It’s been two months since I’ve done an update on local real estate in the Bay Area. One of the reasons I track the real estate market so closely is that most people simply aren’t aware of the magnitude of the price drops that are occurring right now. I’m still hearing quotes like “It’s a good time to buy”. I write these posts to create a larger awareness of the real state of the real estate market here in the Bay Area.
The main thing I want to point out is that the magnitude of the price drops is increasing, not decreasing. Prices are dropping faster than they were 6 months ago. While this means you’re likely to get a better “deal” if you shop for real estate now, it’s also likely that you’ll save a lot more money by waiting…even if you choose to only wait 6 months.
Taking Another Look at 95127
I use zip code 95127 as a leading indicator of the rest of the Bay Area. It’s an outlying part of San Jose that has a lot of “starter homes.” 95127 has more foreclosures and the prices are progressing downward faster than most other zip codes I track here in San Jose — hence the “leading indicator” moniker. What is happening in 95127 is a microcosm of the distress that is hitting most suburban, “middle-class” (if you can call zip codes where the average house is over $600,000 “middle-class”) areas of San Jose.
To illustrate this point, let’s refer back to the two properties I highlighted in my January real estate post. First of all, it’s worth noting that both houses I highlighted in January have sold — no doubt to people who thought they were picking up a pretty good deal. If they intend to live in the house for at least 10 years, they didn’t do too badly — that’s what they are probably thinking. However, I’m going to show you how by waiting just 2 months, they could have saved $50,000 on the price of their homes. That’s 12.5% of the value of these homes!
From my January post:
Property #1 is 124 Birch Ln, San Jose, CA 95127. 3BR, 1 bath, 1564 sq.ft. on a nice-sized lot of 7840 sq.ft. Last sale 7/1/2005 for $601,000. Now asking $399,000. Doing the math, we find that is a 34% discount off peak. The MLS lists 3 pictures of the inside and it seems to be in fairly good condition.
Now, just two months later:
Take a look at MLS #733671 — 10309 Murtha Dr. Five bedrooms, 2 baths, 1965 square feet. A couple warning factors: The property is sold “as-is”, and states “Remodeled kitchen, granite counters, hardwood floors prior to foreclosure lot.” This could mean that some of the flooring and counters have been torn up. This property is obviously a “look before you leap” situation. It is currently listing for… $399,900. Even if it does need work, 400 more square feet and 2 extra bedrooms for just $900 more than the house in January mean waiting was the right decision.
This house last sold in February 2007 (just over one year ago?!) for $689,713. That’s a 42% discount in 13 months. I don’t think there has ever been a stronger argument for waiting to buy. Imagine what waiting another year will bring!
January House #2
Back to January:
3356 Joanne Ave., San Jose, CA 95127. 3BR, 1 bath, 1075 square feet, on a 4,792 sq.ft. lot. A pretty fair specimen of a house for San Jose, though the MLS listing doesn’t include inside pictures, so it probably needs work. Now asking $400,000. This isn’t as good a deal as the first property…
This is where you start to see some huge advantages to waiting. In January, I pored through over 200 properties in Santa Clara and San Mateo counties before finding these two to highlight. Now there are twenty-two 3BR+, 1000sq.ft+ properties in 95127 under $400,000. There were just a handful in January.
I figure we might as well compare our January property to a similar one. Since there are so many to choose from, I picked the cheapest one: MLS #783032, 3420 Dominick Ct, 95127. Unlike the Joanne Ave. property I covered in January, this one has several pictures. It is 1203 sq. ft. (128 sq.ft. bigger than the Joanne Ave. property), with 2 baths instead of one. It’s also on a larger lot: 5227 sq.ft. The pictures show dated carpet, paint, and wallpaper that need to be updated, but the house is overall in good shape. And are you ready for this…this larger house is listing for $350,000.
