Price Per Square Foot – The Case of San Mateo Versus Lafayette

When it comes to unhelpful averages for people seeking to predict the behavior of Bay Area real estate, the national average is way up there. My last post discussed how deceptive the average price per square foot (PP) of a single town can be without context. Throw one out for a county as vast and diverse in single family (SF) product as the United States, it tells you something, but perhaps more useful as to the United States is performing relative to other countries as opposed to how the market for your home in Walnut Creek might behave.

My main real estate interest is the Bay Area, and California in general. I believe it is worth noting, the way CA property behaves in inherently different from all other states due to the existence of Prop 13. In this, deliberately restraining property taxes from increasing naturally along with property values, we are unique.

Folks who are now locked in low interest rates and pre-boom property taxes have more incentive, as well as ability, to rent as opposed to sell in an unfavorable seller’s market. In addition, I have many a friend who bought in 2010 or thereabouts tell me, I know my house is bursting with equity yet too small for my family, but there is no way I’m messing with my tax rate. For these folks, buying their same home at today’s priced would mean a significant tax increase, a cost which, unlike a mortgage, can never be paid down. Further, it makes no sense to sell a home and buy the same one again. Unless one decides to relocate to a cheaper area, the only reason to buy and sell is for a better home, which we could expect to cost more…bringing one’s new tax rate higher still. This is when many people say, forget about moving, I’m calling a contractor.

For better, and worse, Prop 13 incentives long term ownership. A market distortion of this caliber should not be taken for granted when looking at national figures. CA can be expected to behave slightly differently.

A second point which recently resonated with me is that areas with large swathes of new developments built over a similar topography (think AZ and TX) are more at risk for a downturn than older communities with more unique landscape features and/or a diverse housing stock as a result of housing being refurbished and replaced over the course of approximately 100 years. The more unique the property, the harder to ascertain the true value via comps. If two of the same model homes, built the same year and finished the same way, more or less, are for sale at the same time in a slow market it is hard to think a buyer would not have enough leverage to negotiate between the two parties until one of them decided to make a lowball deal.

On the other hand, in a different market, such as Lafayette, CA, two homes on sale nearby to one another could very well be a 5 million dollar mansion built in 2018 on a 2 acre plot and a delipidated 1950s bungalow needing a full gut renovation on a less than a quarter acre offered for the bottom price of 700K. This is less akin to comparing apples and oranges than it is a watermelon and a pot roast.

Lafayette’s topography is diverse. While there is a small centrally located area with standard lots being under 10K, that is not representative of the whole. Beyond that there are hills. And Hills. And HILLS.

Some hills are good. After you meander away from the sound of Highway 24, you may find yourself in a resort-like sanctuary, replete with pool, sport court, outdoor kitchen and cavernous living spaces, ideally framing an unobstructed view of Mt. Diablo. The buyers own all the surrounding land, and don’t care how far down their ridiculously long driveway the trash is put at the city street for the garbage man because they are never going to be the one who takes it there.

Some hills are less appealing. The ones with steep lots with no yards, or the ones near the noise of 24 or Moraga Road, or the ones where you are simply too far from takeout, and perhaps a smidge closer to open space than the existence of fire season will comfortably allow. Add to this more variation in lot size, and one would expect the data to be behave differently than it would in a more uniform city.

While the housing stock in San Mateo is varied, there are far fewer high-priced comps and almost zero true estates: on the Peninsula lavish spreads tend to be concentrated in Hillsborough and Atherton. We have a few hills with fancier homes with views, but it is far less dominant a feature. The majority of San Mateo’s housing stock is on a flat plain with a fairly uniform offering of 5K lots featuring 1000-1400 sq ft homes with 3-bedroom/2-bathroom.

With this in mind, I did the same analysis on San Mateo as I did for Lafayette. I took the comps from all sales of SF homes in the San Mateo sold between Oct 11, 2021 and Nov 12, 2022 and compared them with the same comps from the previous year.  I expected to find more downward pressure and less price variation on current sales in San Mateo compared to Lafayette.

