All RE is local. Really local.

April 2, 2007

All RE is local. Really local.

As a bull market matures, it eventually starts to tire. This is often evidenced by the number of companies and stocks leading the charge becoming fewer and fewer.

1) At first only the newly-minted dot-coms crashed (think pets.com and webvan). The excuse was they never really had any earnings and their decline was supposed to be no cause for alarm.

2) The the internet-related plays were torched (think Sun, JDS Uniphase, Global Crossing, WorldCom, ...). Their valuations assumed internet demand would continue to grow (OK, true) and drive earnings (uh, no!...).

3) The third phase saw the so-called "mature" dot-coms get crunched (think Yahoo and Amazon). "Not to worry," was the refrain, the underlying tech business and strong and you can't go wrong buying and holding with the major networking and semiconductor companies.

4) In the end, even Intel and Cisco investors all were taken out to the woodshed for a thorough financial beating.

We submit the exact same process is now underway in real estate.

1) Condo flippers in Miami and Las Vegas go from printing money to bankruptcy and foreclosure. Not to worry, this was just a little "irrational exuberance" excess being wrung from the market. Most of them never had a real business plan and there is no cause for alarm.

2) The real estate in so-called "red states" starts to suffer, bringing another whole layer of buyers to the realization real estate may always be in demand (OK, true) and profits form holding and/or flipping are readily available to the average Joe (uh, no!...).

3) The third phase saw the so-called "mature" but not Silicon Valley-central markets get hurt. Santa Cruz County, on the fringe of Silicon Valley, and San Mateo County, went negative on their y-o-y prices in July, 2006. Except for an occasional "pop" they've stayed negative ever since.

Not to worry, the core of Silicon Valley (a.k.a., Santa Clara County), along with New York City and metro Washington D.C. are places you can't go wrong buying and holding.

After, real estate in those areas never goes down, right? (please see, Myth #2: SV real estate never goes down, http://www.viewfromsiliconvalley.com/id315.html)

4) Yesterday, the local paper admitted even some Santa Clara County sellers are struggling to move houses, as evidenced by increasing days-of-supply on the market. (Our readers saw y-o-y volume go negative two years ago and saw prices peak, then flatten last summer. "We" have seen this for awhile. Why the local paper just now decided to report it is unclear.)

Not to worry, yesterday's local paper readily invented:

5) Silicon Valley areas with good schools and short commutes will always stay strong. You still have to bid and compete in Los Gatos, Los Altos, Palo Alto and Cupertino. (All good schools.) Even sellers in Sunnyvale, Santa Clara. Mountain View (not top schools, but all short commutes), are doing well.

Houses in East San Jose, south county and Milpitas just aren't part of "true" Silicon Valley demand. "Their" inventory is sitting but they don't count.

As an aside, the paper's arguments seem particularly contrived after you realize 27 of Santa Clara County's 51 zip codes are San Jose. Splitting hairs among the remaining 47% of zip codes excuses a lot of weakness.

But, hey, those View From Silicon Valley folks are "bitter renters." They just always hate all real estate. Why should anybody listen to them?

As long-time readers have come to understand and expect, no rant of ours is complete without some actual hard numbers. Over the next few days and weeks, we will publish a new set of figures which we hope you find useful. Here is the first installment:

Santa Clara County Zip Codes: Total = 51

Date Up$* %-Up$ Up-Vol* %-Up-Vol

2007-03-13 23 45% 16 31%

San Mateo County Zip Codes: Total = 23

Date Up$ %-Up$ Up-Vol %-Up-Vol

2007-03-07 7 30% 7 30%

Santa Cruz County Zip Codes: Total = 11

Date Up$ %-Up$ Up-Vol %-Up-Vol

2007-03-13 6 55% 7 64%

*Any zip reporting 0.0% (1x-$, 5x-%) or N/A (2x-$, 2x-%) is counted as negative. A zero gain is the same as a loss for RE "investors." Figures below 50% are reported in red. (After all, prospective buyers seeing no gain will suddenly feel no urgency to rush out and buy, which was the whole crisis over the last 18 -24 months.)

We will soon be building this data into a more comprehensive data set. Stay tuned...

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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. Buy and sell at your own risk (as we do ourselves).