How has the credit crunch affected local home prices?
The answer to this question, as to most real estate questions, is an unequivocal "it depends".
One quick and truthful answer is, "like a Mack truck". That's the hard-selling answer you get from the mass media. Bloody details at 6.
Another answer, equally quick and truthful, is, "more of the same, only more so." This answer gives you a little more context, which is a lot more context than you get from the mass media.
The final answer, "what credit crunch?", while it sounds flip and self-serving, is just as quick and truthful as the first two answers.
As you may have guessed by now, there isn't just one quick and truthful answer to the question, or to most real estate questions or, for that matter, to any complex question, which never stops people from trying. The effects of the credit crunch are more varied than the headlines and the 6:00 News suggest. I'm hopeful that by the end of this article you may agree, or at least be open to the idea.
To prove the point, let's look at five representative mid-Peninsula real estate sub-markets to see what, if any, effect the implosion of the credit markets has had on the average sales price of a single-family home.
The local sub-markets we'll examine range from entry-level to mega-buck. At the bottom are the neighborhoods east of 101: East Palo Alto, adjacent east Menlo Park (Belle Haven) and, further to the north, the older neighborhoods of San Mateo east of 101 called Shoreview and Parkside. I've also included inexpensive Redwood City neighborhoods west of 101 but east of El Camino.
Next up the price ladder are the starter neighborhoods of San Carlos, Belmont and San Mateo west of 101 but east of El Camino. Then come the midrange neighborhoods of these same cities, west of El Camino, but excluding four relatively pricey San Mateo neighborhoods—Baywood Knolls, Aragon, Baywood and San Mateo Park—that lately have marched to their own hyperactive drummer.
Then, to get more exposure to what must be one of the hottest markets in the country, the area surrounding Stanford University, I've included two more sub-markets. One, which I call "midpenmid", consists of the "entry-level" neighborhoods of Menlo Park, Palo Alto and Mountain View, entry-level only in comparison to the even more expensive "move-up" neighborhoods of these same cities, which is the final sub-market I use here: top-end neighborhoods of Menlo Park and Palo Alto, plus the entire city of Los Altos. I call this sub-market "midpenuppermid".
Now that we have the introductions out of the way, let's meet these sub-markets up close and personal. If your neighborhood isn't included, don't go around feeling left out. Just extrapolate by price range and you'll be on reasonably firm ground—local real estate is demarcated far more by price than geography.
Sales price is on everyone's mind, so let's see what effect the credit crunch has had in these sub-markets. The chart below compares two time periods: Before Crunch, January through August 2007; and After Crunch, sales from September 2007 through late March 2008 that had closed (which means After Crunch basically measures sales prices from September 2007 through February 2008).
As you can see, home prices appear to have been hit hard in the two lower ranges, east of 101 and 101 to El Camino, while holding steady in the next two and actually rising at the top.
Woo-hoo! I can almost hear the market-timers say. I knew it! If buyers can't get loans, then prices must go down! Real estate is collapsing from the bottom up! I'll wait until the smoke clears and everything looks okey-dokey. Then I'll buy!
Hold up, young Warren Buffet.
Something's going on, alright, but it may not be what you think. Prices—and every other market indicator—almost always go down during the six months measured by After Crunch. November, December and January are traditionally the three slowest months in real estate. October and February can be decent-to-good months, depending on the strength of the market in general, but only September is typically strong.
To prove this, check out the equivalent time periods in 2006-2007.
These two prior periods look about the same as Before Crunch and After Crunch, right? Yes and no. Back then prices also declined at the bottom, stayed flat in the middle and rose slightly at the top. But notice how much more gently prices dropped at the bottom end in 2006-2007 than they did Before Crunch-After Crunch.
Next, the equivalent time periods of 2005-2006.
Notice that this time the low and high ends held steady while the middle dipped. So what does all this number-crunching mean?
Remember, I said that one answer to "how much has the credit crunch affected local home prices" could easily be "more of the same, only more so". Early 2006 was the last time the cheapest homes in this area enjoyed strong demand. This peak was followed by a slow decline that had only minimal effect on sales prices—until late 2007 when, not coincidentally, sub-prime and low-doc packed up in the middle of the night and slipped out of town without paying their bills. Since then, low-end prices have dropped like a rock.