So, by waiting 2 months, you can either get a much larger house for the same price, or save $50,000 (and get the seller to front an additional $10,000 on paint and wallpaper to have a house that matches your needs.) Also, though I still haven’t seen a house that is cheaper to buy than to rent when factoring in property taxes, maintenance, and insurance, at least the mortgage payments by themselves are similar to your rent payments.
A Quick Synopsis Of 95118
For the first time in several years, two 3BR+, 1000sq.ft.+ houses in my zip code, 95118, dropped below $500,000. They sold quickly after dropping their prices below $500,000. However, since there is a lot of inventory in San Jose, I expect other sellers to do the same. This is especially noteworthy since nothing similar in this neighborhood sold for less than $600,000 in the past few years. Now it seems that < $500K is the price point where houses sell. There are also some short sale 2BR condos for $250,000 in my neighborhood — again, a price that hasn’t been seen in a few years. Finally, there is a duplex almost identical to the one I live in on the market, in my zip code, for about the same price my landlord paid in 2004. I see no one is really rushing to buy it…and after watching my landlord put tons of money into this duplex over the past 4 years, I understand why!
Of course, I will keep you posted as things change — I’ll likely post every month or two with updates. I am also tracking Pacifica and Half Moon Bay ocean-view houses, since that’s what I’m most interested in buying. Non-ocean-view houses have been tanking almost as hard as San Jose, but ocean view properties aren’t falling as quickly. Ocean view houses only seem to be down about 10% from the peak. I think it will take another 6-12 months before there is significant price movement there.
Should You Buy Now?
So now should you buy? No way! If houses dropped this much in the past 2 months, they will continue to drop more. Besides, even with these price drops, you’re still better off renting. The conforming loan limit change won’t make any difference — these houses are under the old $417,000 limit anyway. There are now more houses for a better price than there were two months ago. What will the next year or two bring? It will certainly be interesting…and I will keep posting about it.
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March 14th, 2008 at 8:00 am
Great post! I love how keen your insight is into something most people overlook.
Glad to have met you Erica! = )
March 16th, 2008 at 9:22 pm
Erica,
I’ll be doing another post about Pacifica real estate prices in the next couple of weeks.
It’s bad here, unless you are waiting for the crash to buy something.
Redfin.com has been very helpful in researching prices–have any better sites?
Regards,
-Lionel Emde
(NOT a realtor)
March 17th, 2008 at 4:26 am
I will buy when prices reach 50% of what they were at the peak - which is at their fair value -since they were 100% overpriced at that time. I think the market will over-correct, but the market should stabilize at historical fair value.
March 17th, 2008 at 8:27 am
Erica,
Thanks for the post. What are your thoughts about the Palo Alto market?
March 17th, 2008 at 9:25 am
Here in Santa Cruz, an impressive (but somewhat flawed) ocean view house, originally listed at 1.39M, just sold for 1.25M - that’s almost exactly 10% less…
As an aside, I think they might have had an easier time selling were it not for the floorplan being a little odd and some idiosyncracies in what was otherwise a spectacular house, but hey, it sold in the middle of this apocalypse.
March 17th, 2008 at 9:47 am
@Carl: I suspect you won’t have too long to wait, since prices in 95127 went from 34% off peak to 46% off peak in 2 months. Of course, if you want to buy in a nicer area, you may have longer to wait. As I said in a previous post, I am waiting for a 30-40% discount on an ocean view home. I suspect I will be renting for quite a while.
@rick: Palo Alto doesn’t have the foreclosure problem that many areas of San Jose do. That’s not to say that prices won’t come down, but they will take longer and may not fall as far. Be patient. You’ll probably need to wait until 2010 or so to find a good deal in Palo Alto, but that’s not horribly far off.
@Scott: How many others are on the market?
Foreclosures haven’t hit the $1M+ mansions yet, but they aren’t selling very fast, either. One that I watch in Pacifica went “pending” and then came back on the market… I’m guessing the buyer’s financing fell through. Sellers of nice ocean-view houses are reluctant to lower prices. As with Palo Alto, your best bet is patience. Late 2010 will be a good time to buy ocean view as well. I am tracking Pacifica ocean view properties and should have more updates as things progress there. Right now, not much is really going on at all. Nothing is selling and sellers aren’t lowering their prices…most places have been on the market for 6+ months. Booooring. 
