Bob and Betty Buy a Home (Part 2): We See Some Homes, But Bob and Betty Get Spooked

March 29, 2007

Let’s continue the saga of Bob and Betty, our hypothetical first-time home buyers who were introduced in the first of a series of articles I’ll be writing.

We met at 9am sharp on Saturday morning at my broker’s office in downtown Palo Alto. Though it’s easier to view homes with clients during open house times, I prefer to do first time tours when nobody else is around.

I had an ambitious tour planned: 12 homes in 4 towns along the 101 corridor. Always exhausting for everybody involved — every time I do this I have more liking for the part of the Redfin business model where clients do this bit themselves! — but nonetheless an important part of the whole process.

While driving, I pointed out important things about the neighborhoods we were in: The typical types of homes, the price ranges, which school district it belonged to, whether it was unincorporated or not, whether it was in a flood zone, where the nearest parks and public services were. I asked them to comment on what they liked and didn’t like in each neighborhood.

At each home we went through the same process, slowly at the first couple of homes, and then more quickly. “What did you like? What did you not like? What did you think of that kitchen? Do you like skylights? Fireplaces?”

By the 5th home I’m usually able to “get it” about what clients are looking for, and with this new knowledge, I crossed out 3 of the remaining 7 homes we had to see.

Suitably tired, we pulled back up to the office around 1pm to review what we had seen, what they had liked, and what they had not liked. I explained the next bit of the process: getting pre-approved. I’m happy to spend a few hours as a sort of “interview” with prospective buying clients, but before I invest too much more, I need them to put some skin in the game too by getting pre-approved. I generally find that if they’re not ready to dig up their financial records and go talk to a mortgage broker, then most likely they’re not ready quite yet to buy a home.

Betty was quite excited about three of the homes we had seen, but it was clear that Bob was losing interest pretty quickly. “Yeah…but nine hundred thousand dollars?” was his most common refrain.

We pressed in on that. Bob had been doing his homework the last week and pulled out all the discouraging figures he had found. Housing starts are down. Interest rates are up. Affordability is down. Condo developments in Las Vegas and Miami are being cancelled. How in the world could prices stay where they are here?

Prices in the Bay Area are indeed a pretty head-scratching discussion topic as they continue to defy gravity, pessimism, and seemingly the laws of economics year after year. I told them bluntly that neither I nor anybody else could guarantee anything about prices here. It is indeed possible that prices could collapse…by 40%…overnight…immediately after they bought a place. Possible? Yes. Probable? No.

I pulled up my secret weapon, Google Earth, on the flat screen wall monitor in the conference room. I zoomed in on the Peninsula and asked two questions: 1) How much land is technically available to build on? 2) How much land is actually available to build on.

Map of the Peninsula area in the Bay Area

The answer to the first question is: tons! From the Bay going west pretty much to Highway 280, nearly every square inch of land is already filled in. From the 280 west to the ocean, there are only a smattering of towns, like Half Moon Bay, Pescadero, and La Honda. The mountains make it difficult to build in that area, but we could certainly fit several hundred thousand more homes there.

However…it ain’t gonna happen! Most of that land is owned and/or protected by Federal, State, County, or City governments, private trusts, conservatorships, parks, and so forth, and not much building is going on.

If you can’t go West, then you have to use the Manhattan strategy: go up. Again, that ain’t gonna happen. San Francisco and San Jose have modest but growing skylines of high-rise buildings, but in between it’s rare to find any structure taller than 8 or 10 stories, and for the most part it’s only up to 3 stories tall. Those zoning restrictions aren’t going to be changing any time soon.

Essentially, 50% of the classic economic supply/demand equation is pretty much fixed, so the real question is what will happen with demand?

Again, at least for the short and medium term, the answer to that is pretty clear: demand is, and will likely remain, robust. Google and other local tech companies are doing well. Venture capitalists are pulling out their wallets again. Start-up nirvana 2.0 is here. Immigrants from across the country, and indeed the whole world, continue to move here.

So, could prices fall by 40% overnight?  Absolutely! But in the only scenario I can come up with in which that happens — a scenario which involves an earthquake, a terrorist attack, and bankruptcies of the top 5 tech employers in the area…all within 3 months of eachother — falling equity may not even make the top 10 list of concerns for many people.

We parted company, and they promised to get back to me within a few days about whether they were ready to proceed. I had my doubts, mostly about Bob.

Sure enough, a few days later I got a phone call from him. “We’ve decided to wait it out,” he said. “We’re just a bit nervous about these prices, and we’re not in a big hurry to buy.”

We agreed to keep in touch every few weeks and see how things developed.
Welcome to real estate in the Bay Area.  Prices are high, and you need a certain amount of faith and intestinal fortitude to dive in for the first time.

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Written by Kevin · Filed Under Buy vs. rent, Buyer and seller tips, Choosing an agent, For buyers, Google Earth, Home buying, Previewing homes, Real estate, Redfin 

Comments

8 Responses to “Bob and Betty Buy a Home (Part 2): We See Some Homes, But Bob and Betty Get Spooked”

  1. Bruce Smeaton on March 30th, 2007 2:09 am

    I can totally relate to the “Bob and Betty” story! I experience it at least once a week down here in Auckland, New Zealand:)

    Unlike yourself, I’m not a licenced real estate agent, but rather a property broker. The difference being that ‘as a property broker, I am able to source brand new houses from a variety of builders and developers at a certain margin below their registered valuation, and then on-sell them at their true valuation price.

