In recent months, I’ve talked a lot about the performance of Lafayette real estate and the surrounding areas, often drawing upon objective sales statistics to underscore and substantiate the points I’ve made in the post. With that said, statistics work best when there’s a large pool of data available. So, in the case of Lamorinda real estate, we have seen a lot of transactions at the lower end of the market, and fewer at the upper end. In terms of reaching conclusions about pricing, it’s easier to rely upon the segments of the market where there have been lots of transactions than it is at the upper end where there have been fewer. In other words, drawing conclusions about the average price of 200 transactions is a lot more meaningful than if there were hypothetically only 10.
Another related consideration is what I’ll refer to as the “Zillow Problem”. This popular website simply doesn’t work in 95+% of Lamorinda because of the non-conformity of the properties. Our communities aren’t built as homogeneous subdivisions with similar homes. One of the reasons that we cherish this community is because of the unique characteristics and beauty of the land, and also because that uniqueness is reflected in the homes. It’s not uncommon for a $3M home to be next door to a $2M home, and around the corner from a $1M home. It’s what makes this community special and it’s what also causes the use of simple price/sq. ft. mathematical algorithms to be inherently problematic. In simple terms, that’s why Zillow doesn’t work in this community. It is also why it is very difficult to use statistics on a “thin” market to draw conclusions on price trends. This is where statistical analysis doesn’t “fit”.
Let’s look at the upper end of the market where there have been the fewest transactions and the homes arguably have the highest level of differences in style, construction quality, aesthetics, amenities, etc. Using $/sq. ft. analysis to determine pricing of one home vis a vis another is almost impossible. Ultimately, it comes down to a MUCH more subjective analysis driven from one’s interpretation of the relative merits of the factors noted above. Just because one of the rare upper end foreclosure properties closes escrow at a hypothetical $2.5M for 6500 sq. ft. doesn’t mean that suddenly a 5000 sq. ft. home may only be worth about $2M. You MUST look at the relative characteristics of each home, and ultimately ask yourself whether YOU would have bought that “other” property for $2.5M. In more cases than not, the answer will probably be “NO”, since you place a higher inherent value on the home that you are considering for purchase. You have to ask yourself, over the long term, which property will be the better investment… the foreclosure property with a suboptimal location that a spec builder never finished, or the one with a coveted location, high quality finishes and emotionally compelling aesthetics?
Will a small number of financially-driven sales put pressure on the upper end market for about another 18 months? The national trends suggest this will be the case, however that doesn’t mean that any given upper end property is over-priced because it hasn’t sold in a month or even two months. That’s more reflective of the nature of a segment with fewer buyers than in lower price ranges.
Simple supply and demand relationships have had their impact all across the Lafayette real estate market and the surrounding communities of Lamorinda… just as they have across the US. Unlike most other markets, the supply of NEW inventory is constrained in our geography. Over the long term, almost no new inventory can be built due to lack of land availability, and it is for this reason that we have not been impacted as substantially in the market downturn as other areas. Once the overall economy improves, that supply/demand relationship will work in our favor and our area will see a faster, steeper rebound. Additionally, our local economy is “fed” by a very diverse set of industries… from technology, to healthcare, to biotech and financial services. The diversity of our economy should help us to continue to outperform most other areas of the country. Lastly, Lamorinda real estate is still undervalued relative to comparable areas in the SF peninsula and in Marin County. Over time, I expect to see these price differentials tighten to the benefit of our Lafayette real estate and surrounding area valuations.