March 17th, 2008 at 10:55 am
@Erica,
There aren’t many ocean view houses on the market at all around. And the ones that are are also crap beyond the existence of the view. For once, God actually ain’t make more ocean view property. That said, I’m in the opposite situation as you: I own one, a very nice one that I bought in 2004 and recently remodeled into very very nice, and I’m considering an eventual move into SF. But probaly not for a few years given the state of the market.
Just below me is a bank-owned wreck of an ocean view property that looks great from the outside (seriously), but which is a $300K+ repair job once you peel back the lid (and you’d never know from the outside). It has just gone into escrow for the third time in its 1.5 years on the market. The last time this happened, the buyer backed out when he learned of the extensive wood-boring beetle damage. I’d say it would go for $1M in this market in sexed up move-in condition, but they’ll be lucky to get $600K in this market.
That said, the bank has done a positively awful job marketing this property. For example I suspect removing the divorced owner’s ex-wife’s wedding dress from the foyer closet might improve the staging a bit, but noooo… It comes with the house, leaving the new owner one step ahead in preparing for his starter marriage (sorry, I guess I’ve been reading burbed too much lately).
March 17th, 2008 at 8:43 pm
What do you think about the livermore market? We were thinking of going with a builder there by the end of the year, are they going to be offering better deals as well.
-Thanks
March 18th, 2008 at 3:37 pm
Home prices will probably fall 10% from where they are by the end of this year and another 10% next year. Important point is to also see when the listed homes were last bought, if within 5 years you know these are subprime related. Finally one must understand that a house is an investment, if it is cheaper to rent than own despite the tax benefits then you are better off renting in a falling market.
March 28th, 2008 at 8:23 am
How about houses in Los Altos or Mountain View with Los Altos schools? I am in the market for buying one. But each day they are going up. It is so frstrating.
March 31st, 2008 at 5:58 pm
@Bava - Livermore — I’d definitely wait. Houses there should drop more quickly (and more steeply) than most of the “inner” Bay Area. I would say your best bet is to wait for a foreclosure from someone who bought new construction a year or two ago. Be patient; prices are dropping so quickly right now that I’d say to stay out of the market for a year minimum.
@Girish - Excellent points! Thank you for commenting.
@Sharon C - Why buy when you can rent for half the price? Rent and be happy. Your kids will be in the same school district whether you rent or own. Renting isn’t that bad here — I’ve lived in the same place for 3 1/2 years with an excellent landlord. Prices will come down there too, but it will take time, since those aren’t “subprime” areas. I have a post slated for April regarding non-”subprime” areas. Please subscribe to my blog to be notified when I post it.
-Erica
April 7th, 2008 at 7:58 am
What about Union City, CA? Should I wait or try to buy the foreclosure now? Thanks!
April 7th, 2008 at 1:33 pm
Hi Johnny,
My advice is to wait a year and see when things settle out. Please subscribe to my blog to get an update whenever I post a new post — my next real estate post will be this month.
-Erica
August 14th, 2008 at 11:08 am
My husband and I live in Contra Costa County and have been watching the prices fall dramatically in Brentwood/Oakley. Now we’re at the place of deciding whether to jump in and buy our first home (we have 2 young children, so we’re anxious for more space), or gamble on whether prices will come down much more to make it worth waiting. While waiting for prices to come down, the interest rate is also increasing.
Also, since homes have come down hundreds of thousands out there, a lot of homes are selling quickly, multiple offers, and above the listing price.
Any thoughts or advice on the Brentwood market?
Thank you!
August 14th, 2008 at 11:16 am
Forgot to mention on the Brentwood post, it’s mid-August when I’m making this post. Significant price drop since you began this post in mid-March.