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

Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. ()

January 7th, 2008 · 3 Comments

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.

Plankton are at the bottom of many food chainsTo 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…

East Palo Alto inventory in Silicon Valley in California

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

East Palo Alto home prices in Silicon Valley in California

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…

Real estate inventory in Redwood City CA

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

Real estate price patterns in Redwood City CAReal estate price patterns in Redwood City CA

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Possibly related posts

Tags: Atherton · Consumer · East Palo Alto · Flood Park · Los Altos · Menlo Park · Mountain View · Palo Alto · Redwood City · San Jose

3 responses so far ↓

  • 1 The San Diego Home Blog » Blog Archive » Short sale pies are food for thought. // Jan 7, 2008 at 9:19 am

    [...] Without beating my head against the wall on this, a day I don’t want to think too hard, I will venture a couple of observations. Attached homes (condos) are generally in a bit more of a pickle than detached. This is not unexpected, but is a potential omen. So go the condos goes the market, eventually. For an excellent refresher on the resale housing trickle-up theory, you should read Kevin Boer’s recent article. [...]

  • 2 Jeff Brown // Jan 7, 2008 at 11:21 am

    This is by far the most readable explanation of today’s market I’ve seen.

    Once the buyers with cash are all satiated, one wonders if the timing will be right for the plankton to resume ‘feeding’ the food chain.

    Wouldn’t that timing be exquisite?

  • 3 A Tale of Two (or Three?) Markets in Sonoma County Real Estate at Wine Country And Horses // Jan 7, 2008 at 3:48 pm

    [...] crisis.    How will this glut at the lower end ultimately effect our higher end market?    Kevin Boer has an excellent post on this phenomenon in the mid-peninsula market of the San Francisco…  I’ll comment in more detail on this topic and prices in another [...]

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