We’re all guilty of it. We read all the doom and gloom headlines about the national and California real estate markets, and automatically project it into our own market. The truth is that while overall the market is sluggish, some markets are much weaker than others. The Central Valley and the distant reaches of Contra Costa County are much worse than the Tri-Valley, Silicon Valley, and the Peninsula (when is the Peninsula market ever bad?). What are the factors that determine whether a given market is performing well, or is mired in a severe real estate recession? In my opinion, there are 5 main factors that determine the stability of a suburban real estate market.
1. Schools. Many buyers select communities based on the quality of the public schools. The better the schools, the more likely buyers will choose that community, even if they don’t have school age kids. Certainly, it is easy to see that the communities with the best schools are faring the best in the current market. Pleasanton, San Ramon, Danville, Palo Alto, Los Altos, Lafayette, Moraga, and Orinda, for example, all have top quality schools, and all are outperforming the rest of the state in terms of the health of the real estate market. Similarly, Tracy, Stockton, Antioch, and other cities with less attractive public schools are struggling right now.
2. Commute Accessibility. The closer the community is to major job centers, the better the demand is. Given a choice, buyers will generally opt for a shorter commute when all things are equal. In fact, they are typically willing to pay more for a shorter commute. Conversely, a community with a long commute will have to be less expensive to compete. It is a trade off: Time and commute expense vs. a bigger, newer house. The problem is that gas is approaching $4 per gallon, and some commuters are finding out that there are other costs to commuting that they downplayed, including time away from family or loved ones, stress, frustration, wear and tear, and fatigue. It makes sense that communities closer to job centers typically fare better than outlying communities with longer commutes. Palo Alto, Los Gatos, Orinda, Lafayette, Cupertino, Los Altos, Burlingame, and San Rafael all offer excellent commute accessibility, and are relatively stable markets. Tracy, Antioch, Stockton, Manteca… well, you get the idea.
3. Jobs. Suburban cities that have a strong corporate presence and an abundance of higher paying jobs also perform better. When a community has an abundance high paying jobs, then the average income in the city tends to be higher, the demand for housing stronger, and the schools tend to be better. San Ramon, Pleasanton, Cupertino, Palo Alto, and others have many major employers in the city limits, and this helps create demand. Oakley, Byron, Brentwood, Manetca, etc are not considered major corporate job centers, and the market in these communities is bordering on abysmal.
4. Supply Limits. When cities have limited land availability, they tend to have a stronger real estate market. There can be natural barriers to supply (the Bay, mountains, city limits, geography), and there can be man made impediments to supply (slow growth politics, lack of water or sewer resources, exorbitant fees). But the fact remains, when there is an abundance of buildable land, the market tends to be more volatile, as any uptick in prices will invite home builders to build more homes. And any reversal in the market typically gets amplified as well, as ample land means aggressive builders will often be saddled with unsold inventory, which puts pressure on the builder to cut prices and/or offer incentives to get their homes sold. This is a major part of the reason the Central Valley real estate market is having such a difficult time right now… there is a huge number of unsold new homes available, and in a motivation contest, a builder will win every time. Builders will do whatever it takes to sell their inventory, and this further depresses the prices of resale homes.
5. Income. Cities with higher median income typically fare better than markets with lower median income. Simply put, people of higher means usually have more financial resources to weather any storm, and often have more equity in their homes. First time buyers and moderate income buyers tend to gravitate towards the less expensive markets where they can get a decent home for less money. Again, this is a big factor in the disastrous markets in the Central Valley, where many buyers got in for little or no money down, and do not have the resources to wait out the market. The foreclosure rates in cities like Stockton, Antioch, Tracy, and Mountain House are significantly higher than the high income areas of Pleasanton, Danville, Alamo, Lafayette, Palo Alto, etc. Cities with high foreclosure rates experience a much more severe decline in prices, as distressed sales drive down prices.
In summary, how a community scores on these 5 factors will go a long way towards determining how stable the real estate market is. Of course, everyone would love to live in Palo Alto or Pleasanton. But the reality is the most stable real estate markets usually tend to be the most expensive, so at the end of the day buyers have to balance this equation with what they can afford.