Los Altos Real Estate Blog

The local paper wrote a nice article recently about the sharp rise of Silicon Valley property prices.  Among the cited towns were Atherton (94027) and Palo Alto (9430x).  There was some mention of Los Altos and a few other markets.  Their analysis was broken down by ZIP codes and several of their figures were just plain wrong.  When you're writing about real estate markets, SKIP THE ZIP.

A ZIP code often contains a combination of geographic areas including multiple towns, a mix of neighborhoods in a single town, a whole town (rare), or a mix of areas.  ZIP codes seldom reflect accurate neighborhoods and hyperlocal markets.  Often ZIP code reports will mix strong markets with weak ones, giving a false impression of how strong or weak a market is.  Here are a few tips:

Agents - Report on towns and/or neighborhoods.  SKIP THE ZIP because using ZIP codes in market reports can be misleading.  This will vary from market to market but generally in Silicon Valley it's better to report on neighborhoods or specific towns.

Consumers - Market reports that focus on specific towns or neighborhoods will give a more accurate portrayal of local real estate.  When reading market reports, be aware that a ZIP code may include more than one neighborhood which could skew results.

Examples of the flaws you'll find in ZIP code based market reports and statistics for Silicon Valley:

• ZIP code 94022 includes both Los Altos and Los Altos Hills.  Los Altos, with an average price of abotu $2 million, isn't as pricey as Los Altos Hills and does more volume.  Lumping the two areas together makes Los Altos Hills look weaker than it is.
• ZIP code 94040 in Mountain View includes neighborhoods such as Waverly Park, Cuesta Park, and Varsity Park each with substantially different price points.  Even the schools are different and schools drive pricing!

My market reports always focus on a town in general or a neighborhood.  My blog contains town-based market reports.  My clients get neighborhood reports.  If you want to know how well a market is doing, you, as the consumer, are better off getting a report about the neighborhood you want to buy in.  Call me, become my client, and that's what you get as part of my services.

As a consumer, you are bombarded with numerous "experts" who offer their opinions on buying and selling homes.  You've likely read something in the newspaper, in a magazine, heard on the radio, or watched on TV that made you think about how you want to go about buying or selling a home.  That mass media outlet (TV, newspaper, magazine, radio, etc) probably makes you feel safe that the information shared...

• Applies to you
• Is trustworthy
• Can't possibly be wrong
• Is more credible than anyone else

While it's understandable that what you read or heard might actually be accurate, just remember that the media is in business just like real estate agents or REALTORS.  Keep in mind, those terms are not the same.  A REALTOR is someone who has joined the National Association of REALTORS (as well as state and local associations) and is bound by the Code of Ethics.  The others are not members and not bound by those rules.  They may, however, be perfectly professional and honest.  Either one, as a local real estate professional, is more likely to give you an accurate view of what you need to do to buy or sell a home than the mass media.

You can trust your local real estate agent or REALTOR because...

• They know the local market better than the media
• They're not as focused on "sales" as you think
• They serve as advisors and consultants in what is arguably a very complex process
• They build their business based on referrals, which comes from trustworthy, long-lasting relationships

This business is about relationships.  The business of the mass media is about spewing information.  A real estate agent wants and needs trust so they can help you.  The mass media doesn't care if they help you, just that you listen or read.  A REALTOR is here for the long-haul and wants to be your lifelong resource for any real estate needs.  The mass media doesn't care if you listen or not.  If you leave, their next sensational story will pull in someone just like you.  The trust you want comes from choosing the right agent for you and letting them listen to what you want/need while they inform you of what you need to know.

Call your local REALTOR, get to know them, trust them, and listen to what they have to say.  That relationship will help you in the long run.

The latest national news headlines say that the median selling price of homes dropped in January 2012. Look at the chart below with median prices for the past several months.  When you look at the trend for the country, there are several months where the data doesn't change at all!  The trend, overall, is very flat.  Quite honestly, it's all a little suspect to see such small variations across an entire nation.  When I look at how the local macro-market has done - Santa Clara County specifically - and how my local micro-market has done - Los Altos specifically - there's no comparison.

