A tale of two markets, part 2.
A tale of two markets: which is the future? contrasts the real estate market of Los Altos with that of East Palo Alto and Menlo Park (Belle Haven) east of 101 as of mid 2006. The article is, as always, ripped from the pages of real life, based on my experience with two listings I had back then. To summarize, the market east of 101 was tanking badly nearly two years ago, while Los Altos boomed.
It's time to revisit those two markets, so proximate in location yet so distant in everything else that matters in real estate. But this time, I'll contrast the market east of 101 with its even more proximate neighbor, Palo Alto.
Despite bubblehead wishful thinking, Palo Alto remains virtually untouched by the foreclosure crisis. East Palo Alto and Menlo Park east of 101, on the other hand, are ground zero. Of the ninety-five active single-family listings east of 101 as of December 24, 2008 a substantial, no, make that a whopping, no, make that a mind-blowing 78 percent are either bank-owned or short sales almost certain to be bank-owned sooner rather than later. HUD data suggest the Central Valley has been hit even harder by foreclosure, but 78 percent is hard enough. What we have east of 101 is a mess of epic proportions—but as we'll see, it's a mess that's working itself out, brutally and inefficiently, inevitable whenever corporate paper-shufflers sell real estate by committee but, for all that, effectively.
About the only thing I can liken this process to is a demoralized, badly-run post office branch having a going-out-of-business sale set in either Dante's Inferno or Elliot's "The Waste Land", your pick. And that's probably unfair to the U.S. Postal Service. But it's getting the job done, and then some. Real estate east of 101 tanks no more. No sir, sales boom these days.
Here we see just how enthusiastically, even remorselessly the banks and their crack(?) agents are disposing of distressed property. I've calculated two measurements of market activity, number of sales per day and absorption rate, for East Palo Alto and Menlo Park single-family homes east of 101 during the most recent period, November 1, 2008 to present. As you can see, the boys are banging out more than one sale a day, a rate that leaves previous booms in the dust. Absorption (homes sold/homes available) has also improved, although it lags the boom years because even the current frenzied rate of sales can't make much of a dent in that market's huge inventory.
What's the significance of this full-throttle activity, and why should you care even if you live west of 101?
It's a truism that real estate recovers from the bottom up. Like all truisms, this one is subject to debate. Yes, credit will almost certainly loosen as soon as banks get distressed property off their books—or as soon as enough investors forget about all those bonds backed by badly-underwritten mortgages—but credit, despite what you read and hear, hasn't been the problem here. Anyone with good credit and 20 percent down can get a loan, and if it's a conforming loan, rates are rock bottom and my clients tell me the banks are still asking, "Is that all you want? Really? Take more. No, I insist." Fixed-rate jumbos are harder to get and more expensive, although still reasonably-priced by historical standards, so the relative handful of buyers still active in the midrange and top end have shifted to adjustable-rate loans.
No, credit isn't the problem here in affluent Silicon Valley. The problem is twofold. First, the unraveling stock market has depleted the down payment of many would-be buyers of midrange and top-end homes. Second, the stock market and unrelentingly dire headlines have depleted would-be buyers' equally-important confidence.
Here's Exhibit A:
Palo Alto has been, until recently, an island of stability in a sea of real estate distress. As late as this summer, city-wide numbers that weren't all that impressive masked brisk activity on, and even substantial price increases in, the homes 95 percent of buyers want in the "entry-level" neighborhoods (where $1.2M is "entry-level") Palo Alto buyers prefer. The chart, however, shows that lately Palo Alto single-family sales have slowed to a crawl. The chart doesn't reveal that sales above $2M are moribund ("moribund adj. Approaching death"; Webster's II New Riverside Dictionary, 1984 edition).
You'll note that late 2008 wasn't the slowest sales period of any year since 2000; late 2007, when the subprime crisis broke, was slower yet, as even affluent Palo Alto buyers waited for the other shoe to drop. But as anyone who tried to buy in Palo Alto in early 2008 could tell you, they didn't wait long. Also note that sales per day were highest during two previous market downturns, dot-bust post-9/11 late 2001, and we're-marching-to-Armageddon late 2002 as the Bush Administration tried to scare Saddam and succeeded only in scaring everyone else.
So much for "It's simple, it's just numbers".
But the chart is misleading (see "It's simple, it's just numbers") because, believe it or not, it paints an overly rosy picture of the late-2008 Palo Alto market. The next chart gives us a more accurate portrait.
When we include absorption, the picture gets uglier still. Recall that absorption is the ratio of homes sold over homes on the market. Because absorption takes inventory, not just sales, into account, it gives us a far more accurate representation of the market. Since 2000, late-year absorption has never been this low. Even late-2001 absorption was higher—a substantial, whopping, mind-blowing 57 percent higher—than late 2008 absorption, and late 2001 isn't a benchmark you want to be anywhere near, let alone trail badly.
So where does all this lead us?
Beats the heck out of me. Sorry for the letdown, but if I knew—if anyone knew, as opposed to assuring you they knew—I'd be charging you for this, and even the people who are charging don't know. I will hazard a guess that the paltry .21 absorption rate in the chart above accounts for the recent 10 percent decline in Palo Alto SFR values. And from what I've seen, Palo Alto condos may have lost as much as 20 percent.
Is all doom and gloom? Palo Alto is still a swell place, whether you bought there in 2008 or 1968. And you bought there, unlike the people who keep waiting for exactly the right millisecond to buy.
It's also a remarkable buying opportunity for the kind of fearless, committed buyer willing to buy in late 2001. Market uncertainty is the buyer's best friend, which is why I put my IRA contribution in the stock market in October instead of next year (and we'll see how that plays out). It's never easy to buy in Palo Alto, but now is about as easy as it gets. Which means not many—least of all the tough-talking market timers—will avail themselves of the opportunity.
But at the ultra-affordable end of the market, as exemplified by East Palo Alto and Menlo Park east of 101, smart buyers—savvy investors, incredulous first-time buyers—are helping themselves to prices that haven't been this low since 1999. They know, as so many don't, that "buyer's market" isn't a misnomer. "Buyer's market" means "time to buy".
And if anyone knows what Elliot was trying to say in "Waste Land", please notify me immediately.