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Lies, Damn Lies, And Statistics: What Mark Twain and Benjamin Disraeli Would Say About Menlo Park’s Median Price Numbers (Part 2)

Continuing my earlier rant about how real estate statistics don’t always tell an accurate story, let’s look at what Menlo Park’s numbers seem to indicate for our ongoing robust spring market.

First, a recap:  courtesy of our good friends the quant jocks over at Altos Research, we saw that the median price numbers for Menlo Park had dropped by some 30% — from $1.25M to $850K — over the 9 month period from April of 2007 to January 2008.

That drop in median price, however, by no means reflected the reality on the ground in Menlo Park — in other words, it is not true that a home in Menlo Park that was worth $1M in April 2007 was suddenly only worth $700K in January 2008.  The reason for that disconnect was simply the change in the mix of properties being offered:  in the last half of 2007, the inventory of lower priced homes east of 101 swelled, dramatically pulling down the overall median.

As if to emphasize that disconnect, we see what appears to be a dramatic price recovery from January of 2008 to now in May of 2008; in fact, it looks like the market has regained all 30% of what it ostensibly lost late last year!

Again, the reality on the ground is quite different; that is, a Menlo Park home that was worth $1M in January of 2008 is most emphatically not suddenly worth $1.3M today.

Moral of the story?  Simple:  real estate statistics are good at telling some stories, but not very good at telling others.  In particular, the median often simply reflects the mix of properties currently on the market and not necessarily any underlying ups or downs in the market.

Tags: Consumer, Industry, Menlo Park

Conforming Loan Limits Newsflash

I’d like to thank Kristen Emery at Princeton Capital in Palo Alto for providing me with the first bit of information that actually explains what the changes to conforming loans will mean to someone in Silicon Valley trying to buy a home.

A little light reading for you:

We have seen a whirlwind of legislative activity these past few weeks! There is much confusion surrounding the recentlypassed Economic Stimulus Package and higher loan limits. Unfortunately, the new law can be confusing to decipher, andnot everyone will benefit. For this reason, we have provided an outline below that clarifies what this new law means for youand how you can benefit from the higher loan limits. 

Description and Overview:An economic stimulus package just passed Congress on February 7, 2008 and was signed into law by the President onFebruary 13, 2008. This new law is effective immediately and includes a temporary increase in both the FHA andconforming loan limits to as high as $729,750 in high cost areas. This means that the interest rates on many mortgages willgo down because these loans are now eligible to be purchased by Fannie Mae and Freddie Mac or insured by the FederalHousing Administration (FHA). Previously, the FHA was only allowed to insure loans with balances lower than $200,160 -$362,790, depending on the county where the property was located. Also, Fannie Mae and Freddie Mac were only allowedto purchase loans with balances at or below $417,000. This resulted in limited options and higher financing costs for thosewith loan balances above these limits. The new law substantially increases these limits in high cost areas and opens upnew options and lower financing costs for many people. 

How to Determine “High Cost” AreasThere are two things you must know in order to determine if you are in a high cost area: 

1. Understanding the Formula

If 125% of the local area median home price exceeds $417,000, the temporary loan limitwould be that 125% of the median home price with a cap of $729,750. Here are threeexamples to illustrate this concept: If the median home price in your area is $375,000, 125% of that number is$468,750. Thisis above the current $417k conforming loan limit. Therefore, the conforming loan limit inyour area WILL change and go up to $468,750. This number is also higher than thehighest FHA loan limits, so therefore your FHA loan limit will also go up to $468,750. If the median home price in your area is $650,000, 125% of that number is $812,500.This number is greater than the maximum cap of $729,250. Therefore, the conforming loan limit in your area willincrease to highest allowable amount under this new law which is $729,250. (Our median home price is $612,000 for Santa Clara County). 