Does the national trend, which is generally flat, really reflect anything happening in my market?  There are markets in my area that are flat, but they seem to be the exception, not the rule. Most of the markets in Silicon Valley, especially the nicer areas with good schools, have been trending up for the past 2 years.  For them, 2011 was a great year.  The trends get more varied as I look at specific neighborhoods and price ranges.  If that's the case, why would a local buyer care what happens to the price of real estate in Texas, New York, or South Dakota? 

My advice for buyers and sellers is the same; focus on what is going on ONLY IN YOUR NEIGHBORHOOD.  Put it this way, if you're in Delaware and reading this my advice to you is the same as anyone, anywhere - Real estate is local.  National trends don't reflect what's happening in local markets.  That said, national trends SHOULDN'T impact the decisions made by local buyers and sellers.  If you're making a decision about buying or selling, focus on the local trends and make your decision accordingly. 

My advice to sellers in Silicon Valley is to move ahead with plans to sell.  The trends are very positive and prices have been moving up progressively in many neighborhoods and towns.  My advice for buyers is to buy now but strive to get the best value you can.  With unemployment down, interest rates low (and likely to stay that way), and more buyers coming into the market, your best bet is to watch the local market carefully and time your purchase to your best advantage.

You see those numbers published for your area and know they're off. Like clockwork, the S&P/Case-Shiller index of 20 metropolitan regions publishes their results, mostly declines, and the media eats it up.  What's wrong is that when you look at actual sales performance in those same regions, the figures published by S&P/Case-Shiller are wrong.  Very wrong.  Worse yet, they're misleading.  Let's take a look at why.

Incomplete metropolitan regions:  In California, the San Francisco Bay Area metro region is defined by San Francisco and immediately surrounding areas, including some troubled markets in the East Bay.  What's missing, and typically included by local market analysis, is the lower Peninsula and all of Silicon Valley.  That means the analysis they use to talk about the region as a whole, doesn't include any of the area's strong markets and over 1 milion residents.  Nationally recognized hot spots like Palo Alto are completely excluded.  Look at other regions they use across the country and you'll see similar exclusions.

Paired sales analysis flaws:  The core of their analysis is "paired sales".  That's when they compare the sale of a home in the past with the sale of the exact same home now.  That method misses micro-market dynamics that impact broader sales averages.

• Compare a home that sold in the past and then sold again recently
• Compare the variance of that sale with the average and median sales in the same area
• You'll see gaps where the sales pairs only account for certain price ranges, home sizes, or neighborhoods

I had an argument with someone two years ago (2010) about paired sales in Palo Alto.  They claimed paired sales showed a decline, which was true.  However, when looking at average and median sales it showed increases that year as well as 2011.  The broader markets improve while the pairs show a different picture.  I'll take the averages any day - much more accurate.

Reports are too late:  There are indvidual metro areas and the 20-city composite is calculated monthly but accurate details are reported 2 months later.  Telling a buyer in April that the market is slow, based on February data, is part of what has held back recovery because the reports cast doubt on a market that, at the moment, may be perfectly fine.

The market reports of a local agent will provide a more accurate picture of the broader trend than Case-Shiller.  While they claim that the index accounts for home quality and other factors (such as reducing relevance based on time between sales), it appears that S&P/Case-Shiller shows a very skewed impression of the market.

What do you need to do to counter these errors?  Split single-family homes from condos/townhouses.  They're two completely different markets.  Educate consumers with...

• Publish monthly stats and show averages and medians, not just one or the other.
• Show the 3-month moving trend and year-over-year monthly comparison.
• Break out towns and neighborhoods, if possible.  Micro-markets are key.

I've been watching the occassional show about buying and selling real estate.  Sometimes these are fun and entertaining but more often than not, they're about as real as "The Matrix".  Some of the shows include Property Virgins, My First Sale, Selling NY, and others.  Consumers watch these shows and think "While clearly staged, they're probably somewhat real".  Wrong!  Let me give you some examples:

In "Selling NY"

1. The agent tells the seller the listing is overpriced and plans to cancel the listing
2. Seller refuses to drop the price and won't take less than current asking
3. Seller tells agent she'll buy a total of three properties over 4 years if current home is sold
4. Agent says "OK, let's work on more marketing strategies!"
5. FAIL!!!

