Those huge price gains of the past ten years: do they still exist?
Anyone who reads or watches the news these days may well wonder if any part of the staggering jump in local home prices we saw during the late great real estate boom has survived. The answer, as always with real estate, is "it depends".
Let's look at the difference in average sales price of a single-family home between Q4 1999 and the most recent closed quarter, Q3 2008, in local cities or neighborhoods that give us a range representative of the 99 percent of the market that falls between ultra-affordable and upper-midrange. For the moment we'll leave out the ultra-top end, towns such as Los Altos Hills and Woodside, because it's so small a part of the market, and because it's so difficult to track statistically over periods as short as one quarter.
First, average home prices in representative markets in Santa Clara County.
As you can see, every market still shows substantial gains. Now let's see what those home price gains translate to in percentage increases.
It's no surprise that the lower price ranges have kept less of their ten-year gains, given the beating the subprime crisis has administered to ultra-affordable neighborhoods over the past year. But note that the total home price gain since 1999 also declines as you cross the million-dollar threshold, also no surprise given the whacking the dot-com bust gave Cupertino and other upper-midrange markets back in the day. What is surprising—but not really—is how resilient entry-level Palo Alto has been. This resiliency comes from two related factors: entry-level Palo Alto's relative affordability vis-à-vis the benefits it offers—"bang for the buck", at least by local price standards—and the "flight to quality" characteristic I've noted in the recent market in other articles. Put "perceived value" with "proven performance" and good things happen to home sellers, even in this uncertain market.
Next, let's look at representative markets in San Mateo County. Here I've also included the condos and townhouses ("CID") of southern San Mateo County.
Again, these markets show still-substantial gains, except in one case, at the lowest end of the price range: East Palo Alto and the adjacent Menlo Park neighborhood of Belle Haven. But a look at the percentage increases reveals some surprises.
The story in San Mateo County differs significantly, even extraordinarily, from that of San Clara County. So maybe there really is something to the saying that "all real estate is local"? You bet.
Let's look at those differences in a little more detail.
Home prices in both the ultra-affordable markets I've used in this article, San Mateo County's East Palo Alto/Belle Haven and Santa Clara County's downtown San Jose, started out virtually the same in late 1999: at about $300,000 on average. Ten years later, EPA/Belle Haven prices have fallen back virtually to 1999 levels, while downtown San Jose prices are still higher by almost $100,000. Why this amazing difference? Both markets have plenty of short sales and foreclosures these days, but HUD data I'll use more fully in an upcoming article suggests that both the incidence of foreclosures and, not coincidentally, the percentage of subprime loans issued from 2004 through 2006 is far higher in East Palo Alto than in the downtown San Jose area.
The other notable difference between the two counties is that San Mateo County home price gains over the past ten years exceed 70 percent when you cross the million-dollar threshold. Part of this great long-term performance comes from entry-level Menlo Park's excellent track record over the past few years, for much the same reasons that entry-level Palo Alto has held up. But part is also due to the tenacity of prices in one of the most popular "move-up" markets on the mid-peninsula, San Mateo west of El Camino, where quality of life and highly-regarded schools continue to attract buyers from other parts of the Bay Area.
Finally, let's look at price changes over the past ten years in a few mid-peninsula "macro" markets, agglomerations of many similar markets, often throughout both counties, including condos ("CID") and the ultra-top end.
Still extremely healthy appreciation, except at the ultra-top end which, oddly enough, shows about as much cumulative price movement—nil—between late 1999 and Q3 2008 as ultra-affordable East Palo Alto. The percentage price change chart confirms this.
The resemblance between the performance of the ultra-affordable East Palo Alto/Belle Haven market we looked at a few paragraphs ago and that of such wealthy exurbia enclaves as Los Altos Hills and Woodside is remarkable—until you remember that the ultra-top end is still recovering from something quite similar to the sudden injection of subprime lending into the ultra-low end from 2004 to 2006 and then its abrupt withdrawal: the dot-com boom of 1999 and 2000 and the bust immediately following. So doesn't this suggest that local ultra-affordable neighborhoods are also doomed to years of flat prices?
Certainly the parallel is striking. Home prices in the most affordable of affordable neighborhoods have dropped by half over the past year, as did prices of the most un-affordable homes in un-affordable neighborhoods—the "trophy properties" of the newly ultra-rich—during the dot-com bust. But I think the parallel ends here. Even in this affluent area, only a handful of people have the mega-bucks it takes to buy acreage in Central Woodside. Exponentially more people—including, most important, the investors and bargain hunters who lead markets out of slumps—can afford a $300,000 home. And that's what they're doing these days, as sales boom at the low end of the market.
All this underscores the long-term, buy-and-hold investment nature of real estate. Even people who bought as little as four years ago still have healthy equity, as long as they didn't buy at the low end of the price range. How long their equity resists the current uncertainty in the stock market, which since September has spilled over into the midrange and top-end real estate markets, remains to be seen.
Stay tuned to this station.