Santa Clara County Housing Market Update - June 2007

The stratification of the Silicon Valley residential real estate market continues.  On one end, the average townhome in the city of San Jose is just harder to sell than it was last year and, not surprisingly, it's much harder to sell than the year before.  In fact, San Jose accounts for half of all closed townhome and condo sales in Silicon Valley's Santa Clara County but for three-quarters of the drop in closed sales between May 2006 and 2007.

That decrease in San Jose, from 288 to 204 closed townhome and condominium sales year-over-year, represents the lion's share of the Santa Clara County drop from 481 to 363.  The reason for the drop in San Jose, however, is different than the reason closed sales are dropping or holding steady in other cities around Silicon Valley.

On the other end of the spectrum is what's happening with single-family homes.  Silicon Valley market cycles being what they are, the half of a percent dip ($4,000) in the median price of single-family homes in Santa Clara County from April to May this year was expected, particularly after the large run-up over the past few months.  On average, there's been a one percent dip in single-family home prices in Silicon Valley between April and May over the last ten years. 

But what isn't obvious in home prices is the drop in new single-family home listings from May 2006 to May 2007.  New listings are down across-the-board in every city in Santa Clara County except for Campbell.  Across the entire county, new listings dropped 13.6%, from 2466 to 2130.

The single-family home and multi-interest development markets are behaving very differently.  One stratum presents an opportunity for investors and first-time home buyers who are willing to compromise.  The other is a good indicator of the hot markets in Silicon Valley.

Compromising Without Losing

It's almost a tradition in Silicon Valley real estate: look at the asking price, gauge the desirability of the area, do a quick once through of the home, then figure out how much more than the list price to offer. 

Fortunately, it's not like that in every city or for many townhomes: the percentage of list price received for condo and townhome sales has decreased from 104.54% in May 2005 to 100.15% this year.

There's also a statistical subtlety.  Has the decrease in closed sales of townhomes hurt median prices?  Nope, even though the year-over-year median price of townhomes and condominiums increased from $500,000 to $537,500, homes that don't sell can't close --- only closed sales impact the median sale price. 

So the median price of homes in Silicon Valley can still be going up while the amount of latent inventory rises, as it did between May 2006 and 2007, from 1182 to 1573 multi-interest development units.  The cream rises.  The rocks don't.

There Are Rocks, and There Are Rocks

I tell my clients that one way to get a great deal is to find one with a flaw that you can fix more easily than someone else can, or one that you're willing to live with when most other people won't.  You can have a diamond in the rough or a diamond in the trough, which isn't as good.  Either way, you still have a diamond. 

Diamonds in the rough might have a bad paint job; poor landscaping; worn carpet; old appliances; outdated styling; an odd but usable layout; or a house that you expect to level or expand.  They're generally "ugly" in some ungainly way, but are fixable with some money and effort. 

Rocks in the rough have outdated electrical systems or wiring; unstable or tilted foundations; rotting pipes; or bad HOAs.  These items are very difficult to see and even harder to fix.

Diamonds in the trough might have a school system that needs improvement; noise from train tracks or traffic; a flightpath overhead; or a school directly across the street.  The home's location has one major "flaw" that you can live with either as a home or as an investment.  They are usually priced into the value of the home when you purchase it.

Rocks in the trough have a reputation for crime; neighbors that don't maintain their homes; a large number of rental units nearby; or a large number of diamonds in the rough clumped together in the same neighborhood.  These items are virtually unchangeable and are not only priced into the value of the home when you purchase it, they also continually erode property values over time as their effects become greater.

Renewed Strength in Silicon Valley Markets

2006 brought a necessary civility to the Silicon Valley real estate market after the activity in 2005.  Even though inventories in Santa Clara County are as high as they've been since 2003, pricing strength has rebounded since 2006, with five cities showing marked increases in the percentage of list price received.

The most significant change is in Los Altos, which dipped below 100% in 2006, meaning the average sale was for below the asking price.  Given a median price of $1,864,000 in May 2007 vs. $1,555,000 in 2006, there are indications of some increasing strength in the higher-end markets in Silicon Valley.

[Source for data: RE InfoLink.  Please note that there is a slight discrepancy of a few thousand dollars between the median home prices for March, April, and May of 2007 reported here and in previous articles.  RE InfoLink recently changed the way they report statistics and unincorporated regions in Santa Clara County are no longer being included in the aggregated numbers.  These regions account for the difference.]