Bay Area Real Estate: Wait 2 Months; Save $50,000

It’s been two months since I’ve done an update on local real estate in the Bay Area. One of the reasons I track the real estate market so closely is that most people simply aren’t aware of the magnitude of the price drops that are occurring right now. I’m still hearing quotes like “It’s a good time to buy”. I write these posts to create a larger awareness of the real state of the real estate market here in the Bay Area.

The main thing I want to point out is that the magnitude of the price drops is increasing, not decreasing. Prices are dropping faster than they were 6 months ago. While this means you’re likely to get a better “deal” if you shop for real estate now, it’s also likely that you’ll save a lot more money by waiting…even if you choose to only wait 6 months.

Taking Another Look at 95127

I use zip code 95127 as a leading indicator of the rest of the Bay Area. It’s an outlying part of San Jose that has a lot of “starter homes.” 95127 has more foreclosures and the prices are progressing downward faster than most other zip codes I track here in San Jose — hence the “leading indicator” moniker. What is happening in 95127 is a microcosm of the distress that is hitting most suburban, “middle-class” (if you can call zip codes where the average house is over $600,000 “middle-class”) areas of San Jose.

To illustrate this point, let’s refer back to the two properties I highlighted in my January real estate post. First of all, it’s worth noting that both houses I highlighted in January have sold — no doubt to people who thought they were picking up a pretty good deal. If they intend to live in the house for at least 10 years, they didn’t do too badly — that’s what they are probably thinking. However, I’m going to show you how by waiting just 2 months, they could have saved $50,000 on the price of their homes. That’s 12.5% of the value of these homes!

From my January post:

Property #1 is 124 Birch Ln, San Jose, CA 95127. 3BR, 1 bath, 1564 sq.ft. on a nice-sized lot of 7840 sq.ft. Last sale 7/1/2005 for $601,000. Now asking $399,000. Doing the math, we find that is a 34% discount off peak. The MLS lists 3 pictures of the inside and it seems to be in fairly good condition.

Now, just two months later:

Take a look at MLS #733671 — 10309 Murtha Dr. Five bedrooms, 2 baths, 1965 square feet. A couple warning factors: The property is sold “as-is”, and states “Remodeled kitchen, granite counters, hardwood floors prior to foreclosure lot.” This could mean that some of the flooring and counters have been torn up. This property is obviously a “look before you leap” situation. It is currently listing for… $399,900. Even if it does need work, 400 more square feet and 2 extra bedrooms for just $900 more than the house in January mean waiting was the right decision.

This house last sold in February 2007 (just over one year ago?!) for $689,713. That’s a 42% discount in 13 months. I don’t think there has ever been a stronger argument for waiting to buy. Imagine what waiting another year will bring!

January House #2

Back to January:

3356 Joanne Ave., San Jose, CA 95127. 3BR, 1 bath, 1075 square feet, on a 4,792 sq.ft. lot. A pretty fair specimen of a house for San Jose, though the MLS listing doesn’t include inside pictures, so it probably needs work. Now asking $400,000. This isn’t as good a deal as the first property…

This is where you start to see some huge advantages to waiting. In January, I pored through over 200 properties in Santa Clara and San Mateo counties before finding these two to highlight. Now there are twenty-two 3BR+, 1000sq.ft+ properties in 95127 under $400,000. There were just a handful in January.

I figure we might as well compare our January property to a similar one. Since there are so many to choose from, I picked the cheapest one: MLS #783032, 3420 Dominick Ct, 95127. Unlike the Joanne Ave. property I covered in January, this one has several pictures. It is 1203 sq. ft. (128 sq.ft. bigger than the Joanne Ave. property), with 2 baths instead of one. It’s also on a larger lot: 5227 sq.ft. The pictures show dated carpet, paint, and wallpaper that need to be updated, but the house is overall in good shape. And are you ready for this…this larger house is listing for $350,000.

So, by waiting 2 months, you can either get a much larger house for the same price, or save $50,000 (and get the seller to front an additional $10,000 on paint and wallpaper to have a house that matches your needs.) Also, though I still haven’t seen a house that is cheaper to buy than to rent when factoring in property taxes, maintenance, and insurance, at least the mortgage payments by themselves are similar to your rent payments.

A Quick Synopsis Of 95118

For the first time in several years, two 3BR+, 1000sq.ft.+ houses in my zip code, 95118, dropped below $500,000. They sold quickly after dropping their prices below $500,000. However, since there is a lot of inventory in San Jose, I expect other sellers to do the same. This is especially noteworthy since nothing similar in this neighborhood sold for less than $600,000 in the past few years. Now it seems that < $500K is the price point where houses sell. There are also some short sale 2BR condos for $250,000 in my neighborhood — again, a price that hasn’t been seen in a few years. Finally, there is a duplex almost identical to the one I live in on the market, in my zip code, for about the same price my landlord paid in 2004. I see no one is really rushing to buy it…and after watching my landlord put tons of money into this duplex over the past 4 years, I understand why!

Of course, I will keep you posted as things change — I’ll likely post every month or two with updates. I am also tracking Pacifica and Half Moon Bay ocean-view houses, since that’s what I’m most interested in buying. Non-ocean-view houses have been tanking almost as hard as San Jose, but ocean view properties aren’t falling as quickly. Ocean view houses only seem to be down about 10% from the peak. I think it will take another 6-12 months before there is significant price movement there.

Should You Buy Now?

So now should you buy? No way! If houses dropped this much in the past 2 months, they will continue to drop more. Besides, even with these price drops, you’re still better off renting. The conforming loan limit change won’t make any difference — these houses are under the old $417,000 limit anyway. There are now more houses for a better price than there were two months ago. What will the next year or two bring? It will certainly be interesting…and I will keep posting about it.