2. Determining the Median Home Price in Your Area

The Secretary of Housing and Urban Development (HUD) will publish the median house prices within 30 days of the billgoing into effect (30 days from February 13, 2008). HUD does not have any interim stats or information for us to use. However, the bill also states that HUD can use any commercially available data if they are unable to compile theinformation on their own within the 30 day timeframe. With that in mind, it is likely that HUD’s numbers will be relativelyconsistent with the data published by the National Association of Realtors (NAR), which already has a solid track record oftracking and publishing this information on a quarterly basis. Therefore, until HUD actually publishes their version of the median home prices, the most accurate way to get thisinformation today is to utilize the data that is published by NAR. Ironically, NAR just released their latest median homeprice update for the 4th quarter of 2007 on February 14, 2008! Contact me today and I’ll research your info and let youknow exactly what the median home price is in your area and how you can benefit from this information. 

What do all the dates mean?

There is some confusion because the bill has a provision that says the higher limits areonly effective for loans originated between July 1, 2007 and December 31, 2008. Inshort, the reason it is effective beginning July 1, 2007, is because the credit crisis startedto unfold in July and August of 2007. Mortgage market conditions rapidly deterioratedalmost overnight. Many secondary market investors suddenly refused to purchase loansthat couldn’t be sold to Fannie Mae and Freddie Mac. (For more info on how this processworks, please see the article entitled Saga of the US Mortgage Industry.) Unfortunately, many mortgage banks had already funded these loans in their ownportfolio or through their warehouse lines of credit. Their intention was obviously to sellthese loans on the secondary market after the loans were funded. However, the creditcrisis prevented them from doing so, and they were stuck holding these loans in theirportfolio. The July 1, 2007 date in the bill is designed to allow these lenders to unloadthese mortgages and sell them on the secondary market to Fannie Mae and Freddie Mac. 

However, the July 1, 2007 date has no bearing whatsoever on new refinance transactions!

In other words, it doesn’tmatter when the loan you are refinancing was originated. The old loan could have been originated in 2005, 2006 oranytime before or after July 1, 2007 and it would have no effect whatsoever on your current purchase or refinancetransaction.

If you are refinancing a new loan today, whether it is a purchase or refinance transaction, that loan issubject to the new limits set forth in the bill. 

The other date of December 31, 2008 means that the old limits will go back into effect after this year. In other words, now isthe perfect time to buy a new home or refinance your mortgage because after this year, your costs will be higher and youroptions more limited again. 

When does this all go into effect?

February 13, 2008 – immediately upon the President’s signature. Therefore, HUD is obligated to publish the median homeprices within 30 days of that date. However, Fannie Mae, Freddie Mac, and various wholesale lenders may have different policies as to how these new loans are going to be priced and underwritten.

 - - - Information provided by:

Kristen Emery

Princeton Capital

kemery@princetoncap.com

650-566-5754

Tags: 2008 real estate market, 4---mortgage-mania, Conforming Loans, first-time buyer, Mortgage, Mortgage Forgiveness Debt Relief Act of 2007

What Does The Change in Conforming Loans Mean To ME?

. . . Said my friend Amy to me the other day. Since she is sort of a typical first time buyer, (actually not), I decided to make an example of her and contribute to her 15 mins of fame.

Amy is your somewhat typical Sillycon Valley MBA tech-marketing type. She works in marketing for a large company, so her income is derived from her salary, as opposed to commissions or stock options that may or may not vest. The company is stable, so her bonuses tend to be consistent and her income fairly predictable. She recently moved from one giant tech company to a large one, so she has a number of years of experience in her industry and job classification, excellent credit, and some equity from a condo that she sold.

Being an MBA, and financially conservative (politically liberal), she can comfortably afford something in the $650K price range, even in the current lending environment. The previous idea was for her to take out two mortgages, a conforming loan of $417,000, and then a second or equity line to cover the rest.

Now that Mr. W. has signed off on the stimulus package that included a short-term increase in the conforming loan limit for 2008, Amy’s interest in buying a house has gone up. The tax rebate will let her buy her kids a happy meal and some new jeans, so her interest is much more in the mortgage changes.