 

	Oct 11-Nov 12 2021	Oct 11-Nov 12 2022	Variation
San Mateo
SF Sold	66	28	41%
High Price	7,350,000	3,775,000	50%
PP of High Comp	1542	1099	70%
Low Price	1,175,000	1,060,000	89%
PP of Low Comp	1203	981	81%
High PP	1,691	1,500	88%
Low PP	668	702	104%
Average PP	1309	1120	85%
# Above 1300 PP	37	5	Minus 32
Number Below 1K PP	6	7	Plus One
% Sold Above 1300 PP	56%	25%	Down 28%
% Sold Below 1K PP	9%	25%	Up 16%
Difference H and L PP	641	798	123%

 

Sales volume in San Mateo has gone down over 60%. This is nearly 30% more of a reduction than was seen in Lafayette. Most of the decrease has been on the high end in San Mateo. Over 50% of the houses which sold between this period in 2021 paid over 1300 PP. This is down to only a quarter of today’s market, dragging the average down 15% despite the lowest PP rising slightly.

In 2021 the difference between the highest selling comp and the lowest was almost the same in San Mateo as it was in Lafayette. In Lafayette in 2021 it was 648, which increased over 40% to a full 915 a sq ft. In San Mateo the spread also increased, but by less than a quarter.

The highest priced home in San Mateo is off by 50% compared to the prior year, however homes selling there for above 7 million are rare. There were only 4 in all of 2021. If you remove this comp, the second highest value home sold in San Mateo in the period discussed is 4.25, which is still a decrease, but one of a lesser degree – 89%.

The SF housing market in San Mateo appears to have slowed. However, it feels like, to me, not so much evidence of impending doom but a necessary mellowing of the exuberant uptick the market experienced recently. No commodity in history has gone up that rapidly forever…not even tulip bulbs.

Does Price per Square Foot Matter?

Many agents like to advertise the price per sq foot (PP) their listings receive upon sale. This makes sense – it is an easily understood way to trigger potential sellers into imagining the sale price of their own home at that number. Jane Blow down the street got $1100 per square foot for her home. Mine is 2650, so that means at least I can make almost 3 million dollars!

Maybe…but maybe not.

There are many reasons for PP variation, with the most common being location, lot size, home size and home condition. The existence of unpermitted work can further distort this already delicate balance. In some regards, I find it a useful measure, particularly when comparing it to current construction and land costs. However, PP can also be very deceptive, especially as an average.

My take on the current market in Lafayette, CA, is that homes of quality are still selling at decent, even impressive, PP while homes which are less desirable (for whatever reason) are inspiring buyers to negotiate rather ruthlessly compared to what was customary a year ago. However, when it comes to considering a high-priced purchase, a gut check in the form of data is highly recommended.  Therefore, I compared the sale price of single-family homes (SF) sold in the last 30 days with the homes sold in the same period a year ago.

	2021	2022	Variation
SF Sold	26	19	72%
High Price	4,420,000	5,600,000	126%
PP of high comp	983	899	90%
Low Price	1,100,000	1,120,000	101%
PP of low comp	754	432	56%
High PP	1210	1347	110%
Low PP	562	432	76%
Average PP	825	791	95%
# Above 1K PP	5	5	No change
Number Below $700 PP	5	6	Plus one
% Sold above 1K	19%	26%	Up 7%
% Sold below $700	19%	32%	Up 13%

 

If we look at the average PP, very little has changed. What is so bad out there when the average market PP for SF has only dropped, on average, about 5%, not the catastrophic 15-30% drop often heralded by the press? Additionally, the lowest priced entry level home increased by 1%. That is the deception of the average.

To me, the data tells the tale of a bifurcated market.

The first is the robust top of the market. The highest PP is up a full 10% this year. In addition, the percent of the market selling for a minimum of 1K PP has increased from roughly 19% of the market to about 26% of the market, an increase of almost a third. Finally, while the PP of the highest priced comp is down 10%, it is nowhere the nearly 50% decrease at the other end. This is no collapse.

It is the bottom of the market which is seeing some significant pullback in terms of PP. The lowest PP in 2022 is only 76% of what it was in 2021 during the same period. In addition, the number of homes selling at less than $700 PP increased despite the total number of homes sold decreasing. In terms of market share, this is an increase of over 60%.

What is has rapidly increased, per the data, is price variation. The spread between the lowest and highest PP in the 2021 period described above was $648. In 2022, during the same timeframe, it was $915. This increase of over 40%.

The data supports the conclusion that with a slower, more deliberate market bargain hunters have been able to sharpen their blades and drive down prices on the low end of PP. Still, due to a very tight inventory, desirable properties are still inspiring competition PP comparable to last year. As a result, the average is staying roughly the same despite a distinct increase in the spread in PP.

Traditionally, has it buyer beware. Right now, when the spread is so large between the potential outcomes in PP at sale, sellers ought to be cautious as well. It is not the prospect of selling for a high PP which has flown the coop – it is the guarantee which has dissipated.