This chart compares average sales prices between the first quarters of 2007 and 2008, and it shows the lowest price range losing about 16 percent in value year over year. But as the collapse reaches critical mass in these neighborhoods, I think the actual decline as this is written, in mid-April 2008, is much, much greater, at least in the mid-20 percent range and quite possibly more. I know of one bank-owned property in East Palo Alto, sold two years ago for $625k, that was just listed at $289k because the bank's appraiser thinks that's all it's worth. He's wrong—the give-away price attracted seven offers—but my guess is that the closed sales price will show a decline east of 101 of about 35 to 40 percent to date. Most of that recently.
Woo-hoo! Now I can definitely hear the market timers get excited. If you're an investor, prices east of 101 haven't been this friendly in ten years. With homes in the most affordable neighborhoods starting to sell at pre-boom prices while rents continue to rise (and as former homeowners look for homes to rent), for the first time in years landlords face the tantalizing prospect of positive cash flow. Too bad it took a social catastrophe to get them this happy dénouement.
But as we move up in price, the effect of the credit crunch progressively lessens. The 101-to-El Camino neighborhoods charted above are far from on fire these days, as the disappearance of way-too-easy credit keeps less-affluent buyers out of the game and the headlines sideline many qualified young-professional first-time buyers. Prices in Q1 2008 were down about 8 percent compared to Q1 2007 but even here, much depends on location, pricing and presentation—stuff that also mattered during the boom, despite what you may have heard, just not nearly as much as now. In this sub-market the really nice homes sell and briskly, sometimes with multiple offers, and often at only a modest discount to what they would have fetched a year ago. But the flip side is that most other houses in that sub-market just sit until a price reduction or two, or until discouraged sellers yank them off the market unsold. We're back to buyer "cherry picking", a classic symptom of a "down" market: the best homes sell, often immediately, while everything else piles up in a logjam.
Next up the price ladder, real estate west of El Camino is much steadier, largely because high-risk loans were never a big part of this market, so far fewer chickens are coming home to roost. In fact, prices in this sub-market have held over the past year, as they have since 2005, although the pace has slowed.
One distinct west-of-El Camino market I don't include here, top-end San Mateo and Burlingame, has shrugged off the credit crunch—"thanks, I needed that"—and for buyers in this price range, typically from $1.5M to $2.2M, tighter lending standards have so far been only a minor roadblock. Life is good for these buyers, very good, with a strong local economy providing relative job security and high compensation. An active pace and crowded open houses testify to this.
Finally, let's move down the Peninsula a few miles, to the ultra-expensive area surrounding Stanford, where real estate also booms. In fact, after a quick breather late in 2005, mid-Peninsula real estate continues to present symptoms of buyer exuberance reminiscent of the dot-com housing market. A Comparative Market Analysis I did this week shows recent Palo Alto Midtown sales bid up an average 40 percent above list price! (Yet a few days later friends who live in Midtown offered their condolences on the "slumping" real estate market, such is the power of the press!)
Prices in so-called entry-level neighborhoods near Stanford such as Midtown are up about 5 percent year over year. But even here, the market has slowed significantly as inventory accumulates in less-regarded areas priced at the low end of this sub-market. The pace further up the scale, in move-up neighborhoods, has also slowed but, here too, prices are up, by about 6 percent.
It's an amazing snapshot of a remarkable market. Prices cave at the bottom yet creep up inexorably (and virtually unnoticed) at the top. Almost every market starts to slow, but frequently with little or no effect on prices.
What's going on? Partly it's something I've mentioned often, something the vast majority of Peninsula residents, amateur and professional market watchers and even agents don't comprehend: the remarkable insularity of price ranges in this area. Not only are the neighborhoods different, but so are the players: buyers, sellers, real estate agents, real estate brokerages, loan agents, mortgage brokerages, loan products, lenders, escrow officers—you name it. These players rarely cross, professionally or socially, the invisible line delineating each price range. So if life is different on one side of the line, then real estate will be different too.
Lately life keeps getting better and better on the elite side of the line. Which brings me to my second point: "prices are sticky going down". Not always, of course. Prices east of 101 are slipping like they were lubricated with water-proof heavy-duty wheel bearing grease. But as you move up the price ladder, loan defaults, layoffs and the other financial crises that turn ordinary sellers into motivated sellers progressively diminish to the point where they cease to be market movers. No price range is immune to downturns, but people who have money always get through them better than people who don't.
"Like a Mack truck." "More of the same, only more so." "What credit crisis?" As the charts and anecdotes show, all three answers are correct. It depends on which neighborhood you ask about.
And for you economists out there, amateur and otherwise, who still wonder if real estate is as local as they say, you have your answer.