My dad has always said that you shouldn’t think of your principal residence as an investment. An investment is something that you put money into, and then, after some period of time or after some specified event, you sell—hopefully making money in the process. While you can do this with your house, when you sell you’ll be without a place to live unless you put that money into yet another one. So while your principal residence is an investment in truth, you really aren’t going to get your money back out of it unless you are willing to drastically change your lifestyle, either by downsizing, by moving to a cheaper part of the world, or by renting. Indeed, for those of us who intend to hang on to our houses for our entire lifetime, we may never actually get any money back out of our principal residence: it simply becomes part of our estate. Thus, while your residence is most certainly an important asset in your financial portfolio, you should really look at it as a place to live, not as an investment.
Having said that, I nevertheless keep a close eye on home prices in my area. Although my wife and I have no intention of selling, I’m naturally curious about what houses in my area are worth, and more importantly, what my house is worth. To this end I remain alert for “For Sale” signs in our neighborhood, and I look through all of the mailings—both postal and electronic—that we receive from local realtors. While these mailings are primarily intended to promote the realtor, they typically advertise recent sales and the prices that were realized. From the provided information I can usually then make an educated guess as to what my own house might sell for.
One of the realtors upon whom I rely for pricing information also includes a brief analysis of the market. From his latest, it seems clear that housing prices in our area are starting to flatten. While the trend is still upwards, the price rise is not nearly as steep as it has been over the last couple of years. In addition, the ratio of selling price to asking price has dropped. Houses used to go for a lot over asking, but lately they are selling for a price much closer to what was requested. As you might expect in such a market, the number of homes currently for sale has risen: there are some 32% more homes on the market right now when compared to a year ago. All of this indicates a shift away from a seller’s market—one that was strongly in the seller’s favor—to one that is more balanced, favoring neither the buyer nor the seller.
What happens to the market overall may or may not be reflected in any individual transaction. I’ve been watching the home sales in my general area and have observed that some homes continue to sell quickly, while others take their sweet time. For instance, one house I’ve been watching and writing about for some time sits on the corner of Hopkins Avenue and Nevada Street:
This is essentially an all-new house, although technically it was a remodel since some of the foundation and subfloor, plus the fireplace, were retained from the original. The house was completed and put on the market back in January, with an asking price of $2,295,000. Although the price seemed somewhat high for the area, I thought it would have little trouble selling, what with all of the cash sales that were going on at the time. It appears that I was both right and wrong: the “For Sale” sign switched to a “Sale Pending” sign somewhat quickly, but after several weeks the “Sale Pending” sign vanished, and the selling realtor once again began opening the house to prospective buyers. I took the opportunity to tour the house, and can say it is very nicely done, as nice inside as it is out. In the process I inferred that an offer had been made and accepted, but that the buyer was apparently unable to arrange the necessary financing by the close of escrow. While the prospective buyer apparently requested more time to complete the transaction, the seller was unwilling to wait indefinitely and so put the house back on the market. So far, some four months after the house was placed on the market, the seller has not budged on their price; the online listing still shows the house as going for $2.295 million. With the market advantage now shifting away from home sellers, I have to wonder how long that price will hold. Eventually the current owner is going to need to get some money out of the house, and with a price that seems right at the top of the market they may finally have to lower it in order to sell.
Contrast the above house with a slightly bigger house nearby, at 1789 Hopkins Avenue:
Although this house hasn’t been completely rebuilt the way 99 Nevada was, it has been extensively remodeled over the years and appears to be in very good shape. Both houses have the same number of bedrooms (4), and roughly the same square footage (2,630 vs. 2,500). The Hopkins Avenue house certainly looks more grand, with its second story and its classic, Italianate style, but it actually sits on a somewhat smaller lot (8,255 square feet vs. 8,712 for the house on Nevada). Each has their pluses and minuses, so I would have expected them to have similar prices and to follow a similar sales arc. But as it turns out the house at 1789 Hopkins Avenue is quite a bit more expensive: the sellers are asking $2.45 million (the online listing is here). And although it is a bit early to tell, since 1789 Hopkins hasn’t yet sold, it moved from “For Sale” to “Sale Pending” quite quickly, after only two or three weeks. Perhaps I’ll be wrong again, but I’m guessing that the speed in which it went into escrow is a sign that this one will close on schedule.
