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.”


Anonymous said...

Here, here! Eluea, I see a successful
book in the making!

If you finish within a half year or so it will be just in time for when even the most hard core real estate dreamers wake up to a harsh reality.

Yes, the misery loves company / schadenfruede impulses are great for selling books.

Do it, it's your calling!

Anonymous said...


I had a house on BI. Lived in it for a couple of years, rented it out, then sold it in 2004. When we were renting it, the rental income almost covered the mortgage. So at the 1998 price, BI pricing was more or less in line with rental pricing.

I live in Omaha now. I do confess that I would pay a premium to be back on Bainbridge if I had a downtown Seattle job.

Given the raw material and labor costs of new housing, I don't think BI will pull back to 1998 levels. Maybe 2004 (which is very expensive).

Eleua said...

Keep in mind that '98 was in the middle of the go-go days of the internet build-out. People were moving to the PNW in droves, and many were just excited to live anywhere they could get to the DT Seattle area. Rents were a bit high.

I have been a BI renter, and I can tell you that rents are nowhere near what it takes to cover your PITI, unless you bought back in the '80s, or perhaps early '90s. There is a truckload of rentals/condos coming available in the next 12 months.

'04 is an optimistic bottom, given it represents the meat of the housing bubble. Prices will only bottom at that level if jobs grow in the face of a real estate crack-up. Interest rates would also need to stay at historic lows, and mortgage finance would still need the waterfall of liquidity it has had over the past few years (along with no lending standards of any kind).

You would also need to prevent a general housing panic.

Good luck.

Anonymous said...

So what's your point about East Palo Alto wrt your bubble thesis? now has the cheapest POS SFH over 900 sq ft. in EPA at $499K - even higher than when you wrote your hand-wringing post in 2005. And people aren't lining up to move to Highland Village.

No surprise that even the armpit of a great area that's completely built out and has tons of high-paying jobs is going to do better than the best neighborhood of a mediocre area with far fewer high-paying jobs and with ample greenfield housing supply.

Eleua said...

You are soooooo correct. Living in an urban hellhole with great weather, is definitely a better decision than living in a crime-free suburban environment that has hot/humid weather for 80 days a year.

Moreover, paying $500/sf is really a smart idea. That high paying job is certainly worth living right in the middle of gangsta country. At least you have good weather....and a state income tax.

BTW, the Y2K census had Palo Alto (not EPA) at $90K income per household. Flower Mound, Highland Village, Copper Canyon, Double Oak, and Southlake all were above that.

Enjoy the weather. Post when you get a break in the urban violence and all that FTB paperwork.

Eleua said...

I'm sure Tehran is an expensive city, but I wouldn't want to live there. Ditto on Washington DC.

Once the property escalator slips into reverse, morons that were paying $500/sf to live in EAST PALO ALTO (and other festering sores of urban blight) are going to cry a river. Getting robbed by a trifecta of hoods, taxmen, and bankers will really suck big time.

If I bought a rundown, POS 1978 Monte Carlo for $75K, would that make me a genius? How would I stack up against someone who bought a mint condition '04 Volvo S60 for $6K?

I'll drive my S60 and have you choke on your own self-congratulations.

It always amazes me how people derive so much of their self worth by how much their house costs them.

Eleua said...

My point is to show how people will pay a rediculous price for an absolute nighmare of a house, just because they think it will go up in value. They have no regard for risk.

The consequences for ignoring risk will be self-evident once the tide turns.

EPA is truly a steaming pile of RE anxiety.

Anonymous said...

Yes, that was your point in 2005, but ***oops*** EPA kept going up and Nowheresville, TX did not.

Who were the morons in 2005, as things stand in 2007? Not the EPA buyers.

Since time immemorial it's been about location, location, location. And,gentrification (crummy areas with otherwise good location going up because richer folks move in) has also been a constant phenomenon. Those who bought in dodgier bits of London 10 years ago, or the Upper W. Side 25 years ago, were also dodging druggies and criminals. But their real estate values also went up faster than your TX.

I'm not suggesting I want to live in EPA, just that your sense of value seems to be out of kilter wrt the objective market, and your two-year-old post mis-predicting a bubble seems like something you might have wanted to hide, not flaunt.

Eleua said...

I need to hide my prediction of a bubble? Are you living on Mars and commuting? California, Florida, Vegas, Arid-zona, New England, and NY are all collapsing. Yes, EPA is still higher than in '05, but it is still EPA and values are starting to leak.

Nowheresville, Texas is still lower priced than EPA, but so what? Just because someone values a rusted-out, 70s era Monte Carlo higher than an '04 Volvo, doesn't prove anything, other than some people are morons.

Placing a bet on the gentrification of EPA is a very longshot bet. It could happen, but if it doesn't, then our would-be Trumps will be living among the worst elements of the entire country, and paying a life's savings for the honor.

Ask yourself how many people would move to EPA if they knew they would lose money, or at best break even on their house? It's all one big, stupid bet without any consideration of risk (both financial and personal safety).

With sub-prime financing unravelling faster than a spaghetti-strap prom dress, it will be very interesting to see how EPA holds up.

Perhaps I'm a bit whacked, but I have never wanted to pay $500K+ to live next to a liquor store with bars on the windows.

Eleua said...

I remember back when I left the Navy and worked for one of the airlines. The captains I flew with all busted my chops because I was saying the NAZ and DOW were completely whacked and too risky.

This was the Autumn of '99. For six months, they rode my ass on how dumb I was and what an idiot I was to try to short the market and go long gold, silver and the miners.

I ate it until the middle of '00, when those same captains started asking me about metals and how to short companies.

Now, they are all RE geniuses. Every last one of them...

Same story. Same characters. Different backdrop. Same outcome.

I'm not saying I've got it all figured out. I'm just saying that people have no regard for risk, and follow the herd for their own safety.

Two problems...the herd is always wrong at major inflection points, and the herd never figures it out until they are ruined.

Enjoy EPA.

BTW, remember when Juniper Networks was "special?" They sold for $244 at the top. They went to $5 in 18 months.

Risk. It is still out there.

David said...
This comment has been removed by the author.
Anonymous said...

Well, how the world has changed in just 15 months, the cheapest POS house in EPA as of 4/12/2008 is 860sft 58 years old at $285k. For $485k one can get this:

2 years old 2010 sqft, or $241/sqft.