Silicon Valley Housing Market Update - April 2007

Blame Palo Alto, Mountain View and Saratoga.  One of the ways I try to help my clients make the most of their money is to look for statistics that are out of place. 

Sometimes a good Silicon Valley neighborhood has an increase in housing inventory, which causes prices there to soften up, other times you'll see an area become a better value when there's been recent (but correctable) bad news.  There are a myriad of opportunities to find good deals or spot areas where you may have to overpay to play.

When I ran the numbers for Santa Clara County this month, I had a picture in my head of what the graph should look like.  After all, since non-real estate folks depend on both my knowledge and intuition, I tour hundreds of houses, both with clients and for my own research, in a year.  It's my responsibility.

Chart of Santa Clara County Housing Prices March 2007

The picture basically looked like this, the San Mateo County graph which has a slight lull after the insanity of 2005 and a modest increase from March 2006 to 2007 --- which in this case is 3.5% for single-family homes. 

Lower priced homes (ones below the Silicon Valley aggregate median) go more quickly and increase in price faster because more people here can afford them.  Because of that, the large increase in the price of townhomes and condominiums in San Mateo, a gain of 7.3% year-over-year, was expected.  I'd sent out letters to prospects in February about this.

Chart of San Mateo County Housing Prices March 2007

Like in San Mateo County, the median price of condos and townhomes in Santa Clara County's part of Silicon Valley also increased considerably: 8.2% year-over-year.  No surprise, a lot of people are competing to buy affordable properties.  

What I didn't expect, though, was the magnitude of the increase in single-family home prices year-over-year in Santa Clara County: 9.2%.  This isn't bad news for most buyers and there are softer areas that Silicon Valley home buyers can take advantage of.

Not Bad News?!

Most of the cities in Santa Clara County had modest increases in their single-family home prices, like San Jose with its median increasing 3.7%, from $709,000 to $735,000. 

Cupertino actually had a statistically insignificant decrease of 1%.  And Milpitas, which based on its affordability is probably seeing some weakness from sales due to ARM resets and sub-prime lending, had a sharp drop of 5.7% year-over-year.  (Milpitas condo and townhome prices shot up from a median of $445,000 to $500,000 --- 12.3%!)

Now let's look at the kids who are wrenching the bell curve.

Chart of Housing Prices for Mountain View, Palo Alto, Saratoga in March 2007

There were whopping increases of 16.5% in Saratoga and 17.9% in Palo Alto, and while most single-family houses were going over list price in Palo Alto (102.66% to be precise), the percent of the asking price received in Saratoga was only 98% --- down about a quarter point from the year before.

If you were planning on buying a house in Saratoga or Palo Alto, you'd better be ready to cash in more of those stock options. 

Why Did I Include Mountain View?

Even with a "paltry" 7.2% year-over-year increase in median home prices, Mountain View is still a very interesting case.  Homes there went for 105.9% of the asking price --- the highest ratio in Silicon Valley real estate for this period. 

During March 2007, there were only 17 single-family houses sold and 22 on the market, compared with 39 and 28 last year.  With supply and transactions down sharply, how come prices didn't go higher?

They actually did.  The real story lays with the most desirable real estate, within a few block radius of downtown at Castro St., maybe extending a little further. 

Like many desirable neighborhoods in Silicon Valley, downtown Mountain View is not an area prone to high foreclosure rates.  In fact, it's a place where a 900 square foot house on a 7,500 square foot lot can list at $900K and go for over $1 million. 

Well that's crazy right?  Actually, it's the right decision. 

In Downtown Mountain View, Are You Buying the House or the Land?

The maximum value of any house is determined by the houses around it.  If your great house is the lobster on the McDonald's value menu, your home's value is in trouble.  But if your house is the hamburger at the Ritz-Carlton, you're in business.

In this case, it wasn't just being an affordable menu item in a high-upside neighborhood.  It's the size of the lot.  For example, a home almost 50% larger at 1328 square feet sold for $1.2 million but had a lot one-third smaller at 5,000 square feet.  Examples of 5,000 square foot lots with houses in that size range going for $1 million aren't uncommon in downtown Mountain View.

The house is what you make of it: you can renovate it, make it larger (Mountain View has shown willingness to work with land owners), or paint the inside with polka-dots. 

The land in that area is the scarce resource.

Can the price go down?  Of course, you take a risk with any purchase short of a U.S. Savings Bond (and even then there's a non-zero risk). 

Does that mean that it will or that it's fundamentally overpriced?  There's a company just a few blocks away that went from no market cap to $145 billion in the last three years.  It's not supply and demand that's driving that market: it's the combination of supply, demand, and ability.  The same thing happened at Microsoft in its heyday, well before the speculative bubble.  

Where to Look for Bargains on Silicon Valley Real Estate

I'm constantly on the lookout for good deals for my clients.  Looking that the numbers, the median price of condominiums and townhomes in Cupertino has actually dropped from $700,000 to $650,000 year-over-year on almost the same volume.  (The average is almost flat: $715,069 in 2006 to $718,220 in 2007.)

Plus the number of days-on-market has increased from 17 to 41 indicating increasing softness in that segment.  Don't get me wrong: 41 days is still a pretty low number.  (Santa Clara multi-family units are at 100.  Sunnyvale is a very low 28.) 

For an area with such desirable schools and a good bang-for-the-buck, there is a window for people looking to enter the Cupertino housing market now.  

If you're not working with a Silicon Valley real estate agent already, please let me know if there's any property in the Bay Area you'd like to evaluate or if you'd like to take a live tour.