Neither of these two house sales are meant to be representative of our local real estate market as a whole, but I find them interesting nevertheless. I do wonder if the changing market trends have had anything to with how these houses are selling (or are not selling, as the case may be). Certainly I’m watching with interest other houses in our area that should be coming onto the market soon. For instance, I’m keeping a close eye on a house under construction at 76 Nevada Street, almost directly across from 99 Nevada. Here is a rendering of what the house will look like when it is complete (this view is from the backyard, in case you’ve seen the house and were wondering):
I’m curious to see how quickly this will sell (assuming that it is being built for sale). While it won’t be complete for another couple of weeks at the very earliest, any further changes in the residential real estate market could have a real effect on the ability of this house to sell.
Lest anyone starts to worry that “what goes up, must come down,” another mailing from DeLeon Realty argues that a significant decline isn’t likely to happen in our area. Although Ken DeLeon acknowledges some softening of our housing prices, he seems confident that the combination of Proposition 13 and the recent increase in capital gains tax rates at both the state and federal levels are preventing many people from putting their principal residences up for sale. Together these serve to limit the number of homes for sale, which in turn should keep prices from dropping significantly. So if any of you are thinking about selling your home in the near future, one local broker, at least, thinks you will still get a good price for it. As for any potential buyers out there, it does seem that our difficult-to-get-into market may not get much easier…
A market that keeps people from listing their homes may be tough if you are a real-estate professional, but it seems to be good business if you are a remodeling contractor. As I walk throughout Redwood City’s residential areas I’m seeing a large number of homes that are being remodeled. That seems to be a sensible reaction to the twin handcuffs of artificially low property taxes (thanks to Proposition 13) and high capital gains tax rates. But our sky-high housing prices are causing others to take some unusual steps. A prime example is the Community United Church of Christ, on Arroyo Avenue in nearby San Carlos. This church sits on a large property at the corner of Arroyo Avenue and Elm Street:
This is a prime piece of real estate, and it seems that the lure of high real-estate prices has proven to be too much to resist. The church has subdivided their property into four separate lots: three 5,000 square foot lots at the corner of Elm and Arroyo that will be sold off for residential uses, and one large lot fronting entirely on Arroyo that will continue to serve as home to the church community. The church’s sanctuary building—shown in the above picture—currently sits where the three single-family homes will one day be, and is thus slated for demolition. A new sanctuary will rise on the eastern end of the property, where once there was a children’s playground, along with a second building that will contain offices, a parsonage, and community space.
This is a fascinating project. The church community has apparently examined itself and realized that they can continue to function within a somewhat smaller, more efficient footprint, giving them the ability to sell off some of the Bay Area’s most valuable commodity: buildable land in a highly desirable area. I’ll be watching to see if this is the beginning of a new trend, or simply a one-off project. In any case, I commend their thinking; it seems to be a win-win deal for the Community United Church of Christ. And they, for one, seemed to have figured out a way to partially cash in their investment without having to move or otherwise radically alter their current form of existence. While most of us homeowners don’t have the same option, and thus can’t really treat our primary residences as a typical investment, at least we can count them as a substantial asset in our total portfolio.
You’ve probably seen this already, but I took a walk downtown the other day and noticed that City Pub is expanding their sidewalk seating out beyond the sidewalk, consuming some pavement that had long ago been marked as a no-parking zone:
Interestingly I noticed that the outside seating area also extends well in front of the Peninsula Uniforms & Equipment shop next door (has it always done this?). In combination with this new depth, City Pub’s outside seating area is now going to be extremely large. I expect that it will get a lot of use, especially given that our colder, rainier weather is now mostly behind us. Certainly you’ll find me there from time-to-time…
Starting on Monday, May 23, and for the next 30 days or so, the city will be removing the island and palm trees in the middle of Broadway between Middlefield Road and Jefferson Avenue. Broadway “will experience partial and full road closure” for much of this time, so be aware and plan to avoid the area for the next month.