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

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Tomorrow (1/10/08) Ben Bernanke is scheduled to speak on his outlook on the economy, and the pundits are all expecting that by examining his comments repeatedly, reading tea leaves, and consulting their favorite oracle, they will be able to predict whether the US economy will slide into recession in 2008, and whether the Fed will cut interest rates again at their next meeting.

The stock market seems optimistic, with trading up today as investors shifted into sectors that are seen as resistant to recession and economic contraction. These are things that we spend on whether things are good or bad; food, medical care, gasoline and heating oil.

Some economists say we are already in recession because of a jump in unemployment in December coupled with little growth.

Nationally, I tend to agree with the doomsayers. Here in Palo Alto, Los Altos, Mountain View and Menlo Park however, we are still beneficiaries of the strong local economy. Local executives are still complaining that they can’t hire enough engineers, the housing market continues to be strong as we are seeing a net inflow of people, and minimal relative increase in housing (no more land), and we have a unique concentration of educational instituions, venture capital and innovation that enables Silicon Valley to continue to reinvent itself.

In summary - We will likely see a national recession in 2008 and 2009, with housing prices potentially falling by up to 30% in some areas where prices have been driven up by speculators/investors. The local real estate market will remain constrained by supply, so we will see fewer homes being sold, but prices will remain at current levels, or even continue to increase. Great news if you are planning to sell your home in Palo Alto, bad news if you want to buy in Palo Alto.

In the Central Valley this will sadly not be the case . . .

Stay tuned for a recap of tomorrow’s commentary by Fed Chairman Bernanke.

Thanks for reading.

Tags: 4---mortgage-mania, economy, Los Altos, Menlo Park, Palo Alto, palo alto economy, palo alto real estate market, Real estate, recession

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