Why Dropping House Prices Can Be a Good Thing

While it may seem that, two-plus years into the post-bubble economy, no one knows anything, there are some encouraging signs in the housing market. Sometimes, they come disguised as bad news.

Our brave new world demands that we stop using the traditional paradigm of data analysis – the median price – to assess the present state of the real estate market. Our trained response, when The Wall Street Journal tells us that “prices declined in 28 major metropolitan areas tracked during the fourth quarter (of 2010) when compared to a year earlier,” is to start looking for the nearest cliff. In reality, this information simply isn’t as useful or as telling as it was two years ago.

From October 2008 to March 2009, the national housing market was in a panic; it was frozen. Someone had turned off the money spigot. Every Realtor I talked to insisted there was “money on the sidelines,” but homes simply weren’t selling, partly because nobody knew what their house was worth anymore and partly because real estate is a world not of outliers but of lemmings. People put properties on the market at 2008 prices then stood there, dumbfounded, when nobody showed up to buy.

This is not March 2009. Nor are we in Houston, which, as of January, had 7.8 months’ worth of real estate inventory stacked up waiting for sale. And in March 2011, “declining prices” aren’t a fair indicator of market health. There are many other factors to consider, some of which not only cancel out year-over-year price drops but instead reveal them to be an indicator of an improved market – especially locally.

Start with this: all real estate is local. This is why you must look carefully at any chart, graph or study that offers a summary of The San Francisco Bay Area.There are nine counties in the Bay Area, including Solano and Contra Costa, two places whose real estate tales of woe, frankly, resemble those of Stockton, not Ross.

In Marin County, San Anselmo and Fairfax, with their inventories of sub-$1 million single-family homes, are uniquely positioned. Minus the high-end stagnancy of a Tiburon or the foreclosure problems of a San Rafael, they’ve become magnets for investors looking for a good – and safe – deal. The result, as chronicled last month by the IJ in an article entitled, “After modest price gains in 2010, has Marin’s real estate market hit the bottom?” is a rush for properties deemed good values by investors.

Homes at the entry level of the market, especially those perceived as being offered at a discount, are now drawing crowds – and multiple offers. Every day is throwback day; buyers are partying like it’s 1999. Because of the interest at the entry level, prices have either stagnated or declined slightly. Meanwhile, transactions were up 13.9 percent in 2010. Almost 2,000 homes were sold, county-wide.

And it’s not just “investors” who’ve come to this party. Two years of price decline has created an opportunity for buyers looking to downsize and capitalize, for first-time buyers and for buyers who had previously resigned themselves to long commutes and cities with less cache than San Anselmo and Fairfax. As time goes on and inventory shrinks, a definite “you don’t want to miss out” has attached itself to any home perceived as a good deal.

Whatever the present impact on overall median prices, 2011’s surge in activity is good news. Eventually, the Ross Valley is going to run out of bargain basement deals. As competition heats up, buyers’ definition of “bargain” will adjust.

Two years ago, the real estate market – locally, statewide and nationally – was in shock. The activity we’re now seeing may not indicate a total recovery, but we shouldn’t point to suppressed overall property values as evidence of bottom-feeding or as proof that no one is buying houses anymore. At this point, low prices show that we’ve found the market again. After two years of price reductions, we now have a starting point for growth.