The San Francisco Bay Area is known for its micro-climates. Particularly in the spring and summer, temperatures and weather conditions can vary dramatically the further you move from the Pacific Ocean (or as I like to call it, the fog belt). In the middle of summer, San Francisco may be enshrouded in fog and 50-degree weather while 40 miles to the south, Silicon Valley is basking in soothing sunshine. Traveling eastward, other valley areas are scrambling for air conditioning for relief from the kind of summer heat the rest of the nation knows well. This area also has matching housing micro-climates. The crash and recovery from the housing bubble has exacerbated these micro-climates.
In "Bay Area housing recovery spreads from Silicon Valley to East Bay", Argus reporter Pete Carey describes these housing micro-climates with fascinating data and dramatic anecdotes, starting with the following stark graphic:
The housing micro-climates of the greater San Francisco Bay Area show a dramatic schism between recovery and despair
Source: Bay Area housing recovery spreads from Silicon Valley to East Bay (linked above)
The green areas are localities where housing prices are at or above their pre-crash peaks. In the most favorable areas with good school districts and plentiful jobs, the housing market is back to the good old bad days. Limited inventories, low interest rates, pent-up demand, and buyers flush with cash are scrambling to outbid each other and driving prices ever higher. In some of these areas, prices are already 15-24% ABOVE their pre-crash peak. Far away from the Bay Area's job centers, housing inventory is plentiful, rampant sub-prime lending has transformed affordability into foreclosures and short sales, and prices are only just now climbing off their post-crash bottoms. The recoveries here may depend upon how fast residents' tolerances for horrific commutes rebuild relative to the decline in tolerance for sky-high housing prices closer to jobs and good public schools. In between these extremes is a variety of local conditions generating pockets of housing prosperity and despair.
Further to the east is Stockton, now the country's largest bankrupt city, gateway and ground zero for the state's housing bubble and crash that rippled hardest throughout the central valley where houses multiplied much faster than jobs. Not shown on this map are the counties northward from San Francisco -- Marin, Napa, Sonoma, and Solano. Contrasts exist here as well from the highly sought estates in Marin county, the plush vineyards of Napa, and bucolic surroundings of Sonoma to Vallejo in Solano County that declared bankruptcy at the height of the financial crisis.
This is quite a panorama that highlights the old real estate maxim of location, location, location. Here are some ZIP code related stats from the Argus article:
"Thirty-four of 185 ZIP codes in five counties have regained or surpassed their bubble-era peak home value or are less than 1 percent from it, according to this newspaper's analysis of February median values for all homes from online real estate site Zillow.
Another 49 ZIPs are within 15 percent of their previous highs, including 18 in the East Bay. A year ago, only part of leafy Palo Alto had regained the value it lost after Bay Area home values crested in 2006-07…
…Fifteen ZIP codes in Contra Costa County and three in Alameda County are more than 50 percent below their peak median home value, according to Zillow's data. In one Antioch ZIP, the median value of a home was $177,700, only 18 percent up from an October 2009 bottom of $149,800 and 62 percent below its peak of $473,400 in January 2006."
An extreme example of the recovery comes from Burlingame, a city with some of the most expensive ZIP codes in the Bay Area.
"Up the Peninsula in a Burlingame ZIP code that surpassed its bubble-era peak in August, Dianna Herrmann decided it was time to downsize and put her historic, 6,000-square-foot home on the market for $3.98 million… Fifteen days later, the house was sold in an all-cash deal for over the asking price."
The anecdotes I hear from friends and family confirm the heat in the Bay Area housing market. One friend offered $50K above asking price for a Sunnyvale home, only to find out that a buyer with all-cash outbid him by another $50K. He has since given up house hunting after seeing a Sunnyvale home in less-than-desirable surroundings sell for a cool million. Another friend has also slowed down her house hunt after realizing that her desired home close to work in Silicon Valley could not be found for less than $1.1M. Some homes in desirable markets are sold within a week of listing, creating an added sense of urgency with buyers:
"The market is so hot that sales in a week are not unusual. According to the real estate company Redfin, 24 percent of Alameda County listings in March were pending in a week; the numbers were 32 percent in Contra Costa County, 19 percent in San Mateo County and 26 percent in Santa Clara County."
A classic quote I found in a flyer for a home in Fremont -- an important traffic hub/gateway between the East Bay and Silicon Valley -- offered a modest 3-bedroom house for about $600K that needed updates. It was marketed as an opportunity to turn this residence into "the home of your dreams!"
So why spend time studying and tracking this madness?
First and foremost, this drama provides the backdrop for the great results homebuilders are reporting in their California-based communities. Homebuilders like Tri Pointe Homes (TPH), KB Home (KBH), and Meritage (MTH) are benefiting from the premium markets in the Bay Area (for more on TPH see "A Concentrated Way To Play Rapid Price Appreciation In The California Housing Market"). Similar stories can be found in Southern California. The homebuilders learned many important lessons from the housing crash. One lesson has trained them to focus their building in areas with strong job growth and growing economies. Places like the Bay Area are providing blueprints for the country's recovery, and we can find homebuilders converging on these locales.
Secondly and in related fashion, the frenzy going on in the housing market is likely a leading (or confirming) indicator of an improving economy, albeit an unevenly recovering one (after all, California has a poverty rate of 16% using traditional measures. When using the Census Bureau's new supplemental approach that adjusts for the cost of living, California's poverty rate goes to tops in the nation at 23%). The notion that deflation is a risk in this economy should be quickly dispelled after understanding what is going on in markets like California. The buying will slowly but surely spread out as it always does to the lower-priced regions of the Bay Area as the economy continues to grow. This will have plenty of cascading and multiplying impacts.
Finally, the California housing micro-climates are a great reminder of why both housing bulls and bears can make convincing arguments. Depending on the lens applied, debaters can conjure up plenty of skewed arguments about the health or weakness of the housing market. The biggest mistake I continue to see is the interpretation of low sales numbers (better yet, lower than expectations) as an indicator of a slowing housing market. When inventories are tight and sellers are anxiously waiting for today's soaring prices to make them whole on their homes, it is no surprise that sales are constrained. Bulls can also overstate the case if they do not recognize that tight credit conditions continue to lock out many entry-level and first-time buyers. The housing market cannot continue its recovery if the buying remains dominated by well-heeled cash buyers. I am still looking for hard data on how many of these cash buyers are Canadians taking advantage of the enviable combination of a strong currency and relatively low prices for American housing; and/or wealthy Chinese nationals looking for lucrative foreign investments.
Overall, the housing market recovery is still just getting started. Markets like the San Francisco Bay Area are leading the way. Pent-up demand is getting released and running into low inventory levels. Homebuilders are scrambling to ramp up to meet some of this demand by buying land and securing scarce construction resources. The cost and price pressures are part of the early growing pains from a decimated industry where supply is not yet recovered enough to handle demand where it is most robust. It is hard to determine when prosperity will be more widely shared, but I am expecting that once unemployment begins a new trajectory downward, scenes like the ones in the Bay Area will spread like wildfire across the country… especially since interest rates are likely to remain extremely low as employment data only slowly improve.