Sunday, January 28, 2007

East Palo Alto: A Steaming Pile of Real Estate Anxiety

Yesterday, I was fumbling through the My Documents file in my computer. It is amazing what a trip down memory lane your My Docs file can be. I stumbled upon this posting that I wrote in early '05, for a now-defunct housing bubble blog. I thought is summed up the real estate market pretty well, and captures what life was like at the top of the bubble.

Enjoy, and take the opportunity to mouth-off at the end of the article.

The Rationale Behind Chronic Apoplectic Tantrums

ap·o·plec·tic adj.
Of, resembling, or produced by apoplexy: an apoplectic fit.

Having or inclined to have apoplexy.
Exhibiting symptoms associated with apoplexy.
Extremely angry; furious

It was another peaceful day in North Texas. Our wildflowers are in full bloom, all the grass and trees are green, crystal clear blue skies are the norm, and temperatures oscillate between the mid 60s and mid 80s. Children play in the park, teens hold carwash fundraisers, and Californians call to talk about real estate.

It was almost peaceful.

The latest tidbit of insanity that I care to share with all of you concerns the absolute mindlessness of the bi-coastal real estate bubble. Many believe that no bubble exists; these people all live in the coastal regions, and are complete morons. My latest example of how the bi-coastal real estate market is just a bundle of high priced twaddle comes from the epicenter of urban crime in Northern California – East Palo Alto.

Let me set the stage for East Palo Alto, California. For years it lead the entire nation, not just California, in murders per capita. Yes, in the modern Olympiad of senseless human slaughter, East Palo Alto was able to swipe the gold medal from perennial heavyweights such as: Detroit, Compton, Washington DC, Gary, and East St. Louis. Rape, larceny, assault, and home invasion are graded events, and there is enough crack to last 10 lifetimes. It is the type of place where if you get a flat tire, you drive on the rim until you get out of town.

I lived in Mountain View, which is about 10 minutes to the south, and my parent's gardener lived in EPA. Soanne was about 6'5" and 300# - mostly muscle. He has the physique that would inspire an Oakland Raider offensive lineman to address him as “sir.” One night, he was at home with the wife and a bazillion kids taking in a night of NBC tv. Suddenly, there was a blast at the front door, and 4 kids presented themselves. The intro was made with a smoking shotgun (that's how they removed the 4 locks on the front door), and they announced they were taking possession of Soanne's TV, stereo, and assorted valuables.

Yikes! This was just a few short years ago.

So, I decided to take a look at and see what kind of money it takes for homes in the alimentary discharge of Northern California to trade hands. I first put in $350K-$450K as my search criteria, and did not match a single property. My heart began to race. I entered in $10K-$1M, and the lowest price home listed for $485K.

The worst POS in the nastiest neighborhood in all of Northern California lists for $485K. But it is nice. 1020sf, 2 bed, 45 years old (it didn’t say if it was a meth lab, or how many bullet holes are in the exterior – I’ll have to check the disclosure), and you have to walk outside to get to the garage (a serious safety concern).

Let’s get some perspective on the sustainability of the California market.

Rather than go to another prison inmate training facility to compare notes, I thought I would take you to another city in another state that was the polar opposite of EPA, California.

I like to use my home city of Highland Village, Texas. Highland Village, Texas is located about 25 miles north of Dallas along the shores of Lake Lewisville. The averages household income (reported) is $105K, and it sports the LOWEST crime rate in Texas for the past 4 years. It is 95% European descent, and everyone speaks the same language. If it were relocated to Northern California, it would be Alamo, or Mercer Island in the Pacific NW. Let’s look at what the same $485K would buy you in a very nice suburb of Dallas, Texas.

Using the same search engine, I found this humble abode (now delisted).
4000sf, 4 bed, 3.5 bath, 8 years old, floor-ceiling Austin stone fireplace (very nice), gourmet kitchen, 3 car garage, .4 acres, and a full size indoor basketball court with 20’ ceilings. The neighborhood is in the nicest part of the nicest part of Highland Village (Lakeside part of Highland Shores).

Oh, by the way…if you paid asking for this house, you would still have $35K left over, compared to the crack-house in East Palo Alto, California.

Yes, there is the weather. That explains the disparity. For 80 days in Highland Village, you will sweat your balls off. Granted, you could play basketball in your indoor court, or take the $35K and go on vacation. Either way, Texas is the second most populous state, and the millions that call Texas home seem to get along just fine. The remaining 265 days in Texas are just wonderful. The winters are like fall, and the spring is absolutely beautiful.

East Palo Alto does have great weather. It is right in the middle of the mid-Peninsula microclimate, and it is very nice. Granted, you will be stuck in your 1000sf house all 365 days a year, or risk having a 9mm hole bored into your skull.

EPA is quite neighborly, as the would-be high school students routinely visit to help distribute pharmaceuticals, and recycle home electronics and automobiles; but at least the weather is nice, and did I mention the 10% state income tax, and schools that rival DC, West Virginia, Mississippi, Arkansas, and Hawaii? Good thing you don’t need an air conditioning unit, as the local gangs would probably be fencing them outside of Home Depot.

So, what can we conclude about this? At $485/sf in the hemorrhoid of Northern California, these would-be real estate tycoons are taking a very risky gamble. I wonder how long the arbitrage that presently exists between the coasts and fly-over country will last? My guess would be for it to end very soon. These otherwise intelligent people are risking an entire life’s fortune on what would be euphemistically called a steaming pile of real estate anxiety. They all must sell to an even more deluded group of morons, or will have to become very comfortable with living in a horribly shuddersome neighborhood, as they will be trapped.

Mr. Market can turn on a dime. Unless the entire city becomes gentrified, my guess is the urge to sell will become quite pronounces at the first sign of trouble. Our new residents could have bankers trying to rob them by day, and the thugs by night. What a wonderful “investment.”