Utter insanity is turning south.
In Palo Alto, a small town of about 67,000 souls, including Facebook CEO Mark Zuckerberg, about an hour south of San Francisco, in the middle of Silicon Valley, and part of the 9 million people in the vast Bay Area, the median home value in July, according to Zillow, fell to $2.486 million.
That’s still up 103% from July 2011. These are not palaces. Median price means 50% cost more, 50% cost less. These are modest homes, in theory where the median household can settle down. Drop to $1 million, and you get the “million dollar shack.”
But the median price is up only 1.6% from July last year, and down 0.5% from the peak in April of $2.5 million, a tiny fraction really – “tiny fraction” in Palo Alto means $12,500.
The median listed price per square foot, at $1,357, is down 7% from June.
Prices started “plateauing” a year ago, which means they’re now heading south. Zillow, with its usual optimism, expects them to drop only another 0.3% over the next twelve months.
The 71 homes listed for sale on Zillow start with four 1-bedroom 1-bath condos of around 770 sq. ft. each, in the range of $540,000. Two of them have been on Zillow for 41 days, and two appeared 11 days ago. There are also 2 pre-foreclosure units, to be sold at auction, and one foreclosed 1-bedroom 1-bath condo.
It doesn’t take long to get into the median price range of $2.5 million, and there’s plenty, some of them with reduced prices, some of them on the market for over 150 days.
Then, at the top end of the pile is a 5,330 sq. ft. home listed for $17.5 million, on Zillow for 68 days so far.
If the price of the median home doubles over a period of five years, as they did in Palo Alto, it’s not because that median home has gotten to be twice as big or twice as nice, or whatever, but because the dollar has lost half its value with regards to this type of asset. It’s called asset price inflation.
Central banks have been very effective in creating asset price inflation. Stocks, bonds, commercial and residential real estate, etc. all have skyrocketed.
There are also consumer price inflation, producer price inflation, wage inflation etc., and in that regard, the dollar has been holding up better.
The median rent in Palo Alto is $5,800, which puts even San Francisco to shame. The Zillow Rent Index sits at $6,318, down about 3% from November last year. Like home prices, rents have plateaued with a southern bias.
So it’s a money suck. Which is fine when prices go up, and if you have an unlimited amount of money. But now that prices have hit a wall, and if you don’t have an unlimited amount of money, the money suck can get painful in a hurry.
People are already putting two and two together and are bailing out, including Kate Vershov Downing, who resigned from the Palo Alto Planning and Transportation Commission. Her letter of resignation, dated August 9, starts out this way:
This letter serves as my official resignation from the Planning and Transportation Commission. My family has decided to move to Santa Cruz. After many years of trying to make it work in Palo Alto, my husband and I cannot see a way to stay in Palo Alto and raise a family here. We rent our current home with another couple for $6200 a month; if we wanted to buy the same home and share it with children and not roommates, it would cost $2.7M and our monthly payment would be $12,177 a month in mortgage, taxes, and insurance. That’s $146,127 per year – an entire professional’s income before taxes. This is unaffordable even for an attorney and a software engineer.
It’s not a place for young people either, despite its Silicon Valley allure, unless they want to bunk down together and with their combined high salaries pack into a median house. “Hacker hotels,” they’re called. That’s fun, for a little while. And then? Bloomberg explains it this way:
Palo Alto lost 7% of its 18- to 44-year-old population in the 2000s, the only age group to show a decline, according to Census data cited in the city’s report. Those aged 45 to 64 grew by 19% and older than 65 increased 20%.
The power behind this rampant home price inflation? Maybe “tech.” But probably not anymore, given that tech salaries for most employees no longer suffice to live adequately in the town.
And foreign buyers looking to get their money out of harm’s way, and not caring about what price they pay? “Realty bus tours popular with Chinese and Indian buyers are a common sight, with purchases leading to unoccupied investment properties dubbed ‘ghost houses,’” as Bloomberg put it. But China is cracking down on money laundering. And the US government’s anti-money-laundering efforts recently stopped ignoring real estate. So foreign buyers too may be drying up, as the languishing prices indicate.
Many folks have suggested that Palo Alto needs more subsidized “affordable” housing – though that may not help much either, except make life even more expensive for the rest of them.
The real solution? As a matter of principle, I don’t give financial advice. But if I were out there giving financial advice and charging an arm and a leg for it, it would sound like this: “If you own a home in Palo Alto, sell it now.”
There has never been a more perfect time to sell, except perhaps earlier this year, but that train has departed. Cash out of this bubble while the cashing out is still good. Let someone else get stuck with the losses. Because a 30% loss on the median home of $2.5 million is a cool $750,000. And losses after such a breath-taking real estate bubble can exceed 50% without breaking a sweat.
If you rode up the gravy train from 2011, and doubled your money and made $1.2 million on your home, don’t let the market take that away from you. That’s what I’d say if I were selling financial advice, and then I’d send you a bill for an arm and a leg.
And for crying out loud, make sure you don’t buy again in Palo Alto because you would just plow your money back into the bubble. Move to downtown Detroit, which is getting cool again, and telecommute, while laughing all the way to the bank, every day. You wouldn’t be the first one to do it!
I get chills when insiders tell outsiders “not to panic.”
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