At the time of our conversation, the difference in rates between a conforming (under $417,000) and jumbo ($417,001+) loan was about .75%, depending on a million things, which I will leave to co-contributor Eric Trailer to explain. Jsut plugging in some numbers, on a loan of $585,000 (10% down on our $650K house), her payments would drop about $4300 a year excluding taxes if that loan was at the lower rate. Now we are talking interesting.

Admittedly, this is very simplified, because it doesn’t take into account the cost of a conforming first and then a second, or whether lenders will have tiered pricing based on the loan amount, or credit scores, documented vs. non-documented income, etc., etc., etc.

My intent is to show the effect of this new law on “normal” Silicon Valley home buyers who have “normal” jobs, and are trying to put a roof over their heads. While the tax rebates of a few hundred dollars will only have minor impacts on most of us (I get $300, I think), the effect on home buying capability will be potentially significant.

Let the comments fly, and thanks for reading.

Tags: 2008 loan limits, Conforming Loans, economic stimulus, Home buying, Jumbo Loans, Mortgage, mortgage mania, mortgage rates, new home buyer

Warm And Beautiful

I had promised myself to be nice to Teresa Boardman, to not gloat…alas, her post Cold, But Beautiful (designed, I suppose to make one think St. Paul, MN is actually habitable…by humans) got me thinking…

Bayfront Park, just down the road…60 degrees…clear blue sky.

Ah, California!

No tag for this post.

Lies, Damn Lies, And Statistics: What Mark Twain and Benjamin Disraeli Would Say About Menlo Park’s Median Price Numbers

Mark Twain, it seems, merely popularized, but did not actually coin the phrase Lies, Damn Lies, and Statistics.  That honor belongs to none other than the British statesman Benjamin Disraeli, the first Earl of Beaconsfield, KG, PC, FRS.  (With all these acronyms after his name, one wonders if he may have been the first Realtor!)

I’ve ranted not infrequently about how real estate is local, local, local.  What nationwide, statewide, or countywide prices are doing may or may not reflect your city.  The overall trends in your city may not be a good indicator of your particular neighborhood.

And that’s where Benjamin Disraeli’s famous quote come in.  You can make numbers tell whatever story your bias prefers.

The story I’m about to tell is hyperlocal if ever there was one.  If you’re not in this immediate area, the lesson for you is not in these specific numbers, but in the notion that you have to understand your local market.

Here, for instance, is a pretty bad story to tell, and it appears that the story, as told by the great numerical storytellers of Altos Research, is quite simple:  home prices in Menlo Park are in freefall, with the median having dropped from an all-time high of $1.65M in mid-2005 to a current $875K-ish.  2007 prices have — apparently — dropped by 30%:

That story just doesn’t make sense to me, however.  The marquee towns up and down the Peninsula — those with good schools and their associated high prices — have actually done quite well over the last year.  Why would Menlo Park be any different?

Palo Alto:  Median prices mostly up last year, with a retreat in the latter part of the year, and signs of another season upsurge upon us…

 

Los Altos:  An incredible run-up in prices, again with a dip last year, and again with a sign of a revival this year…

 

Los Gatos:  A rise last year, though not as much as the other towns, and a pullback in prices in the latter part of the year…

You get the picture.  Why then is Menlo Park so different?  Have prices really dropped by 30%?

The answer?  Most emphatically not!

In fact, take a look at these numbers, pulled from our local MLS.  Of the twelve Menlo Park neighborhoods, only two of them had median prices go down in 2007 — and then only by 2-3%.  Other neighborhoods saw medians rise from 5.6% (Flood Park) to 35.6% (Alpine Road Area.)  The following graph shows the percentage change in median prices from 2006 to 2007.

How can both of the following two facts be true?

• Median home prices in Menlo Park have dropped by 30%
• Median home prices in 10 of 12 Menlo Park neighborhoods have risen, while median home prices in the remaining 2 neighborhoods have fallen, but only modestly.

