Tuesday, July 31, 2018

California Real Estate: Sustainable or Just Another Example of Extraordinary Popular Delusions and the Madness of Crowds?

Silicon Valley is in a real estate frenzy. Frankly, I think the market is slowing down, but that’s just based on my observation, which lasted a whole weekend. That’s not saying prices will come down—just that they may not go up as fast as they have been.
The real estate market out there is and has always been, in my experience, different. The first time I moved there, in 1976, I wanted to offer less than the listing price. The agent was shocked. “Oh, you don’t want to insult the seller,” she said. And this attitude has prevailed (except for the early 1990s when a recession hit the area—I wasn’t there during the last crash, so I don’t know how prices were affected then). As an example of how entitled Silicon Valley sellers are, there was a letter to a real estate columnist in the July 15 San Jose Mercury News complaining that it had taken their agent three weeks to bring them a full-price offer when their neighbors had several offers over asking price in just a few days for an “inferior” house. Imagine! Complaining about a full-price offer. And about those prices.
Strawberry Square, a development of 350 townhouses, is my gauge. I sold my 4 bedroom 2½ bath 1,440 square foot unit there in 1994 for under $200K. A similar unit was for sale during our trip for $1.2 million. It appears to have sold. These units were built in the 1970s and priced around $30,000. They were built on slabs and without air conditioning, and while you can put air conditioning in the units, it has to be routed through the (hot) attic and is an expensive proposition. In spite of the fact that temperatures can get well over 100º, everyone assures buyers, “Oh, you don’t need air conditioning,” which might have seemed reasonable at $30,000, but for $1.2 mil?
          Our host lives in a townhouse she and her late husband bought in the 1980s for $150,000 that could bring well over $1.5 mil today because of its location. She assured us there’s nothing under $1 million in Silicon Valley, and I tend to believe her. Dan and I went to a couple of open houses—one is a 4 bedroom 2 bath house on a busy street priced at $1.7 mil. This house appears to have been redone by a flipper—on the surface it looked great, but it was redone on the cheap; it still has the original 1970s aluminum windows (and no air conditioning). The other open house we went to is a 3 bedroom 2½ bath townhouse priced at $1.398 mil. One reason I think the market is slowing down is this unit was reduced (gasp!!!) from $1.448 mil.
          These houses are in my old neighborhood, west San Jose. Prices are much higher in Sunnyvale, Mountain View, etc.

          High housing prices are not limited to Silicon Valley. We visited a 2 bedroom 1 bath in Pacific Grove, near Monterey, that is priced at $749,500. The house was built in 1909 and has no driveway, garage, or functional parking in front of the house. It also needs a new sewer line. And though there’s no air conditioning, you really don’t need it there.
          We saw high prices all over California, which begs the question—how do people manage to find a place to live there? That’s a tough one. Some people don’t. As we were driving on Santa Monica Boulevard in Los Angeles we saw a large homeless camp under a freeway overpass. Our host in San Jose and I talked to a guard at Airframe Supply while Dan was doing his business there. The guard drives two hours each way to his job and shares an apartment with his father.
          California has two classes of people—those with homes and everyone else, and those with homes don’t seem too interested in those without.
          Housing in California is complicated. Proposition 13 was passed in 1978. It limited property taxes to 1% of the sales price of the home. I believe taxes were allowed to escalate at something like 2% a year, but voters can (and have) approved add-ons (kind of like the streetcar add-ons we will soon have) and “special” taxes can be added as well. Nevertheless, tax rates are much lower for people who bought way back when, and those people are only going to let go of their houses when they die. For people in the market now, even without the add-ons and special taxes, the buyer of a million dollar house will have an annual $10,000 tax bill.
          With interest rates going up and interest and state and local tax deductions being limited, I wonder how sustainable this boom is, but it’s almost always wrong to bet against California real estate.

          Which brings me to the question almost everybody asks: Don’t you wish you’d stayed?
          In a word, no. As I mentioned in my previous post, we stayed with the widow of the man who wound up with my job after I left. I believe the job contributed in a major way to his death. He had diabetes, and as far as I know, Company L did nothing to accommodate his illness. He went on disability a couple of years after I left. I visited him in 2000. He eventually lost both legs. He told me, even in that condition, he was happier than he’d ever been at Company L. That’s how much that job sucked. He died in 2004. If I had stayed, I doubt I would have fared any better.
          My house is definitely not worth a million dollars, but it’s nicer than anything we looked at in California.
And I have a life.  

© 2018 Larry Roth

1 comment:

  1. It isn't just Silicon Valley. Most of California, cities and suburbs - Portland, Seattle - even Boise are feeling the bubble, and rental units are in too short a supply for rents to reside at a comfortable rate for common working folks.

    All the more reason to re-visit your books and get a life if you are still trying to build one.