A brief history of local real estate, part 1: sales price.
In my monthly See how local real estate is doing now you'll find seven charts, each going back to the tail end of the late great dot-com boom. This is one of those charts:
It's good data, as one reader observed admiringly, but until now I've never used it for anything more ambitious than telling you what the market seems to be up to this month. Now let's see if these seven charts, starting this week with sales price, can reveal interesting trends in local real estate since early 2000.
Bear in mind that, while the real estate market here has admittedly been volatile since April 2000 (or to be more precise, since late 1999), the relatively small number of homes in each of the five sub-markets shown exaggerates that volatility. So don't get freaked out by a one-month blip or dip. Instead, focus on trends over a number of months.
The first thing you've probably noticed is that the top-end trend line looks likes a condemned rollercoaster ride. Again, it's important to remember that statistics based on a small group of homes can deceive if interpreted too literally. This is especially true of the top end, where no two homes are alike and no two months are alike, and where sales have been thin over much of this period and so many have never made it into the MLS.
So the top-end's price performance isn't as hair-raising as it looks. But almost. Why? Well, when's the last time you saw a twenty-four-year-old dot-com millionaire carrying suitcases filled with cash. Except in a museum. Yes, the dot-com boom injected huge amounts of money into the top end, while the dot-bust removed same. This chart tells us top-end prices took a long time to recover, and this chart is optimistic.
Does any of this sound familiar? Large injections of funny money into a real estate sub-market, followed by its inevitable withdrawal and that sub-market's inevitable collapse. And look how long it took the sub-market to recover, if ever. Boy, now there's a life lesson any confirmed real estate skeptic can run with. Yes, boys, put your money in the stock market instead, because the stock market never collapses!
I guess.
Next look at the opposite end of the local market, low-end SFR. You've all heard how funny money, here in the form of risky loans to cheats and swindlers—or maybe it was cheats and swindlers making risky loans to the credulous and overly optimistic—pumped up (your choice) all real estate or, if your fever isn't that high, just low-end real estate, to unsupportable levels.
And certainly the low end has taken a beating since late 2007. Its peaks and valleys aren't as lurid as the top end's, but a decline in value of over 50 percent in roughly fourteen months is lurid enough. And virtually identical to the top end's decline and fall earlier this decade, both in degree and duration.
So what lessons can we draw from this uncanny parallel? None, would be my guess. Yes, it's mildly interesting and maybe even wildly exciting to discover that sub-markets at both extremes of the price range shed half their value, give or take, in only a year, give or take. And, yes, both illustrate what funny money can do for and to a real estate sub-market. But both instances, while cautionary tales, are more aberrations than life lessons. Neither offers much direction to today's real estate buyers, unless they're up to their eyeballs in inflated tech stock or stated-income option ARMS—and there's not much of either going on these days.
Let's look at the remaining three sub-markets, starting with condos. Condos have been at the bottom of the sales price totem pole for most of the past ten years, but notice that
Boy, now there's another life lesson for any real estate skeptic who wants evidence that subprime altered the fundamentals of the real estate market. Obviously, subprime pumped up the low-end SFR market, beyond its traditional valuations, to unsupportable levels.
Except that it's not that simple, for at least two reasons. First, subprime was a big part of the condo market too. The distinction I make in the chart between "condo" (a home, held in the condominium form of ownership, with another home above or below it) and "townhouse" (also condominium ownership, but with no home above or below) is essentially meaningless except that here "condo" is another name for "the affordable end of the condominium ownership market". Cheap condos are as much a part of the entry-level, first-time buyer market as cheap single-family, and if you've looked at cheap condos lately you know that they too have seen plenty of distress. For example, in May 2008 there were 194 San Jose condos on the market listed at $225,000 or less. Only three were regular sales. The remaining 191 were bank-owned or short sales. That's not a distressed market, that's a massacre, one that makes Custer look like he really did okay at Little Big Horn.
The other reason the question is inconveniently complicated is that when low-end SFR prices passed condo prices in early 2001, subprime was a very small part of either market. Check the previous sale date of bank-owned homes, as I do prior to showing them to clients, and you'll find that almost all were sold (with 100 percent financing) between 2004 and 2006.
So what does this shifting of position between condos and low-end SFR over the past decade tell us? Beats me, but I'll bet "pumped up" isn't it. My guess is that these shifts have far more to do with the demographics of the buyers who favor SFR versus the buyers who favor affordable condos. The segment that buys single-family in affordable neighborhoods, in my experience mainly blue-collar workers with families, wasn't hammered nearly as hard by the dot-bust and its lingering fallout in the early part of this decade as the young professional singles and couples who often buy affordable condos, because the former benefited from and depended far less on the dot-boom than the latter.
Which brings us to two markets that have moved with remarkable similarity over the past ten years, townhomes and midrange SFR. That similarity is no coincidence because, again in my experience, the same type of buyer buys both, with the main differences between the two groups age and income.
It's also two groups of buyers that, by and large, don't have to rely on gimmicks like "exploding ARMs" and over-hyped stock valuations to buy a home. And therein lies their strength.
Not that either is immune to loss. Midrange SFR lost over 20 percent from late 2000, the peak of the dot-com boom, to late 2001, the depths of the dot-bust post-9/11 housing depression, as did townhomes. During the current crash, townhomes have lost about 25 percent since early 2007, midrange SFR about 20 percent. Note, of course, that not only were these losses far less than those of the other sub-markets, but that the period over which they occurred was much more gradual. Note also that these loses were far less than those of the major stock market indices.
So what life lesson can we take away from this? Different homebuyers = different markets = different outcomes. Which means that if disaster hits one set of homeowners, it doesn't inevitably hit all homeowners.
In two weeks, A brief history of local real estate, part 2: absorption.