REALITY CHECK:  If the listing is overpriced and won't sell, no amount of marketing will get it sold.  That agent "sold out" and got bribed with future commissions which no self-respecting agent would do. 

In "My First Sale"

1. One agent tells the sellers their property is overpriced and to rent if they won't accept a lower price
2. Seller refuses to budge and won't rent, eventually leading to the agent quitting the listing
3. Seller then hires another agent who tells them the same story, this time they listen
4. 2nd agent gets credit for giving good advice when 1st agent gave them the same advice
5. FAIL!!!

REALITY CHECK:  Sellers, especially first timers, need to listen and often don't.  An agent is hired for their expertise and refusing to listen to it guarantees failure, which is what happened.  Sellers - listen to your agents!

In "Property Virgins"

1. An agent shows first-time buyers several homes in Texas where the markets are going up
2. Buyers see lots of good properties but want to "get a deal" and dismiss properties priced in their budget
3. The agent shows them nicer homes in lesser locations in their price, buyers not happy
4. Buyers eventually go back to OK homes in decent locations, don't like compromise
5. FAIL!!!

REALITY CHECK:  First time buyers in a sellers market shouldn't be whining about pricing.  Worse yet, the agent shouldn't be telling them they have a shot at getting a deal in a market where prices are increasing.  The "get a bargain" image is media fabricated and this show just reinforces it.

There are a lot of other examples where "reality TV" is showing just the opposite.  From high-end listings to remodeling bargains, the idea that real estate is simple and straighforward is generally wrong.  I'm especially peeved at the remodeling shows as they make resolving issues found in a remodel look like a matter of a couple of phone calls to the right specialist.  How about the hours and days spent trying to find the right person, get them in, and actually fix the issue?  It never happens "over night" like the shows portray.

Reality TV is anything but.  While fun to watch, consumers need to keep in mind that these shows are mainly fiction or at best, glossed over versions of reality.  Keep it real and listen to your agent, they know what they're talking about.

I've been told by a west coast agent that Bank of America declined a buyer's loan on a short sale that appraised OVER the sales price.  I've been told by an east coast agent that Bank of America has declined a buyer's 203K loan for no discernable reason.  They've been cited as one of the worst banks to deal with in the State of California and have a track record of glaring issues with foreclosures, short sales, and even normal loans.  Agent after agent reports issues with closing BofA loans.  They've pulled out of...

• the reverse mortgage business
• the wholesale mortage business
• looking at leaving the correspondant mortgage business
• what's next?

They've come under the scrutiny of the Fed for being overburdened with debt and numerous analysts and pundits have pointed out that Bank of America is severely undercapitalized.  The claims made by their proponents are that they're "too big to fail", which is a load of B.S.  Enron was considered too big to fail by many industry insiders and how'd that work out?  That's right, it failed.  I think BofA is on the verge of exiting the mortgage business and possibly on the verge of collapse for three reasons:

• They're taking longer to approve loans or not approving them outright for no reasons
• They've exited several aspects of the mortgage business already
• They're undercapitalized and are carrying too much bad debt (earlier acquisitions of other banks)

If they collapse, then what?  Does it going to be doom and gloom on the stock market?  Will interest rates suddenly rise or loans be impossible to get?  How about "none of the above"?  If BofA fails, it'll be done softly and with plenty of planning put into getting them back to solvancy or selling them off, in whole or in part, to other banks that are better run.  One other attractive possibility is this...

Government receivership!

Nationalize these buggers so they stop making risky loans, playing games with money, and inflating service costs with no added benefit to the consumer.  I know, it all sounds very "anti-capitalism" but the banks have shifted into speculative arenas to drive income without offering any real value to customers.  If the purpose of the bank is to transfer money, playing games with MBS and other areas isn't the way to do it.  I think "innovation" in the financial services industry is an oxymoron and we'd be better off if they just made loans with less regard for aggressive growth year over year.

This topic has been on the minds of many REALTORS® as the ongoing evolution of REO inventory held by both banks and the federal government evolves over time.  Homes foreclosed on by former Fannie, Freddie, FHA, and VA loan holders now sit vacant and the government asked the real estate community for suggestions on how to handle it.  Proposals range from renting the homes to selling them in bulk to investors.  Personally, I don't like either of those suggestions as they either make the government a landlord (bad idea) or enable investors to make a fortune off the failure of the average citizen.  I have a better idea and I'd like your input.

