Housing Markets Avoid ‘Tech Wreck'
All quiet on the western real estate front? The silence is probably a result of California's property owners collectively holding their breath while listening for the other shoe to drop.
The first shoe to fall with a thud was the reversal of fortune in the state's storied dot-com sector. Since the dramatic about-face during the second half of last year, stories have been leaking out of the Bay Area and West L.A. about plummeting commercial leasing activity and lease rates, particularly in San Francisco's South of Market area. But so far, the bust has not significantly affected the state's housing markets. And even some commercial and industrial markets are still humming right along.
The widely-publicized misfortunes of Internet giant Cisco Systems — which cancelled real estate projects in three Bay Area counties (Sonoma, Contra Costa, and Santa Clara) — has sounded an alarm in the real estate pages of California's daily newspapers. Layoff announcements that underscore the "Tech Wreck" are weekly occurrences. Yet, the other shoe fails to drop.
Two watchdogs of California's real estate health are still publishing reports that insist the market remains strong. The Construction Industry Research Board's April report says, "California private building activity, measured by building permit valuations, totals $3.814 billion, up 19% from February, and down 5.8% from March 2000." The CIRB goes on to predict that developers will build 152,000 housing units this year, the highest number since 1990. Furthermore, the inflation-adjusted dollar totals for all building activity is forecast to reach $47 trillion, the highest number since 1999. What remains to be seen is whether these statistics are harbingers of a new recession – much as the 1989 and 1990 figures now appear to have been.
Meanwhile, according to the California Association of Realtors, the state's median home price rose nearly 10% for the first three months of 2001 compared to one year earlier. This includes a 22.5% rise at the epicenter of the Tech Wreck, Santa Clara County. In fact, every housing market tracked by the CAR logged increases from the first quarter of 2000. The Northern Wine Country (Sonoma, Napa, and Mendocino counties) logged the largest spike in median price – a 27% increase to $348,000.
One of the popular axioms from the 1990s recession was that consumer confidence ultimately drives the overall economy. And it's well known that home-buying activity is strongly linked to consumer confidence. If economic health can be rendered at a micro level, then perhaps market-level data on home-buying activity is a better indicator of the real-time health of a local economy than alarming trends in certain economic sectors.
At a statewide level, the only down-trending data in the housing markets are the sales activity numbers. Transactions posted a 5.4% decrease from the first quarter of 2001 compared with the first three months of 2000. But other sales data countered even this statistic. For example, the number of days it took for single family home to sell dropped from 35 days in the first quarter of 2000 to 28 days in 2001 — hardly evidence of a chilling market.
And, whereas sales activity weakened in a more than half of the 16 state markets tracked by CAR, some of the more affordable markets (Central Valley, Sacramento, and Northern California) logged sizeable increases during this year's first quarter. In fact, the Central Valley logged an 11.3% increase in first quarter sales — and a 20% increase in the median priced home. It's fair to assume that some that the Valley's metropolitan regions such as Stockton, Modesto and Bakersfield are experiencing spill-over growth from the Bay Area and Los Angeles to combine with the booming agricultural sector.
John Frith, a Sacramento-based lobbyist for the California Building Industry Association, has noticed that the Capital's housing market is not the only thing that appears strong. "A new downtown high rise office project that is largely leased was just announced last week. And Sacramento continues to experience a significant migration of technology sector firms relocating from the Bay Area, joining already established Apple and HP," Frith observed.
Sacramento experienced a nearly 3% growth in sales activity for the first quarter of 2001, combined with a 23% growth in the median home price. Meanwhile, Silicon Valley first quarter sales activity dropped 28%from a year ago, though the already high median price still grew substantially to nearly $600,000.
So, despite the hand-wringing on the business pages these days, the picture is not black and white. It's reasonable to assume that the Silicon Valley's problems will affect localized Bay Area housing markets — and may cause ripples elsewhere. But it's also looking like the state's housing markets are more subject to local economic conditions – some of which are decidedly not recessionary. We may be waiting for that other shoe to drop for quite a while.
Stephen Svete, AICP, is president of Rincon Consultants, Inc., a Ventura-based consulting firm.