One Home, Many Prices

When it comes to real estate, it is often easier to speak in generalizations as opposed to specifics. Sales of the same house rarely correspond with the market’s ups and downs. The trade volume of most single family residences (SFR) is simply too low. Therefore, the value of a particular house becomes a matter of speculation rather than fact. Further, even in a case where data exists, a single property’s ability to act as the perfect comp relative to the market is limited by changes to the neighborhood and/or home which occurred during the period in question. Despite the limitations, I recently discovered a SFR in San Mateo which has transaction data corresponding with several key moments in the local market’s uneven trajectory since the turn of the century.

In June of 2001, after the tech bubble had burst and the local market was less rather gridlocked, an unremarkable 2/1, built in 1937 on an otherwise commercial block, sold for 385K. It was a quick sale, going pending in a week, for 60K over ask. The comments note the seller was in default. 

Less than five years later, in April of 2006, as the sub-prime lending industry exuberantly marched the global economy towards a cliff, a new buyer secured financing for the place to a tune of 690K, or a nearly 80% more with nary a major renovation to account for the increase. One year later, the owners put it back up for sale – for 839K, a jump of over 20%. The market, for reasons of caution, or lack of demand, or dearth of available financing, did not respond.  The property was withdrawn that fall. 

Two years later, in May of 2009, it was brought back to market. Despite the addition of a bathroom, it sold in October 2009 for 532K, a loss in value, before costs, of 20%. Per the Case Shiller Index, late fall 2009 through early 2012 saw the lowest SFR housing prices post Great Recession, before they trudged back up. Indeed, subsequently, many folks would happily go into contract for a SFR in San Mateo for such a price.

After a remedial facelift, the home was listed again in April of 2013. Listed as a 3/2, it showed more like a duplex with a 1/1 downstairs and a 2/1 upstairs. While it remained a challenging location and floorplan for most families, its proximity to downtown was desirable, and it still had the potential for improvement. Listed at 599K, the low side for SFR in San Mateo at that point, it was one of the homes I looked at that spring before purchasing my first home later that year. The sale closed at 720K.

What is it worth today? 

Less than 1.65, which is what the owner was requesting before it was withdrawn from market in February 2023, after being listed for 4 months. The pictures showed nice interior upgrades, backyard improvements, and a vast roof deck, but buyers did not accept the upgrades warranted an increase in value of 130% in ten years. The sellers agreed to disagree.

 The home is currently listed for rent at $5,250 a month. Assuming the owners had traditional financing with 20% down in 2013 and the sense to refinance at the market’s record low interest rates, it is unlikely they owe more than 500K, unless they took additional equity out of the home. If this is the case, the current mortgage payment could be expected to remain under 2K a month, leaving a decent cushion to cover tax, insurance and basic maintenance if the target rental price is attained. When the potential sale price of the property decreases and rents remain stable, the owner’s potential yield increases, incentivizing removing it from the sale market. 

Thus defines a distinct portion of the market right now – buyers who don’t want to buy at the prices sellers feel entitled to receiving, and sellers in a solid enough financial position to avoid having to accept less than they feel they deserve. In San Mateo, the number of withdrawn homes since the first of the year has increased by a factor of three since last year. Thus, it is a standoff of sorts, with only the most motivated buyers and sellers participating in trades.

Can a market crash when there is little compulsion for owners to sell? It makes sense for a buyer who spent 690K with nothing down to sell at a “loss” when their teaser rate evaporated amidst a lending freeze. Today, a total profit of over a hundred percent wasn’t incentive enough to impel a potential seller to part with their property due to the plain and simple fact they had other options. The age-old motivations for sale, death and divorce, shall persist, but overall, at the moment, unless a property is either highly desirable and/or fairly priced, no one side is budging: buyers wait while sellers withdraw.

 

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.

 

Rent or Sell?

This spring I met a young man looking for alternate housing. He was, as of May of 2021, living in a large house in Sunnyvale, which he was splitting with several other young men. It was a 6/3 on a large (over 10K sq ft) lot on a quiet street. For this, they were paying $6300, which just about covered the annual taxes of $6800, a legacy of its 300K purchase price in 1986.

Instead of renewing their lease 2021, the owners decided it was time to sell. The tenants moved out, they painted and staged the place, and put it on the market. It sold in mid-July for 3.4 million.

The home was originally listed for rent in April of 2019. Since then, Redfin has predicted prices have risen 33%. If this is true, then the value of the place around the inception of the lease was 2.244 million.

Assuming the home is paid off, the yield for the property to begin with would be:

6300 X 12 – taxes and expense (roughly 5100 per month)

In 2019 the owner was using the 2.244 million in equity to bring in approximately 61K a year, or a yield of 2.7%.

However, with the rapidly rising home values this yield falls precipitously.

When you make 61K a year using 3.4 million of equity your return drops to 1.8%.

Likewise, a home I looked at for a client, a crumbling heap with tons of ‘potential’, was on the market because it’s tenant of 10 years had finally vacated. Instead of spend a solid 4, perhaps 5, figures to bring it up to a standard likely to rent swiftly and at a good price, they put it on the market without so much as sweeping the floor. Listed at 975K, it sold for 1.075. Given the previous rent was less than 3K, the argument to sell is persuasive.

Stagnant rents combined with robust sale prices incentivizes landlords to reposition their capital for better returns or more liquidity.

 

 

Better Than a Bond?

There are still investors in the game!

As we hear so much about the housing market being driven largely by desperate homeowners wildly throwing money around in order to secure their dream home, it is refreshing to know there are folks who look at the numbers and see them make sense as a long-term investment. What kind of return is expected when one shells out on the Peninsula amongst the latest single family home feeding frenzy?

This morning I stumbled on the comp which provides some insight.

At the start of September, a house near downtown San Mateo sold. A 3/2 of almost 1700 sq. ft. and newly, though a bit cheaply, spruced up, it closed at 1.569, or a hair above $925 a sq. ft. The two-week close time indicates rock solid financing – as in all cash.

It is now listed on Craigslist for rent with an ask price of $4695 per month. It is impossible to know the tax basis if we operate under the assumption the deal was a 10-31 exchange. Should they get this price, the return with no costs is approximately 3.5%. Reality scales back that assumption, tax abatement aside. However, even paying a 10% management fee and 10K in tax, the return hovers above 2.5%, or 0.5% above what Bloomberg is reporting as the 30 year Treasury yield.