First, a little history lesson.  The mortgage crisis was created when the federal government changed the banking regulations and encouraged loans to pretty much anyone.  The banks, understanding the law, set up real estate agents and would-be homeowners with easy loans to sell homes to people who were marginal borrowers.  In the mix of all this, there were a lot of people who had good jobs, fair credit, and could still make their mortgage payments.  Those folks lost their jobs when the economy collapsed and ended up losing their house in the process.  Basically - the Fed and the banks set these people up for failure.  The banks got bailed out and the homeowner gets burned.

My proposal is this:  sell all the REO inventory back to anyone who was foreclosed on

Who qualifies for this? 

• Anyone who was foreclosed on who had a Fannie, Freddie, FHA, or VA loan
• They must currently have a job with
• Their income must be enough to cover the cost of financing rebuying a home with a mortgage up to 40 years
• They must not have lied to get their previous home loan

What the banks must do?

• All banks must participate in lending to these borrowers
• Underwriting guidelines must be based on income and credit alone (credit score must be 600+)
• No loan can be denied if the person can qualify on income and credit score

I'm sure there are more than a few details that should be spelled out on qualifying criteria.  Basically, I want the Fed to right the wrong done to the American homebuyer.  The real estate meltdown caused a 4% rise in rentals and now the market has shifted to investors who buy homes and turn homeowners into renters.  While I'm absolutely in support of investments in real estate, the purchase of Federal REO inventory by investors seems like kicking the market while it's down.  Let's get these homes back into the hands of real buyers.

What do you think?

How many times have you called on a rental only to find out they have a "no pets" policy?  I'll bet it's 90% of the time or more.  Dogs are the biggest rejects and cats rarely fare better.  It doesn't matter if the dog is tiny and has a bag attached to his rear-end to guarantee no messes, most landlords refuse to allow pets.  As a renter, you're probably a bit angry (feeling discriminated against), frustrated, and wondering "Why do they do that!?".  Well, let me clarify that last question a bit.  I'll give you some insight into what's in the minds of the landlords - since I represent quite a few of them.

DAMAGE!  Yes, that's right, damage.  Your darling little pet does a lot of damage, little bits at a time and you don't notice it but the landlord does.  Plus, there are ACCIDENTS which happen from time to time.  For dogs, it's peeing or pooing on the carpet.  For cats, it's hairballs and vomit.  Either way, both will leave stains on carpets that can't always be removed.  The most common damage done by pets is:

• Urine/feces on carpets leaving stains and/or odors
• Hair, dander and mites in carpet
• Scratches to doors, walls, windows, and casings
• Claw damage to screen doors/windows
• Pet odors that can't be easily removed
• Damage to plants, grass, and trees in the yard

Damage to yards includes holes, clawing on trees/fences, plants killed by feces/urine, and plants killed by animals repeatedly walking over them.  This is one area where time will tell how much damage your pet has done.

So you can understand why a landlord doesn't want to have your well mannered pet running around their house.  When they consider the cost to clean and repair, that's why you can't get a pet in most rentals.  Carpet cleaning alone will cost $300+ for an average size house.  Replaceing a screen door will run another $40.  Replacing a small plant, another $20.  It adds up quickly.  If a wall needs to be repainted due to pet damage, that'll run $100.

My suggestion, and this is just the best advice for Silicon Valley, is to offer a prospective landlord a generous deposit for each pet, usually $400.  That will cover the most common damage.  Keep in mind that your cat will do that much damage in a year, easily.  So, don't count on getting the deposit back.  Even if it's a house cat, the cost of carpet cleaning and possible replacement will eat up that deposit quick.

Just consider that the price of having pets.

Yes, I'm serious!  What's the immediate and long-term impact of the Fed's loss of the "AAA" credit with S&P?  Other than a drop in the stock market and rise in the cost of government borrowing, what else does this mean to home buyers and sellers?  Will this move derail the real estate recovery or help it?  At the end of the day, what matters most with all this political positioning is the material impact on our everyday lives.  There's a silver lining to every cloud, even this one.  After all the dust settles from the initial shock of the downgrade, we'll see some positives and negatives.

