NY Times..
Bay Area Real Estate Prices Too Hot for Some to Touch
By MATT RICHTEL
ARATOGA, Calif. — The ranch-style house, on a corner lot in this Silicon Valley suburb, was listed for sale at $1.1 million. It was a fixer-upper that needed a lot of work, assuming it would not be torn down. But within three days the house had 18 offers, most from buyers eager to pay cash. It sold for $1.45 million.
The sale sounds like something that took place two years ago, when the dot-com economy was soaring. But it occurred earlier this month, amid a regional downturn in which unemployment is up markedly and individual net worth has plunged in lock step with the Nasdaq stock market.
Despite tough economic times, the real estate market in the San Francisco Bay Area, after a very brief cooling off period, is sizzling again. But instead of celebrating the boom in housing, as much of the country has been doing lately, Valley residents are raising alarms. Housing in this region, some of the most expensive in the country, was already unaffordable to many and the problem is growing worse as wages and employment weaken.
[Across the country, sales of existing homes rose sharply last month, the National Association of Realtors reported on Tuesday, and prices have continued to increase, with the median home price of $153,300 up 7.1 percent from a year earlier.]
The phenomenon in Silicon Valley, however, is somewhat different from that elsewhere, where lower mortgage interest rates have easily outweighed the recession's effect on home sales. Here, an extreme shortage of housing and land is combining with leftover wealth from the technology boom and pent-up demand from buyers who feel the real estate market is a safer place to be than the stock market. And many people who did not try to buy real estate during the boom, figuring they could not afford it, have come off the sidelines and started making offers on property even if their incomes do not justify it.
"It's really the paradox of Silicon Valley," said Stephen Levy, director of the Center for the Continuing Study of the California Economy, based in Palo Alto. "If we're doing this during a recession, imagine what's going to happen when the economy heats up."
Mr. Levy said that the problem, fundamentally, was a shortage of housing across all levels from the extremely affluent to the service worker. While the collapse of technology stocks wiped out a lot of wealth, he and others who follow this market say that it did not clean people out completely, and it also left many determined not to go overboard on stocks again.
"Housing prices are continuing to go up, and the stock market is continuing to go down," said John K. McIlwain, a senior fellow for housing for the Urban Land Institute, a nonprofit research center. "Where do you want your money?"
Nationally, Mr. McIlwain said, the growth in the number of potential home buyers continues apace, with the biggest impacts being felt in the South and West.
During the 1990's, he said, the country grew by 32 million people, exceeding growth in the 1950's of 28 million, the explosion that yielded the term baby boomers. And he said the country was poised to add another 30 million in each of the next two decades, with 70 percent to 80 percent coming internally, not from immigration.
The nine-county Bay Area is expected to grow by a million people in the next 20 years, according to the Bay Area Council, a regional public policy group. But the council said only 401,570 housing units were planned — 264,000 short of the number necessary to balance housing with that growth.
The disconnect between supply and demand suggests to some economists that this market is less of a real estate bubble than was the case the last time a serious recession here coincided with rising housing prices, in the late 1980's. Then, Mr. Levy said, there was more speculative buying of property in hopes of reselling it at a profit.
But there may be a bubble of a different kind — a debt bubble — said Ken Rosen, a professor at the Haas School of Business at the University of California at Berkeley, who studies real estate trends. He said that people who were anxious to buy homes on the theory that prices would only continue to rise were borrowing as never before, sometimes putting themselves in precarious positions of spending 40 percent to 50 percent of monthly income on mortgages. Prices are "so far out of line with incomes," Mr. Rosen said.
The contrast between stronger demand and weaker incomes is particularly pronounced in Silicon Valley. Mr. Levy noted that regional unemployment is around 6.4 percent, up from 2 percent in December 2000, and that there are 100,000 to 150,000 fewer jobs here than there were a year ago.
The housing market in Silicon Valley tapered off last year, but it rebounded quickly after Sept. 11, said Harry Murray, manager of Alain Pinel Realtors, based in Saratoga. "It's been just crazy since October," he said.
The median home price in the Bay Area, composed of nine counties including and surrounding San Francisco, rose to a record $402,000 in April, according to figures released this month by DataQuick Information Systems. That is up from $378,000 a year ago.
The California Association of Realtors estimated this month that there was a 2.6-month supply of homes on the market, meaning that if no other homes were added to the inventory, the existing supply would be sold out in that time. That compares with an inventory of 3.8 months a year ago.
The association's seven-county survey found that in April in the Bay Area, only 23 percent of people could afford the median home price, which the realtors group estimated at $530,000, up from slightly more than $507,000 in March and by far the highest in the country. (The median figures are higher than the DataQuick figures in part because they include only single-family homes, not condominiums, and do not measure Napa and Sonoma Counties.)
During the dot-com boom, affordability dipped to 18 percent, but economists were less concerned then because they assumed that housing prices were being temporarily driven up by the stock bubble, and that they would come back down again.
Even those who can afford to own a home are concerned about the circumstances — and baffled about how a struggling local economy can fit with red-hot real estate.
"It begs the question: why should it run up this much?" said Chuck Jones, a financial analyst whose own circumstances in some ways illustrate the complexities of the issue and the seeming dichotomies. Mr. Jones was laid off last July from Solomon Smith Barney, where he had worked for almost five years. He spent five months out of work before getting a new job at a smaller firm, Stein Roe, and for a lower salary.
But despite the tumult, his current residence in Menlo Park — which he shares with his wife, Aaron, and two daughters — rose in value by several hundred thousand dollars and is now worth $1 million to $1.5 million. That's the good news.
The bad news is that the family had hoped to upgrade to a larger home, but the prices of homes they have looked at have gone up, too — beyond the point they can afford. One home they looked at, since sold, was priced at $1.9 million, dipped to $1.6 million right after Sept. 11, but is probably worth $2 million now.
"It gets you to think about remodeling," Mr. Jones said.
The phenomenon is hardly just affecting current homeowners, or the already affluent. Mr. Levy said the problem was taking a growing toll on "nurses, teachers and firefighters" as well as others who serve communities where they can no longer afford to live. He said that it was not merely the low-wage workers who were frozen out of home ownership. "This is a poverty problem, but it's not just that. It's an everybody problem," he said. "This is threatening the fabric of the state's ability to compete."
Mr. Rosen from Berkeley said one obvious solution in the Bay Area would be denser housing. But there are tough hurdles for developers looking to get permits to build, chief among them the lingering impact of Proposition 13, the 1979 tax-revolt law. Mr. Rosen said that under the law, property taxes cannot exceed 1 percent of the value of the home; many communities are afraid that new developments they allow to be built will not generate sufficient tax revenue to pay for support services.
Nationally, inventories are down, too, according to the National Association of Realtors, which found that there was a 4.3-months supply of homes on the market in March. "We have historic lows in inventory," said Walter Molony, a spokesman for the Realtors association.
The area with the biggest increase in home prices was Long Island, where the median price during the first quarter rose to $287,500, up 26.5 percent from a year before. |