The answer, Mssrs. Disraeli and Twain, lies in a different statistic:  the amount of inventory on the market.  Take a look at the story told in this graph, which shows the number of homes sold per year by neighborhood:

 

The sheer amount of data in this graph, and its size, makes it hard to read.  The key points:  the number of home sales in Menlo Park in 2007 was just over 400 — significantly lower than the wild years of 1999, 2004, and 2005.  The number of homes in the “East of US 101″ neighborhood — the least expensive one – however, increased dramatically.  The average number of annual sales in that neighborhood is 36, but last year there were fully 69 — just about double — the number of sales.  In the higher-priced neighborhoods, on the other hand, there were fewer sales than normal.

Another graph…this one showing how many sales typically happen in a year in each neighborhood, followed by how many sales happened in 2007:

 

The lowest-priced neighborhood — East of 101 — had a dramatic increase in the number of transactions; almost every other neighborhood — in particular the expensive ones had fewer sales.

So this, ladies gentlemen is the key story that Mssrs. Disraeli and Twain — not to mention my stats professors — would want us to understand:

• The median price of homes in Menlo Park has indeed dropped in 2007.
• The price of most individual homes in Menlo Park, however, has actually increased in 2007:  that is, most homes were worth more at the end of 2007 than they were at the end of 2006.
• The anomoly between the above two points is explained simply by the mix of the homes that were sold:  2007 saw a much higher than normal proportion of less expensive homes.

Tags: Altos Research, Flood Park, Los Altos, Los Gatos, Menlo Park, MLS, Palo Alto, Real estate

Plankton, Vendus Encourigitis, and the Stratification of Market Activity in Silicon Valley

A few days ago I spoke about the effect a mythical local insect, Vendus Encourigitis, has on housing inventory patterns here in Silicon Valley. It quite dependably comes out in the early part of each year, spraying homeowners with pheromones that make the notion of selling their home completely irresistible, thus putting an end to the seasonal problem we have here of low inventory. A close cousin of said insect, Achetus Encourigitis, tends to come out shortly thereafter, encouraging buyers to compete with eachother to buy the new inventory and drive prices up.

To continue the allegory, we look at another creature, this time a real one, but again with an allegorical function in this tale. I speak of the lowly plankton, a tiny oceanic life form: in size, seemingly insubstantial, but in importance, great. The plankton, you see, is at the bottom of many aquatic food chains, and if it were for some reason to disappear, the effect would be disastrous for the creatures that depend on it for food, and for predators of the creatures that depend on the plankton, and so forth: a ripple effect ultimately reaching most aquatic life.

The plankton of local real estate is the humble first-time homebuyer in the lower priced areas such as Redwood City, East Palo Alto, Menlo Park east of 101, parts of Mountain View and San Jose, and so forth. These folks purchased their homes in the last few years, assuming (as we all did) that prices would continue to rise, and they could then “move up” into a ritzier neighborhood with the equity they had built up. A higher than normal percentage (for this area) of such purchases were made with sub-prime loans.

Fast forward to 2008…these markets are hurting, some of them quite badly.

East Palo Alto’s inventory, for instance, has been marching steadily and worryingly upwards since early 2007…

…and prices have been going in the opposite — and expected — direction:

When inventory is over three times what it was a year ago, and prices have dropped by over 15%, the market basically freezes. Deflation does what it always does: makes the bargain-hunters decide to continue salivating just a bit more, because surely those prices are going to continue going down! Homes sell more slowly, prices continue downwards…it’s a vicious spiral.

And the plankton who own these homes? Well, if they can’t sell, that means they can’t buy the $850K starter home in Flood Park…and that homeowner can’t buy the $1.1M home in Palo Alto…who in turn can’t upgrade to the $1.6M property in Los Altos he’s been salivating over…who in turn can’t move to a respectable venture-capitalist-ridden neighborhood in Atherton.