The Positives

• Lower energy prices:  Gas, oil, etc will all drop because a weekend economy means less spending on things like driving.  This means lower utility bills and more money for borrowers to save or spend.
• Lower food prices:  The cost of farming and shipping food will drop as energy prices drop.  This could reduce the monthly grocery bill which means more money available to stay in existing homes or homebuyers to save.
• Interest rates will stay low allowing buyers to obtain excellent 30 year loans or further reduce the cost of a loan modification.  It all depends on what your mortgage is tied to.  An ARM is usually tied to short-term, more volative interest rate moves and could go up.
• Moody's, Fitch, and others have kept their ratings the same and many major investors, such as Warren Buffett, have said the S&P decision is a mistake.

The Negatives

• Consumer credit could rise for items such as credit cards and car loans.  This is because short-term rates are likely to rise as the bond markets adjust to the credit rating.  If so, it could be a small bump but they could wipe out gains from dropping energy prices.
• Federal debt will rise which means they've got to get money from somewhere.  That could translate into higher taxes, fewer cuts, or other decisions that could impact jobs, corporate spending (which creates jobs), and thus fewer home buyers.
• The purely psychological impact of seeing the stock market drop!

Keep in mind that psychology plays the most important role in the overall economy.  Perception is reality.  Any hint at a possible negative in the markets will translate into buyers who balk at spending money or sellers who think the market will drop.  Either way, if buyers wait for prices to drop and sellers don't want to go on the market because they think prices will drop, we'll see less activity.  Regardless of the degree, consumers will take a "time out" to think about all this and it could derail the current real estate recovery.

Now, more than ever, we need to let people know that jobs are being created, interest rates are low, prices are reasonable, and this is an excellent time to buy a home.  This short term political gambit is nothing more than a game of chicken between the economists at the S&P and Congress.  While they sort it out, we need to focus on continuing to stabilize the housing market across the country.  Read up on what's happening, be well informed, and pass along the reality (not the news sounds bites) to your clients both present and past.

In the Silicon Valley market, many buyers will make a request when they interview a buyers agent; can you give a commission rebate?  What goes through the minds of these buyers is that agents make a fortune from their commissions.  The perception from buyers is that an agent gets 3% of the sale of a $1 million home and walks away with $30,000.  Nothing could be further from the truth and Zip Realty and Redfin are admitting that in the strongest possible way.

ZIP Realty has cancelled all buyer rebates as of October because they can no longer offer them and remain profitable.  Just so we're clear, ZIP Realty can't be profitable offering buyer rebates.  The message to buyers is "commissions are what they are so real estate companies can remain in business".  The decision by ZIP Realty to end commission rebates is driven by the fact that the industry standard 3% commission exists because it's what companies need to charge to remain profitable.

In the news as well yesterday was the announcement from Redfin that they would reduce the discount they offer from 1.5% to 1%.  Since Redfin has a slightly different business model without traditional real estate offices, they may be able to afford this change and still stay in business.  However, the bottom line is that discounts hurt their business.  Operating with lower margins will only work for so long and trying to make it up "in volume" is a business myth.  As far as I'm concerned, the reality is that...

You either get full service or no service.  There may be varying degrees of "full service" and I strive to offer services that far exceed what the typical REALTOR® provides.  However, the idea that a reduced-fee company can offer anything more than assistance with paperwork is proven over and over as a joke.  The companies that start off with grand dreams of offering full service at discount prices always end up changing their fees to stay alive or just go out of business.

My advice for buyers is: stop asking for discounts.  The seller is paying the commission and a REALTOR® will do more to get you a good deal than you could ever save getting a few commission dollars back.   The value a REALTOR® brings to the negotiating table far exceeds savings from a rebate.  Our expertise in the market, from how many offers a home gets to what terms and conditions are working in the current market, is what will get you the best deal.  Let us do our jobs for you and we can assure you, you'll walk away happy.  That's my promise to my clients and I strive to get the best possible price in every situation.  Let us do our jobs and we'll stay in business to handle all those referrals you send us because we did such a good job for you.