(4/12/2007) Home sales plummet 21% in Santa Clara County, real-estate agents lose quarter of a billion dollars in commissions this past year; How, When, and Where you should buy that SFO Bay Area dream home this spring-selling season . . . or you should wait a while before you buy a home quickly, may be?
Eye-opener by Sam Mishra, MBA (MIT Sloan)
Nationally, deflationary trends persist in housing prices. Thirty sub-prime lenders have either closed shop or gone bankrupt. The sub-prime contagion may spread to broader mortgage / credit markets --- the biggest prime lenders including Wells Fargo had more than 10% of their lending business in the now considered somewhat scandalous sub-prime sector. Alt-A mortgage payments are behind schedule year over year. Added downward trends include falling new and existing home sales, and rising foreclosures and vacancy rates nationwide.
Meanwhile, some premium-priced bay area real-estate micro-markets apparently are still chugging along on an ever-increasing upward spiral in terms of prices, and even in terms of the number of houses sold in some instances, as per the local print media --- including the San Jose Mercury News. The positive / upbeat reporting is not surprising, considering that spring-selling season is in the air, and it is self-serving for the surviving realtors / real-estate agents to rev-up the home-selling business. However, I have done some number-crunching for you, to separate facts from fiction.
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Santa Clara County median data for four weeks (Source: Mercury News Saturday Real Estate sections):
May 6, 2006: Sales Price: $670,000, Sales Volume: 2144, Sales Volume Change from last year: -16.8%
Sep 2, 2006: Sales Price: $670,000, Sales Volume: 1919, Sales Volume Change from last year: -27.2%
Nov 18, 2006: Sales Price: $673,250, Sales Volume: 1851, Sales Volume Change from last year: -28.8%
Mar 31, 2007: Sales Price: $750, 000, Sales Volume: 1091, Sales Volume Change from last year: -13.8%
* * * * *
So, if you take the above (almost) equally time-spaced data and calculate numbers for the last 12 months, you arrive at the following data:
Average Sales Price = ($670,000 + $670,000 + $673,250 + $750,000) divided by 4 = $ 690,812.50
Sales volume for 12 months = (2144 + 1919 + 1851 + 1091) multiplied by 3 = 21015 resale single-family residences / condos and new construction homes total
Total Transaction Dollar Amount = Sales Price multiplied by sales volume = $690,812.50 * 21015 = $14,517,424,687.50
Total Commission for All Real-Estate Agents at 6% = 0.06 * $14,517,424,687.50 = $871,045,481.25
Average Sales Volume Change in the last 12 months = (-16.8% - 27.2% - 28.8% - 13.8% ) divided by 4 equals - 21.65% ...20% means one in five. So, one in five real estate agents lost business because of plumetting sales in Santa Clara county. But more on this later...
Now, let's do a little algebraic calculation. Based on the above data, if X was the commission earned the year before last year, the commission earned last year was X - 21.65% of X = X - 0.2165 X = 0.7835 X
Based on above data, 0.7835 X = $871,045,481.25 or X = $1,111,736,415.13
So, year before last year, in one year, real-estate agents earned a commission of $1,111,736,415.13. This came down to $871,045,481.25. In other words, in the last 12 months, real-estate agents have earned $1,111,736,415.13 - $871,045,481.25 = $ 240,690,933.88 less in commissions compared to the year before.
What happens when markets turn sour is that people who are good in business survive, whereas those who are not as good are driven out of business. So, for our calculation purposes, let's assume that those who were not so good were averaging $50,000 per year in commissions, and are not selling houses any more, because $ 240,690,933.88 in commissions was lost in the last 12 months. In other words, $ 240,690,933.88 / $50,000 = 4813 real-estate agents went out of business in the last 12 months in Santa Clara County. If we assume that the agents who went out of business were earning 6 figure of $100,000, then also we come up with a number of 4813 divided by 2 or at least 2400 agents who are hurting because they did not earn any commissions last year!
So, you can see that in the business of buying and selling homes which is itself kind of at its bubbly peak, 2400 real-estate agents have lost their jobs in Santa Clara county itself. Now, if you take this number and multiply by 10 to include the 9 SFO Bay Area counties plus the Santa Cruz county, you have 24,000 real-estate agents who were earning 6 figure just a year before and who are jobless today!
On joblessness, we should also consider that we have 150,000 less jobs in the SFO Bay Area compared to the tech peak of 2000 / 2001, as per the San Jose Mercury News data itself. So, it is not just that real-estate agents are hurting, but that all the Ph.D.s I meet in Panera Bread who can't get any jobs are hurting too. In fact, I was listening to a KQED talk-show on India where the guest was a British writer married to an Indian. The writer wrote a book showcasing how the Indian economy was picking up. When it came to taking phone calls from listeners, a Ph.D came on the air and wanted to know if he could find a job in India, because he could not find one here in the Bay Area; and the guest had to quip: sure, look for a job in India, you can find one. That is the actual state of employment / unemployment in SFO Bay Area.