The sub-prime woes affecting the lower-end markets are bound to eventually impact Palo Alto and its kin — though probably not as much as this analogy makes it sound. Why? In this market, there are plankton at almost every price point, so homeowners looking to sell don’t necessarily need to wait for a $500K homeowner to be able to sell his home. For every East Menlo Park’ian who was planning to — but no longer can — move across the 101 to buy an $850K home, there’s a dual-income tech couple who’s looking for the same $850K as their first home. Higher up the food chain, newly minted Googlers represent the plankton of the Atherton market.

But make no mistake about it: the lower end markets here are hurting, and will continue to do so for a while.

For instance, Redwood City’s inventory, much like East Palo Alto’s, is more than triple where it was a year ago…

…and prices in the two lowest quartiles are not looking pretty:

Tags: Atherton, Flood Park, Google, Menlo Park, Mountain View, Palo Alto, Real estate, Redwood City

Fair Oaks Community Park

The Fair Oaks neighborhood in Menlo Park is well known for its traffic-slowing British-style “roundabouts”, specifically designed to slow down those impatient folks trying to skirt around the busy traffic on Middlefield and Marsh. What these busy folks tragically miss when they speed through the neighborhood is the wonderful community-owned and cared-for park.

Located on Fair Oaks Avenue, just before it curves and then dead-ends into Edison, this park was started and funded by local residents. It’s a small park, not very ambitious, but very comfortable and homely, with a small basketball court, a number of swings, a sandbox, a jungle gym, and a few other distractions for the kids.

On any given day you’ll see an assortment of local moms, dads, and nannies, all carefully shepherding their little charges as they bustle about on the important business of childhood. This is a park where the neighbors meet, where friendships are struck, where adults get to laugh at the kids’ amusement. It is, in every sense of the word, a community park.

No tag for this post.

Halloween “Trick Or Treat” Report: Crescent Park Sucks, Fair Oaks Rocks!

Having neither children nor a sweet tooth, Trick or Treating has never been much of a tradition for me.  This year, however, the dear wife and I borrowed some kids and accompanied them on an a quest for as much teeth-rotting debauchery as possible.

To fit in, we of course needed costumes.  I did a pretty bad rendition of a 70’s disco dude, while my wife took on the disguise of a Freudian slip.  She’s the far better looking one in our marriage, but, alas, she’s also much more private than I, so you’ll have to content yourselves with this picture.

 

With drooling thoughts of a bigger haul, we headed across the San Francisquito Creek — and the city and county line — to Palo Alto’s ritzy Crescent Park neighborhood.  Much to our disappointment, the pickings were slim — and not because the neighborhood had already been picked clean.  At most 10% of the homes had any form of inviting Halloween decorations, and the homes that were offering treats were fairly skimpy with their offerings.

We soon headed back to our home turf in Menlo Park’s Fair Oaks neighborhood.  Much, much better.  At least 50% of the homes were taking part, and a good portion of those had gone all out with their decorations.  Everybody was generous, and the trickle of treats from Crescent Park soon became a torrent.

The same two or three homes stood out.  One in particular has become a neighborhood staple of over-the-top Halloween spirit, starting with a witch that seems to always run into the same telephone pole (though from different directions each year!), to a scary graveyard, to a haunted entrance…everything you could wish for!

[GALLERY=1]

Tags: Consumer, Fair Oaks, Menlo Park, Palo Alto

New Construction in Menlo Park Fair Oaks Neighborhood (Part II)

Continuing yesterday’s description of new construction in Fair Oaks, we move east of San Benito to 15th Avenue, aka Palmer Lane, an interesting street in its own right: it starts its life at Marsh Avenue in the humble Fair Oaks neighborhood, executes a sharp southward turn, crosses Fair Oaks, shortly thereafter boldly changes its name to Palmer Lane, crosses Middlefield Road, immediately takes on the moniker of Fair Oaks Lane, continues its leisurely meander past the weekend-only Atherton train station, crosses El Camino Real, and then becomes the picturesque Atherton Avenue, which remains its name for another one and a half southwesterly miles, and shortly thereafter becomes Ridgeview Drive, dead-ending just north of Bear Gulch reservoir. Five name changes and spanning at least three biomes — quite an accomplishment.

