drivers.

Anyway, that's my story and I'm sticking to it.  But as a service to those of you who always have at least two or three spreadsheets running, here's our local Top 10 leaders in annual price appreciation since 1994, 2000 and 2005.  First, since 1994, when local real estate was just starting to flatten out from the 1989 bust.

Honorable mention should go to these five cities or areas that have had double-digit annual price appreciation since 1994:  Los Altos SFR (10.5%); Cupertino SFR (10.4%); Sunnyvale with Cupertino schools (10.4%); and Campbell and San Carlos SFR, each with 10%.

Any surprises here?  Not really, except Redwood City east of El Camino, an area not known for its imposing neighborhoods or high-scoring schools.  Aside from that anomaly, which will also show up on a Bottom 10 list in two weeks, this is a Who's Who of brand-name school districts:  Palo Alto, Cupertino, Menlo Park City, Las Lomitas and, at the more affordable end, San Carlos, Sunnyvale and Campbell.  School districts that have historically, or at least since I've been in real estate, attracted solid, often affluent buyers more interested in quality of life than a screamin' deal.

Hmm.  So maybe good schools do prop up property values?  We'll see about that.

Next let's look at the Top 10 in annual price appreciation from 2000 to present.  2000 was, for all intents and purposes, the peak of the dot-com market—actually, very early 2001 was the real peak, but so few homes were sold over so short a period that it doesn't work well statistically.

Honorable mention to Los Altos CID (2.1%) and Campbell SFR (2%).

Any shockers?  Yes, Cupertino townhomes and condos, a class of housing not usually known for above-average appreciation.  But certainly Cupertino itself has seen above-average appreciation, as the city has developed a strong brand over the past decade.  And while this list is still strongly biased toward Santa Clara County, now we've picked up another San Mateo County market and it's a bit of a surprise:  San Mateo between 101 and El Camino, an area that ranges from affordable to really affordable, and with schools that can be solid but not top-scoring, and with its share of distressed sellers since 2008. 

Of course, the biggest shock is the whopping decrease in annual price appreciation over the period.  What's up?  Two busts, one in 2001, the other from 2006 (or late 2008, depending on the price range).  Just like the stock market.  And just like the stock market, two big slumps in one decade made it tough for the local real estate market to turn in big gains.

Finally, the period from 2005 to present. 

Atherton SFR and Palo Alto CID were the only two other local markets to stay in positive territory, at .2% annually, since 2005.

Four things strike me about this Top 10 list.  First, it's an all-Santa Clara County show.  Second, not only does Palo Alto hold down two of the top three spots, but top-end Palo Alto, a very pricey market, leads the list—which gives you a good idea of where, and in what price range, the serious activity has been lately. Third, two, count 'em, two condo and townhouse markets are in the Top 10, at a time when most of that ilk still see price declines.  And fourth, every market here peaked, not in 2005 when most California real estate peaked, but in early 2008, giving them another three years of price appreciation to cushion the eventual blow.

Any lessons from all this?  Possibly:

• yes, the areas with highly-regarded schools did take a hit when dot-com went dot-bust, since those were the areas that benefited most from the boom, but even so, it does look like that old bromide, "good schools support home prices" is true
• buy the most expensive area you can afford—virtually none of these areas are cheap
• buy in Santa Clara County
• buy a single-family home
• don't buy in a first-time buyer market, because first-timers are the first to jump ship and the last to climb back on board, which leads to long periods of flat or declining prices
• don't buy in "undiscovered neighborhoods"; tried and true is best

Of course, reality may well keep you from following any and all of this advice.  Don't care about schools?  Then think twice before paying a premium for them, because the neighborhoods that feed to them are red hot now.  Want Palo Alto but can only go up to $750k?  You can waste your time waiting for prices or interest rates to plummet, or you can buy a nice townhouse.  Work in the City?  Then some parts of Santa Clara County may not work.  First-time buyer in a first-time buyer price range?  Then buy in a first-time buyer neighborhood.  They're so under-valued right now that it's hard to see you going wrong.

Finally, which of the three charts—1994, 2000 or 2005 to present—is the most realistic, the most predictive of long-term trends?  This is a great time to say that past performance doesn't guarantee future results.  With that qualification out of the way, I think that the longer the perspective, the more accurate the picture.  Short-term results can be skewed by anomalies.  Long-term trends show which cities and neighborhoods are most likely to have staying power.

In two weeks:  the Bottom 10 lists.

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