Property values (still) point up?

July 10, 2006

"Property values (still) point up"?

(c) copyright View from Silicon Valley, 2006. All rights reserved.

All at once last week we got stories on local real estate which, even while claiming continued strength in the headlines, put forth "interesting" rationalizations for weakness buried down in their bodies.

We feel compelled to point a few of the more egregious examples:

1) Front page headline read:
"Property values point up" followed by a sub-headline:
"ASSESSED VALUES INDICATE VALLEY ECONOMY RALLYING"

First of all, "Assessed values indicate valley economy rallying"?

So it's true? Real estate is now the bellwether of the Silicon Valley economy? Not the NASDAQ? Not VC funding? Not IPOs? Not even Google, but real estate??? Apparently, we missed the memo...

Or maybe it's just that all the traditional Silicon Valley measures benefited so few residents during the recently-alleged "boom" that real estate is the cheerleaders' chosen platform to keep us in line, waiting for the next big pay day.

This piece included:
"But the assessments also are a gauge of the local economy. While this year's percentage increase was only slightly larger than last year's, it reflected healthier growth, Stone said. Last year's growth was driven by a roaring residential real estate market fueled by low interest rates, which overshadowed lagging recovery in commercial markets."

``By and large, the overheated residential market seems to have cooled, and at the same time, commercial and industrial property values have been gradually increasing, which brings it into better balance,'' Stone said.

--First of all, "this year's percentage increase was only slightly larger than last year's"? should have been the article's title. This is the real "news."

On the commercial RE claims, as we warned just over a year ago in, "A tidal wave of commercial real estate," long-time pros have already bailed out of even long-held commercial real estate. This commercial real estate "recovery" seems likely to become another example of money lost by novices to experts.

"Real estate agents said Stone's assessment reflected their views from the trenches. San Jose Realtor David Martz said there were nearly 4,700 single-family homes for sale in the county last week, approaching the high inventory of more than 5,300 in July 2001."

--Once again, the RE pros have an information advantage. They know the "real" inventory number is 4,700 compared to us amateurs relying on DataQuick (DQ)figures, last published (June 30) at 3,117. The pros know inventory is approaching July, 2001 depression levels instead of just the early-stage recovery figures from late 2003.

"(T)he number of Santa Clara County properties granted assessment reductions this year rose about 50 percent to 6,500. More than 80 percent of those, or 5,246, were residential properties. The total reduced value of those properties was $697 million, an average reduction of $132,000."

--Wow! "Interesting" info buried down in the 14th of 17 paragraphs! With barely 20Ku homes re-sold in 2005 (down more than -10% from 2004), 6,500 lower prices feels like a really big number.

One the same day, we got:
2) "'A buyer's market' in Central Valley" with the sub-headline,
"COMMUTE COSTS, INTEREST RATES ON THE RISE, SPURRING SLOWDOWN", plus a graphic

This was classic!:
"Communities like Los Banos and Tracy are experiencing a real estate slowdown more pronounced than the one under way in the Bay Area, partly as a result of rising commute costs, creeping mortgage rates and home prices that might have soared a bit too high."

Later followed by,
"Donna Baker, an agent with Preferred Real Estate Group in Tracy, said many prospective buyers who work in the Bay Area are shying away from homes in Tracy now, given how much the commute would cost them."

--Are you kidding me? Selling driven by gasoline prices?? Puh-lease! On a list of reasons people are selling, or not buying, the price of gasoline is not even in the top 10.

"In 2001, following the breakdown of the dot-com economy, the real estate market slowed first in Santa Clara County and other Bay Area locales, and then spread to the Central Valley. But that pattern was the reverse of normal, said Paul Desmet of the Ryness Company, which does research and marketing for new-home builders.

"``You typically see demand remain strongest closer to the job centers,'' he said."

--Building a case why weakness won't come knocking here in Santa Clara County? Except we already know, from the previous article, inventory is approaching 2001 levels in Santa Clara County also.

"Brian Gentry put his four-bedroom, 2 1/2-bath house in Los Banos up for sale by owner in April at $585,000. Since then, he's dropped the price by $20,000, hired a real estate agent to help him market the place, and is offering $4,000 toward closing costs."

--Boo-hoo! Buyers from 2003 are still sitting on gains but greed has them living a fantasy where they can still get 2005's peak prices. It's not out of generosity they are "throwing in" the blinds and refrigerator. (Do sellers really take that stuff with them?) When Mr. Gentry gets back to selling for what he paid in 2003, this might become news. Until then, the market will be teaching sellers everywhere, "Pigs get fat, hogs get slaughtered."

In between those gems, we got,
"(M)any people who buy first homes in the Central Valley do so because prices there are more affordable than closer to the bay.

--Well, duh!

``If they build up some equity, then they can afford to move back in,'' he said. ``To make $100,000 or $200,000 in equity in the past couple years in the Central Valley, that's a very common story.''"

--Mostly, all move-up are gaining is a bigger mortgage.

"Until late last year, the rate of price appreciation in the Central Valley was about double that of the Bay Area, providing inland homeowners with significant equity gains in a short time."

--Except now nobody is buying --because of commute costs???

--Then you have to ask, "So which is it? Can buyers make another $200K if they just suck it up and commute for a couple (more) years? Or is the cost of commuting taking back the big run-ups in the outlying counties?

Interestingly, unlike the earlier story, this article uses DQ:
"Sales of new and resale homes in the vast Bay Area bedroom community... were down 29 percent in the first five months of this year compared to the same period in 2005, according to DataQuick Information Services. That's a steeper drop than the 19 percent decline in the Bay Area.

"But what's more sobering for home sellers in inland counties is how many homes are piling up on the market. In San Joaquin County... nearly 4,000 existing houses were for sale at the end of May, about 3 percent of homes in the county and nearly 250 percent more than the amount in May 2005, according to Trendgraphix...

"In Santa Clara County, nearly 2,900 houses were for sale as of June 5, less than 1 percent of homes in the county and nearly 50 percent more than a year earlier."

--Maybe the reporter "dangled her participle"? She implied 2,900 houses for sale was a Trendgraphix figure instead of DQ, except our readers know DQ was at 2,974 "as of" June 8.

On a side note, the DQ numbers imply San Joaquin County has only ~133,000 houses. Our own research finds Santa Clara County has ~424,000 houses, 3% of which would imply over 12,700 listings.

3) The table attached to the article shows clearly, in our opinion, the cheapest locations continued to make the largest percentage gains. Once again showing RE prices are a financing phenomenon, not a trend change in value.

The lowest-cost areas (Morgan Hill, Gilroy) increased more than prime locations like Palo Alto and Los Altos. Did these areas suddenly become more attractive? (Even with the higher cost of gas?) Or were they just the places with the highest susceptibility to achieving some sort of "affordable" payment?

In a true pricing revolution, where long-term value was perceived, prime locations would continue to ratchet up, sometimes at the expense of less-prime locations. Not the other way around.

Just like stock market odd-lot sales and commercial real estate in 2005, prices popping out in the boondocks is a sure sign the small investors are getting "in."

What happens after "everybody" is "in"?

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The above is not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Invest at your own risk.