But back to the new construction: in its incarnations as 15th Avenue and Palmer Lane, there are no less than 6 — six!! — pending, new, or recently completed homes.

Starting from the south and moving northwards, we have 515 Palmer Lane, a grand old home sitting majestically on an ample 20,000 square foot lot. The home itself is over 3300 square feet and has 5 bedrooms and 3.5 bathrooms, plus a quaint old cottage in the back. When it was on the market from mid-2005 to mid-2006, it exuded charm from every pore, but it also begged for renovation: the floors were uneven and squeeky, the kitchen had certainly seen better days, and the wallpaper was practically screaming, “Get me outta here!” Sold for a tidy $1.8M, there has been a steady stream of work going on there, and no doubt the interior of the home has been largely restored to its original grandeur.

Right next door is 519 Palmer Lane, another home that started life as a grand old place on a 20,000 square foot lot. The home, alas, is no longer there, having been razed to the ground. The buyer split the property into two and is now building two large-ish homes on it. The listing agent — Sam Anagnastou Anagnostou — has a sign up already, though the homes are a good few months from being ready. (Note: My tradition is to link to the web site of any broker I mention, but I was not able to find Sam’s.)

Further up we have 659 Palmer Lane (I believe that’s its address), with a similar — though less ambitious — pedigree as 519. It’s done a neat little transformation from an 8000 sq ft lot with a teeny 1200 sq ft home to two larger homes, each on teeny lots.

Further up, at 770 15th Avenue, is a long, narrow, rectangular lot, whose highest and best use, given its shape, may be a bowling alley. Shelly Roberson — friend, top agent, and spouse of 3 Oceans contributor David Roberson — recently purchased the lot and has plans to put two “darling homes” on the site. It won’t be easy, but having seen some of Shelly’s other projects, I have no doubt she’ll succeed.

And finally, at the corner of 15th Ave & 18th Ave — you gotta love a neighborhood where 15th Ave and 18th Ave, as opposed to 15th Ave & 18th Street cross each other — is a new home that was finished some 18 months ago. County and MLS records for this property are sketchy, but it appears the current owner bought the home in the early 90’s, lived in it for a while, and then did an extensive remodel. It’s now a tasteful 2-story home whose view I enjoy seeing every time I negotiate the traffic circle (”roundabout” for my British readers) at 15th & 18th.

For a Google map overview of these properties, please head yonder.

Tags: Consumer, Fair Oaks, Menlo Park

New Construction in Menlo Park Fair Oaks Neighborhood (Part I)

As a denizen of Menlo Park’s quaint Fair Oaks neighborhood, I try to keep an eye on the goings-on in the neighborhood. Lately there’s been a rash of new construction. Armed with a camera, and a determination to give Google Maps a test run, I thought I’d give an update.

View Larger Map

This home, on the corner of 8th and Oak Drive, used to be, well, a dump — no other way of describing it. I remember touring it some 18 months back and it looked like a big red country barn that had escaped, perhaps from Modesto. An intrepid local builder named Homer — well known to folks in this neighborhood — bought the home, tore it down, and rebuilt it as a 3000-ish sq ft home, complete with all the trimmings. The home’s layout on the Oak Drive side had to be a bit creative, since Menlo Park is somewhat protective of its trees. Homer finished this project some 8 months ago.

Just down the road, at 535 8th Avenue, some new construction is in progress, and it looks suspiciously like a 2nd-story addition.

Four streets east, on San Benito Avenue, there is a forlorn-looking, but sizable, empty lot. Given the shortage of land on the Peninsula, it always surprises me to see such things.

Further down San Benito lies another forlorn property, this one with a rather disheveled home on it. Renovation has been on-and-off-going for a while now. This home undoubtedly had boatloads of charm, and will hopefully be restored to its rightful condition.

Tags: Consumer, Fair Oaks, Menlo Park

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