California Real Estate Data Study Part #2

As we identified in our last historical data study e-mail, we are shifting from a seller’s to a buyer’s market. More inventory has spawned buyer power. Our transformation to a buyer’s market has continued to create valuable buying opportunities for many of our clients. Congratulations to those of you that have recently purchased homes and investment property with us. Our market is developing nicely allowing buyers to negotiate value while maintaining historically low interest rates. We are currently immersed in a much more balanced market.
Below is the second installment in a research series we have created to document the history of the California real estate market. As promised, we have localized our appreciation data, and in this installment we are taking a closer look at the Bay Area. Below is our study of Bay Area appreciation history verses prime rate history.

Bay Area Historical Real Estate Data Study

Click Image to Enlarge

As we saw in our previous e-mail, when we overlay the California appreciation history with the history of prime interest rates there are some interesting correlations. Average appreciation in California is 9.42%. We can see that the worst California housing depreciation since 1976 (in 1994 we had -6.3%) was not due to high interest rates. In the 90’s California had a deluge of military base closures coupled with a large tax increase and national recession. Note, the second worst depression in California’s housing was not that significant in terms of depreciation (-0.65%). It occurred in 1982 and was highly influenced by high interest rates. Historically, high interest rates tend to stagnate appreciation, but not cause large drops in the market.

Oakland, Hayward & Fremont Appreciation Vs. Prime Interest Rate

Click Image to Enlarge

This graph mimics California’s appreciation history, but Oakland, Hayward and Fremont (OHF) seem to be more insulated to bear markets. Average appreciation in OHF since 1976 is 9.512% (the green line on the graph above). This is better then California’s average appreciation of 9.42% over the same period. The worst valley is in 1995 mimicking California’s deepest valley, but this area’s dip was limited to a -4.68% return where California as a whole had a -6% return. Maximum appreciation in OHF occurred in 1977 totaling 27.25% trumping California’s maximum appreciation of 27% in 2004.

San Francisco, San Mateo, & Redwood City Appreciation Vs. Prime Interest Rate

Click Image to Enlarge

San Francisco, Redwood City and San Mateo’s (SSR) graph also mimics California’s appreciation history, but SSR seems to be more insulated to bear markets. Average appreciation in SSR since 1976 is 9.77% (the green line on the graph to the right). This is better then California’s average appreciation of 9.42% over the same period. The worst valley is in 1991 which is prior to California’s deepest valley (1995). SSR’s downturns seem to be a bit more insulated to California’s average. Its deepest valley was a -4.87% return where California as a whole had a -6% return. Maximum appreciation in SSR occurred in 1979 totaling 27.25% trumping California’s maximum appreciation of 27% in 2004.

San Jose, Sunnyvale & Santa Clara Appreciation Vs. Prime Interest Rate

Click Image to Enlarge

San Jose, Sunnyvale, and Santa Clara’s (SSS) also mimics California’s appreciation history, but SSS seems to be more insulated to bear markets. Average appreciation in SSS since 1976 is 10.03%. This is better then California’s average appreciation of 9.42% over the same period. The worst valley is in 1991 which is prior to California’s deepest valley (1995). SSS’s downturns seem to be a bit more volatile than California’s. Its deepest valley was a -6.36% return where California as a whole had a -6% return. Maximum appreciation in SSS occurred in 1989 totaling 32.91% trumping California’s maximum appreciation of 27% in 2004.

What Does This All Mean?

It is interesting to note the history behind the real estate markets. Although we know that past occurrences do not dictate future trends, we can see California’s housing market elasticity and the average returns that are typical. We know that California has a very different real estate market than the rest of the country. In part this is because we have such a large and robust economy. Our data also shows that the worst depreciation since 1976, was a valley lasting 3 years in length. This leads us to believe in long term value investing in California real estate. We will have our ups and downs, but over the long term California’s real estate markets are robust.
From the data we have gathered on Bay Area Appreciation we can speculate that the Bay Area economy is often more robust then California’s real estate economy as a whole. For instance our data suggests that the East Bay economy was not as dependent on the military base closures that occurred in the 90’s. In our next e-mail we will be looking at average returns in other investments besides real estate. For instance how does your real estate return on investment compare to an average stock market return?
As we noted in our previous study this data shows that now is a great time to buy California real estate. As we have seen in past markets rising interest rates tend to create short periods of less than average appreciation, not large drops or depreciation in real estate prices. Thus we can infer that when interest rates rise it is probable that the increased cost of money will make buying a home more expensive. Currently mortgage rates are low in comparison to historical averages, and our housing markets have slowed driving less competition for buyers. For the first time in 5 years we are experiencing a buyer’s market. Our Appreciation and Prime Rate graphs illustrate the current intrinsic value of historically low rates and slowing appreciation in our market.