Lostpassword2, Both Buyer and Seller in Palo Alto, CA

Strange days??

Asked by Lostpassword2, Palo Alto, CA Thu Jun 23, 2011

I hear realtors saying Palo Alto is on fire. One even took out multiple ads in the local paper proclaiming this. And you know, I see some evidence: 262 N.California sold for $100K over asking at $1,268,000 for a totally outdated, junky place (Ioved the way the master bedroom flowed into the...garage) on a small lot at $1,366/square foot.

But then I see much nicer 865 Forest finally sold at $1,037/sq.ft. after 2 months on the market for $75K LESS than its previous 2009 sale at $1,675,000 for a loss of at least $165K over two years when you include realtors fees. That's $7.5K/month for 22 mo. of occupancy, not including the $8K/month interest the sellers ALSO would have paid for a loan. But since it appears they actually bought w/cash, it works out even worse: during that period, the S&P increased 43%, which means had they simply parked that $1,675,000 in an index fund they'd have $720K more, or $32Kmonth. All told, the cost per month: $48K. Brutal. What am I missing here?

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Answers

9
James Peterson’s answer
One should not compare a pure investment vehicle such as S&P vs. Residential real estate the way you have. You do have a good point for the time periods mentioned, however this comparison has the following issues:

1) Broad vs. Specific (entire S&P vs. 1 home)

2) Short time period. When investing in a HOME, you cannot expect a high return on investment. It is an investment that will Hedge inflation, meaning in the long term will net higher returns than inflation rates. It is risky to by a home on a short term basis bearing market conditions and cost of sale.

3) A place to live and enjoy, vs. pure monetary value

I don't get what you're looking for? A place to live? or something to invest in?

You need to look at the bigger picture, Palo Alto is a great community, with great schools, top paying jobs and top-notch neighborhoods, which makes it very desireable and it comes with a price tag to boot! It is not a stock market.

I agree with the answers below as well, certain neighborhoods demand more than others. It's all about location, location, location.
1 vote Thank Flag Link Thu Jun 23, 2011
Hello Lost and thanks for your question.

I completely agree with John Souerbry on this one. Palo Alto is a many community-ed area with varied micro-communities having greater appeal than others. This variance of appeal, as well as limited inventory in an area where homeowners can afford to wait until the market recovers before selling, creates demand for some homes while leaving others a bit colder.

As for the entire City of Palo Alto being "on fire"--that's an extremely broad statement and there are certainly homeowners within the city limits who would argue that there may be smoke, but no flames--in other words, there is certainly demand (as there is always in Palo Alto), but hysterical demand would hardly characterize any market at this time.

Schools, more than anything, influence the demand for certain homes, especially in places such as Palo Alto and Los Altos. Beyond that, access to the home and major traffic arteries, noise from surrounding areas, possible affects of Cal Train and high speed rail, and the characteristics of the neighborhood all act to place both negative and positive pricing pressures on homes that are relatively the same while being located only blocks or a mile from one another.

As to why the one owner on 865 Forest was unable to recoup the cost of the home, the story is seldom as simple as "we bought high and sold low...." While, from first blush it would appear the owners made a bad deal on the home, truth is you won't really know just by the statistics of pricing. Your Realtor or real estate professional can help you find out more about the home and what may have occurred to skew the price, if there was, indeed, a price differential.

To really get a good idea of the market in your area, you need to work with a Realtor knowledgeable in your part of town. I know that John practices in Palo Alto, as does Realtor Marcy Moyer. Both are sharp, both are very "in tune" with PA, so you might contact them directly for assistance in understanding the market in your area.

Good luck!!
Grace Morioka, SRES
Area Pro Realty-People's Choice
1 vote Thank Flag Link Thu Jun 23, 2011
PA is jam packed with lots of different neighborhoods with different values. Lots of companies and Stanford U are hiring, and the recent round of IPOs created a good number of $1M+ buyers. More buyers + limited inventory usually means a hot market of some type, at least in some neighborhoods.
1 vote Thank Flag Link Thu Jun 23, 2011
I agree with Terri. Buyers and sellers are unique as well as what drives them. Your analysis is based on logic, but homeownership is not exclusively by the numbers or based in logic. One cannot predict where the funds for the home in your example came from. Although the S&P is up, there are many stocks that are not (take GE, Cisco, and BofA as quick examples). The cash funds may have come from stock option grants so to the buyer (at the time) it may have been bonus funds. The recent sale may have been subsidized by another employer through the grant of stock options or bonus to attract that individual to their company.

