Glimmer Of Hope?

A Sight Not Seen For A Long Time

It may just be new year fever, but there are signs of things stating to improve in the Silicon Valley housing market according to the SJ Mercury News today. Although prices are down 40%, year-on-year sales in Santa Clara county, November '07 to November '08, were up 14%.

Obviously there are a couple of effects at work here: inventory and affordability. Back in November '07, low-end houses, where there's always been an imbalance between supply and demand, were few and far between, and let's be honest you really didn't get much for your dollar. Fast forward 12 months and now you have a lot more choice within a given price band and you get significantly more house for your money.

If you are employed, solvent and can get a mortgage, life is clearly pretty good for house buyers just now. If prices are truly down 40% in your chosen area and you are still making what you made 12 months ago then it's hard to see any reason to sit on the sidelines much longer, unless of course you think you may get laid off sometime soon ... which alas is still a fear for a lot of SV workers. So apart from the solidly employed, who else is buying?

It seems Silicon Valley is luring real-estate investors back to its bosom. From a year ago, sales to absentee or investor buyers rose 38% to now account for 11% overall. Which is a lot. And interestingly, those investors are spreading their dollars across a broad church of property districts from the relentlessly up-market (Los Altos Hills, Atherton etc.) to the more Blue Collar(San Jose, Alviso, etc.)

Does all of this signal that we have reached a bottom and that things are now starting to turn around? From a real-estate perspective then ... perhaps, especially at the low end of the market and particularly once Spring arrives, by which time post-Christmas layoffs will be over, any businesses who couldn't scrape past the new year sales will be gone and company budgets will be set for '09. Add to that the chance for a "new president dividend" in terms of optimism & consumer sentiment and things might be looking brighter than they have done for quite a while.

The real signal for a broader upturn will likely be when Wall Street stops reacting negatively to further bad news. That's been a leading indicator of recovery in at least the last two significant recessions and no reason to think it won't be so once again. Wall Street is basically a forward-looking discounting mechanism and hence a leading indicator of corporate recovery. Therefore, it will be very interesting indeed to see how the markets react in these early weeks of January to new economic or political data that's perceived to be negative. If there's a floor found over that period then we may well have found a base for the much-mooted second-half recovery.

Happy days are here again? Not quite, but perhaps we might at least cancel the suicide watch.

Yea, Now We're Winning ... Kind Of

Over breakfast, I found myself reading an article in the european edition of the Financial Times discussing the impact of the precipitious fall in world oil prices.

Now that the price of a barrel of oil has fallen by 50% from its peak, bringing it down to around $70 to $75, the writer was noting that this is likely to have a positive impact on the west but a much more significant and negative effect in the east.

It seems that the national budgets in Iran and Venezuela, for example, only balance when oil trades at $95 per barrel or above; that figure is $70 for Russia, making them about break even today but clearly much worse off than before Wall Street withered. (This is of course a game the US doesn't even get close to playing, thanks mostly to dwindling oil output and a budget deficit that beggars belief.)

Add to the above an analysis by Deutsche Bank that says the marginal production cost for crude is between $65 and $80 a barrel - by implication also therefore the trading range that things should settle into over the long term - and it's hard to see how even with OPEC trying to trim output and push prices back up again that we will see much in the way of upwards pricing pressure.

Ultimately, it was economics that brought the collapse of the Soviet Union, not some inate demand from the proletariat for the wholesale adoption of democracy. Over the past years, Iran's burgeoning balance sheet has unnaturally emboldened the state in both its rhetoric and the surpression of internal anti-government dissidents. Being flush with cash makes it much easier to covertly fund terrorist activities elsewhere and also creates a thick insulating blanket against the negative effects of any sanctions applied by the western powers. Take away that comforter and it makes you wonder if falling oil prices may ultimately do more to bring stability to the middle east than the reverse trend ever could, especially as meddlesome forces get increasingly distracted by niggling domestic issues like, shall we say, trying to stay in power?

Oh, and the dollar is finally worth something again. Funny old world, innit?

Google Up, House Prices Down

Shapes #2

Just another day in Silicon Valley.

Google pulled the proverbial rabbit out of the proverbial hat and confounded its (non) proverbial detractors. Profits were up but free cash flow was reduced to below $1 billion, thanks to CapEx hitting an eye-popping $842m. In one quarter. Yipes. Still, I suppose it gives them a budget line item them can trim when the going gets tough.

Meanwhile, the San Jose Mercury News reports that the median price of a home in the Bay Area fell 20.4% year-on-year to $549k, with Santa Clara seeing a fall of 9.3% over the same period to $685k.

So there you have it, a solution to everyone's problems. Have Google divert just one quarter of CapEx into buying houses in the Bay Area and, assuming you get a discount for bulk-buying, that equates to 1,700 properties changing hands overnight, single-handedly reinvigorating the entire Silicon Valley economy and making a handful of realtors rich as a double chocolate toffee pudding with extra cream on the side. Well, there has to be a downside to any plan, right?