It is Hard to Resist the Dopamine of Collective Euphoria in the Housing Market

Individual investor results may vary.

By Kara Cox, real estate investor, agent. Observer of Bay Area Real Estate on San Mateo Parley.

Having lived both in the Bay Area during the dotcom explosion and NYC during the MBS explosion, I know a thing or two about financial bubbles. Or at least how they feel in the moment: akin to being at a frat party at 2 am. Everyone is spewing garbage but thinks they are a genius, and the only way to make sense of it all is to drink up or take yourself home.

That’s bubbles.

It is hard to resist the dopamine of collective euphoria. It is only in retrospect in which everyone saw it coming, knew it couldn’t last, etc. We didn’t, for the most part. It is easy to look back with derision about the Dutch and their bout with overpriced tulips, but is that so much different than what happened with Or when folks rushed to own homes in 2005?

Data presented on the major realty sites tends to focus on the gains of the last ten years, more or less. This is handy to their purpose…making a home seem like a great investment, on top of providing other practical and emotional benefits. The last ten years have been great!

However, to fully reap those financial rewards you would have had to buy around 2010, and this was precisely the moment lending was in shambles.

For example, a friend of mine bought a place in San Mateo in late 2010 (3/2, approx. 1300 sq. ft., slightly oversized lot) for a little under 650K. According to it has gone up in value 135% in the last 11 years, and will go up an additional 9% over the next year. She said, at the time, they worried they were overpaying. Despite such potential gains, her non-tech propelled family isn’t going anywhere, short of winning the lottery.

With prices soaring and a constant stream of reasons why prices can’t possibly go down, I start to get nervous. It’s not that I don’t think there is a lot of value in a home in San Mateo. It’s that I can’t shake the feeling there are a lot of outliers in the data which are disguising the facts the overall gains are being distributed in far less democratic manner than they might seem with additional context.

For example, there is an adorable comp on the market in San Mateo which came up pending in the standard two weeks or less (2/2, approx. 1650 sq. ft., oversized lot). The ask price is around $1,200 per sq. ft., for a list of 2 million.

Estimates of the property’s value:

  • Redfin = $2,274,831
  • Collateral Analytics = $2,445,000
  • CoreLogic = $2,420,700
  • Quantarium = $2,328,339
  • Zillow = $2,305,555

What is of special interest to me about the comp however is its past sale history. In the summer of 2005, it sold for $1.4 million. It next sold in 2013 for $1.41 million.

It took eight years to recoup the sticker price, to say nothing of the losses of interest, commission and other ownership obligations. Should the house sell for the low side of the projection, $2.3 million, it would be easy to tout this as a miraculous achievement. Having bought in 2013 for $1.41 million, you sell for $2.3 million. Minus the commission only (4.5%) you are walking with approximately $800K.

Assuming you put the standard 20% down this is 285% return on your money over 8 years. Not bad, on paper, but it goes down significantly when you start stripping out other ownership costs.

Then, keep in mind, if you do the math for the guy who bought and held in 2005, had he continued to hold, the return on the property is sliced in half. As it was, he lost a great deal of money. Such are the numbers showing how long it took for a top-notch trophy property located in San Mateo to rebound after the last dip.

I came across another property which tells a story of much greater financial woe and heartache stemming from that period which, for a while, burst with enthusiasm. This one is located in the outskirts of Hayward. Way, way out…I passed a yak.

The house was built in 2003 (4/3, approx. 2700 sq. ft., large lot with Bay view). Its stats are as follow:

  • Early 2003 – sold for a hair over $800K
  • Mid 2005 – sold for $1.19 million
  • Late summer 2012 – sold for a hair under $700K
  • Current estimate on Realtor – a hair over $1.4

Realtor points out that the house has appreciated 90% over the last 11 years. However, the bulk of this benefit goes to the most recent buyer. The previous one lost $500K of value between the years of 2005 and 2012. Let’s assume the sale price estimate is correct. If you calculate the return of the asset itself over the span of its first sale and today the overall return looks, to me, a lot more like 75% over the last 18 years. Individual investor results may vary. By Kara Cox.

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