    I actually spent the best part of the last decade working, not as a property broker but as a mortgage manager for one of New Zealand’s mainstream banks. With hindsight, it was a great grounding for situations like meeting up with the “Bobs and Bettys” of this world… because unlike most realtors, I can literally tell within a few minutes of conversation “if” they can afford to buy anything at all, let alone buy the home/s I might be wanting to show them.

    San Francisco sounds like it is precariously balanced at or near the top of the recent property boom. Auckland is exactly the same. In fact, despite the doomsayers predictions of the past three years, our property market continues to rumble ever onwards!

    We’ve enjoyed 100% gains across the entire country over the past decade - and in certain areas, ‘hundreds of percent’ gains!

    However, there are some fundamentals driving our market at present - particularly the investment property market - that don’t look like going away any time soon.

    For example, we’ve enjoyed a massive upturn in immigration to this country. That in itself creates a ‘demand exceeding supply” situation.

    Plus, with mortgage interest rates having risen 3% in 4 years, this has meant that ‘would be first home buyers’ are choosing to stay renting indefinitely rather than take on the crushing burden of a large mortgage. This in turn has meant that demand for rental property has exceeded supply, making property investment even more attractive than it already is!

    Actually, a couple of colleagues and myself were recently studying some housing stats and came a cross an example of a villa in the Auckland suburb of Mount Eden (10 kilometers from the CBD) that was “living testament” to the power of property as an asset worth investing in.

    For example, in 1983 it changed hands for a mere $79,000. 10 years later it sold for $312,000. In 2004 it was sold for $920,000. Last month it sold for $1,200,000!

    Over a 23 year period it had enjoyed annualised returns of approximately 65% per year!

    But here’s the real kicker…

    During that same 23 year period this property was exposed to the impact and subsequent fallout from the 1987 stock market crash, the 1989 property crash, the recession of the early 1990’s, the sheer chaos leading up to the first Gulf War, the Asian crisis of 1997 (which ripped 15% - 20% out of the Asian - Pacific property market)… then there was “9/11″…and you know what THAT did to the markets for a few months!

    So yeah… I keep telling the “Bobs and Bettys” that no matter what price they pay for their home, no matter how expensive they might feel it is… it’s gonna seem awful cheap in 10 years from now!

  2. Athol Kay on March 30th, 2007 9:59 am

    When I went back to New Zealand this Christmas, I was quite surprised at the cost of housing. To the point of maybe not being able to move back if I wanted to.

  3. Sinster Sock Puppet on March 30th, 2007 11:37 am

    When I went back to New Zealand recently I was stunned to see how much the housing prices had incresed.

  4. Kess on March 30th, 2007 4:32 pm

    Your hypothetical story about “first-time home buyers” borders on ridiculous. Why on earth would your “first-time home buyers” choose to buy their first house in one of most expensive areas of the Bay Area? I’m surprised they did not go straight to Atherton or Hillsborough. And they must have never heard of a town home or a condo, I presume?

  5. Kevin Boer, Realtor, 3 Oceans Real Estate on March 31st, 2007 11:40 am

    Hi Kess,

    Thanks for dropping by.

    This ongoing story is a composite sketch of clients I’ve worked with. I know we live in fantasy land here in the Bay Area, but yes, there are many, many first-time home buyers who buy homes around ~$1M.

    They’re typically dual-income families, with combined gross salaries around $300K or more (e.g. husband at a big high-tech firm, wife an attorney), who’ve been out of grad school (MBA, LLB, PhD) for at least 3 years.

    The highest price home I’ve helped first-time home buyers get was around $1.25M; couple was similar to in the above paragraph but were 6 years out of grad school.

    Single buyers, or couples with lower gross incomes, typically do start with lower-priced homes or condos.

    I haven’t decided yet where my hypothetical first time home buyers will end up, but of course it will not be Atherton or Hillsborough. If this series continues over a few year time period, they might end up in Atherton or Hillsborough the 3rd or 4th time around, but only if one of their employers does a successful IPO. I probably won’t go down that route because it’s too much part of Silicon Valley lore.

  6. Lenore Wilkas on March 31st, 2007 7:48 pm

    This story is played out to many Realtors on the Peninsula. Prices do not go down and unless we see a large influx of housing, likely won’t. The highest first time buyer I helped was $1.895 million. One income, with a stay-at-home wife. It was NOT in Hillsborough or Atherton or Portola Valley or Woodside. We did look at all four towns, though. It was in Half Moon Bay.

    Unless you live in our Fantasyland, it is impossible to understand the how’s and why’s of it happening. It just does. We are very lucky to have a strong economy right now. But, even when it has been sluggish, the housing market between Burlingame and Palo Alto has not deminished. Just the opposite.

    You are right on, Kevin, we have no where else to build and if you want to live here, you pay the piper.

  7. for sale » Bob and Betty Buy a Home (Part 2): We See Some Homes, But Bob and … on April 2nd, 2007 10:17 am

    [...] DAMON PACE - CEO wrote an interesting post today onHere’s a quick excerptI had an ambitious tour planned: 12 homes in 4 towns along the 101 corridor. Always exhausting for everybody involved — every time I do this I have more liking for the part of the Redfin business model where clients do this bit … [...]

  8. The Bay Area Ain’t The Only Place With Long-Term Gravity-Defying Real Estate Prices! | 3 Oceans -- The San Francisco Bay Area Real Estate Blog on April 3rd, 2007 7:35 pm

    [...] My recent post about my fictitious buy-side clients Bob and Betty garnered a number of comments, ranging from skepticism that first-time home buyers could buy a $1M home (hard to believe, but true here in the Bay Area) to commentary on other high-priced areas. [...]

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