If you are considering purchasing you need to look at how the numbers work for YOU. In terms of the market, look at the overall trend of a particular neighborhood and worry less about particular examples. There are always exceptions to the rules. You need to pay to live somewhere, so you must determine if purchasing makes sense for you. The numbers need to be such that you can sleep at night and feel comfortable when you get home at the end of a hard day and close the door.

All the best,
April
April Tavares, GRI, ASP
Realtor®, DRE License #01742179
Montalvo Realty
Direct: 408-309-5471
Email: April@AprilTavares.com
Free Santa Clara County Market Trend Reports: http://april.rereport.com
Web Reference: http://www.AprilTavares.com
1 vote Thank Flag Link Thu Jun 23, 2011
Hello Lost,
Homeowners sell for a lot of reasons. In some cases, they are under pressure to sell and they take the first offer. I'm not a sophisticated investor, but I do know that in a soft market, selling after two years is not a strategy for wealth building. Many Realtors will tell you that if you are not going to be in a house for five years, you might not build equity.

You might be aware that Mark Zuckerberg just purchased a home the 940301 zip code (Palo Alto) - maybe a sign that things have calmed down enough at Facebook that he can take care of needs like this. The previous owner of Zuckerberg's house made $1 million on the sale.

I do agree with you. The example you cite is brutal.

SuZ
PML of Longmont, CO
0 votes Thank Flag Link Wed Jul 20, 2011
Hi Lostpassword2,

You calculus for cash buyers can actually work in the other direction. Say you have a liquid net worth >$10,000,000. This will qualify you for a collaterized portolio loan interest rate < 1.4%. Thus you can borrow the cost of the home, purchase it cash, and still keep your portfolio working for you. Assuming you parked the money in an index fund, you would end up with a net > $25K per month appreciation, and you still get to live in the house you (presumably) like.

In general, people structure bond portfolios to arbitrage the low interest rate and pay down the outstanding loan balance with the extra income. Such loans are not margin loans, have usually 1 year lock outs and can refinance at will at any time. After all you can always just pay cash for the home if the environment changes.

This is not necessarily for the faint of heart, but many people in the valley finance their home purchases in a similar fashion. Comes down to interest rate risk management.

Your point, however, that housing is not a good investment is sound. It generally isn't. However, once you accept this reality, you can plan your finances to support the lifestyle you are comfortable with.
0 votes Thank Flag Link Thu Jul 14, 2011
Lostpassword2,

I agree with a lot of the Realtors below that it's necessary to get down to the community and location to determine the selling characteristics. But I would also add that financing plays a role in all of this. Until recently there has not been a reliable source of financing at competitive rates by which buyers in the $900K range and up could finance their purchases. I don't know the facts about Palo Alto, but here in Marin County the market segments as defined by purchase price (and to my logic, financing) exhibit very different dynamics in terms of days on market and final price to original price.

Rob Spinosa
rspinosa@rpm-mtg.com
0 votes Thank Flag Link Thu Jun 23, 2011
It is true that, overall, properties in Palo Alto have held their value quite well in recent years, for a number of reasons.

That being said, any blanket statement ("Palo Alto is on fire") implying that simply because a property is located in Palo Alto means that any listing price will be overbid reflects a lack of understanding about how the real estate market works. As ad copy, this may be defended as a kind of "puffery," used for purposes of attracting listings.

Each real property has a unique set of characteristics and must be evaluated on an individual basis. A real property is not a security (e.g., a stock), as Terri has pointed out.

In your position as both buyer and seller, you can maximize your benefits by means of a realistic assessment of market data. A good agent can suggest strategies that will work in your favor.

Regards,
Dan

Daniel Berman
Pacific Century Realty
Listing Commissions as Low as 1%
Buyer Rebates to 50%
Multilingual Services
0 votes Thank Flag Link Thu Jun 23, 2011
That each area, each, home is unique as are the buyers and sellers. If people only purchased homes as investments your analysis on certain properties appears sound. However, the American dream of home ownership takes over and as the credit card commercial quotes "Priceless".

Only you can determine if home ownership makes sense for you. Work with a trusted Realtor to get the information you need on each property you are considering for purchase.

All the best to you.
Web Reference: http://www.terrivellios.com
0 votes Thank Flag Link Thu Jun 23, 2011
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