Oscillation

The Merriam-Webster Dictionary defines Oscillation as ” a single swing (as of an oscillating body) from one extreme limit to the other”. Below you’ll find a great example from our current, and kooky 2009 Real Estate market.

delmonte

This house, located at 3046 Del Monte in San Mateo, came on the market in September of 2004 listed for $569,000. There’s no interior photos to prove what I’m saying here but I remember it clearly. The house inside was reduced to the framing. There were a few plywood boards laid out so that you could walk around inside. It was basically gutted and needed bathrooms, kitchen…etc. My fondest memory is that, since there were many areas without flooring, you could see directly into the crawlspace. The interesting thing about that was the little detail that the entire rear foundation wall on one side had fallen over…and natural light was pouring in (probably along with vermin in all shapes and sizes too). Oh, by the way…it’s on the corner across the street from Hillsdale High School. To call it a fixer upper would be to grossly misrepresent the property. It was a shell! Never the less, it got 8 or 10 offers in it’s first week on the market and closed escrow, AS IS, at $630,000

Now, let’s fast forward to the wonderful world of 2009 and look at this gem:

miramontes

It’s the house at 209 Miramontes in Half Moon Bay. It’s in a fantastic neighborhood, a block and a half from the state park and the Ocean. Check out those pictures…it’s stunning! It came on the market late in 2007 for $1,625,000…and didn’t sell. They relisted in in 2008 for $1,385,000, then dropped it to $1,285,000, then dropped it to $1,100,000…then dropped it again last week to $999,000!!  The house is 3330 sq ft on a 7500 sq ft lot and you can walk to both the Ocean and downtown Half Moon Bay. There are several comps in the last few years in the $1.5mil and up range and there’s a house at the end of the block currently listed for $1,985,000. Several potential buyers were circling it this week but only one materialized and it sold at the asking price yesterday. The other potential buyers felt like it was a little “risky”. What? $999,000 reflects a 45% reduction in value…and  it’s risky? In 2004 it wasn’t uncommon to pay 20% over the asking price, yet nobody talked about how risky that was.

Thus the oscillation concept. Why is it risk free to buy an uninhabitable shell in 2004, and pay over the asking price to boot, yet you can’t give away this kind of palace in 2009. Wild!

Comments

  1. After losing a fortune in the South Sea Bubble, Sir Issac Newton remarked “I can calculate the movement of the stars, but not the madness of men”.

    A little reading about the Tulip Mania in Holland or the South Sea Bubble in England should help folks understand this oscillation.

  2. Jim Minkey says:

    Thanks for the comment Asif as well as an interesting arguement. I would argue that unlike the Tulip and South Sea bubbles Real Estate in San Mateo county has unquestioned underlying value. Comparing the Tulip Bubble to Real Estate is like comparing the temporary frenzy for Beenie Babies or Cabbage Patch Dolls to the value of waterfront houses in Foster City. (by the way, we have some beenie babies that you can have for free…please!)

    The Del Monte house actually sold twice more after this sale, once for $708,000 and again for $980,000…probably what it’s worth right now.

    The Miramontes house is 1 million dollars less than a comparable a block away. It has a 2002 price on it. What surprises me is the lack of recognition of it’s inherent real value by more than 1 set of buyers. I can understand people saying “Hey, who cares about these crumby Tulips…or these worthless stock certificates, we don’t want them anymore”. But a house like this has real value now and will always have real value…and it sold at a very big discount!

  3. A lot of the underlying values are in the credits during the credit expansion. When the credit market reversed its cycle, the underlying value based on credit should be gone.

    That is happening in markets: credit is becoming expensive as asset is becoming cheaper.

    Jim: I think you have the knowledge in estimating how much value is based on credit:-)

  4. Jim, the interesting thing about any bubble and the subsequent crash is that it swings to an extreme in both directions. Greed causes values to inflate beyond all reasonable levels and then when the bubble bursts fear leads to price deflation once again beyond reasonable levels.

    In the case of the dot com bubble that struck so close to home, in hindsight, it was perfectly clear that Amazon.com at over $100/share at the peak of the bubble was overvalued. The same stock went to under $8/share just two years later, well below its actual intrinsic value.

    In my humble/honest opinion we are just beginning to see housing revert back to its long-term trend line of 3% gains per year. With unemployment rising, we could easily see housing go well below current levels. Thanks to massive government stimulus we might not see this happen and hopefully the housing market will stabilize sooner rather than later.

    Alex makes a good point about the affect of credit on the intrinsic value of an asset class.

  5. Jim Minkey says:

    I completely agree with the notion that the expanded credit market led to overvalued property in places like Daly City and San Jose simply because so many homes closed featuring zero down subprime loans. The values were artificial.

    What honestly confuses me is the fact that the vast majority of people who bought in our area…and I would include most of Half Moon Bay as well, bought with adequate income, using good loans and having good sized down payments. I know many many people who are well qualified right now, with plenty of cash who simply lack the confidence to pull the trigger.

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