So, those who listen to the surviving real-estate agents touting that economy is strong, unemployment in the Bay Area is at all time lows, and you should buy a house now because interest rates are still low, should look at the fact that it is self-serving for the surviving real-estate agent to keep the home transactions going, because the agents are really hurting themselves. If you think that the Bay Area economy is decoupled from the National economy, you will be making a big mistake, because the Bay Area tech companies products are a big portion of the capital expenditure or cap ex of big and mid-size corporations nationwide, and cap ex is slowing down, because the economy is slowing down nationwide. Just yesterday, Citigroup announced that they will lay off 17,000 employees. This is bad employment news indeed. It is a matter of time when competitors of Citi like Bank of America or Wells Fargo start laying off. Already, auto manufacturers like GM and Ford are closing down factories, and laying off workers at a rhythmic pace for the last decade!
So, one needs to be cautious while buying a home in the Bay Area this spring selling season, because if everywhere else the prices are flat or are pulling back, it will happen in the pricey bay area as well. Bay Area is just behind the other real-estate markets in terms of the bubble bursting, that is all.
Consequently, I recommend the Bay Area home buyers to do the following:
1. Monitor home prices for the next 12 months, are you sure they will go up when prices are coming down everywhere else? May be you should wait a while before you buy a home quickly in the SFO Bay Area this spring-selling season?
2. Should you really pay that 3% commission to your real-estate agent, when you know that his profession is hurting, and he is earning 25% less on the average compared to last year? Should you not rather negotiate harder with him?
3. Have a wide-angled view on the nature of employment and economy as far as the Bay Area goes. Don't think that you are privileged because unemployment is being touted at 4.4% and the state of the economy is strong, especially in the Bay Area. Jobs are being off-shored to India and China at an accelerating pace, and the only way to create jobs is to innovate. But that may not be happening as rapidly as you think, for Ph.Ds and veteran tech workers are jobless here in Bay Area.
4. Please keep in mind that if you get into a mortgage, you should have the resources to keep paying the mortgage whether you have a job or not. Frequently, if you don't have a job, you have to relocate. Relocation is profitable if you have lived in a home long enough for it to have appreciated in price so that you can make some profit on the home you are selling. But that profit will be a loss if house prices stay flat or pull back in the next five years, because you will have to pay commissions, property taxes every year, and mortgage fees every time you refinance.
5. Buying a home on mortgage is a great idea if you work for a growing company in the Bay Area like a Google, Apple or Cisco; and you have enough invested in stocks / stock-options; and you want to diversify into real-estate. Buying a home will diversify your asset base, and provide you with the lifestyle choices you need in terms of living in a home vis-à-vis renting an apartment. If you work in Google where all the breakfast, lunch, and dinner is free, you want to complement that with the lifestyle of a home-owner!
6. Buying a home on mortgage in the SFO Bay Are may be a great idea if both spouses work, and you have enough socked into stocks / bonds already, and want to improve your lifestyle. Chances are lower that both spouses will lose their jobs at the same time, but I have seen it happening.
7. In any case, buying a home by putting in the traditional 20% down will prove to you that you are committed to owning real-estate long term as opposed to speculating / flipping. All data points to median prices going down in the SFO Bay Area for the next few years.
8. Don't cave into the social pressure of buying that house in a good school district like Cupertino / Palo Alto by paying $200,000 more. Real-estate is like any other investment. So, dollars will chase that cheaper house in Mountain View / Sunnyvale if it makes sense. A family with 2 kids can live in a not-so-good school district and send the 2 kids to private high-schools for the $100,000, and can have the net gain of the other $100,000 by living in Mountain View, as opposed to Cupertino, for example. So, market efficiencies will ensure that high house prices in great school districts can't keep going up when prices in nearby towns are going down!
9. America is a land of opportunities. How many times have you heard this? In the SFO Bay Area suffering from off-shoring and layoffs, opportunities abound for entrepreneurs - that Chinese grocer who is in business, that Thai chef with two hot Thai restaurants, that Iranian gas station owner, or that Indian Patel who owns two motels. But if you are a technocrat, you live in the Bay Area with shrinking job opportunities.If you aspired to be a real-estate agent, you know you can't for the next few years, because sales are plummeting, as I showed with actual data and numbers above. If you are a Ph.D., good luck finding a job here! If you were a CEO of a start-up which went bust, chances are you are unemployed, knocking on doors of all sorts of Venture Capitalists and simultaneously looking nationwide for that next job! If you fall in the later category of a fallen Ph.D / CEO / technocrat, you are at a disadvantage trying to buy a home on mortgage when the competition you have is from that immigrant grocer / restaurant / motel / gas station owner who will come with cash and buy that home! And no one can ever drive you away from your home for which you paid cash!
Disclaimer: Recommendation is not advice. Please read our Terms of Service.
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