(LAKE TAHOE REAL ESTATE BLOG) I want very much to thank one of the people who attended our real estate seminar at Lake Tahoe Community College last Saturday for inspiring this post. Lets call her “Maggie”, and she had an excellent question about a recent article having to do with the national housing market.

The article is about housing values in general, and in California and Florida in particular. The name of it is “Homes in Bubble Regions Remain Wildly Overvalued.” It was published by Brett Arends on February 12, 2008.

To us, the main thing about this article is the assumptions in it are general, and do not apply everywhere, even in California or Florida. The article's point of view is based on the relationship of US per capita income and US median home prices. This may have bearing on some real estate markets across the country, but it certainly has no bearing on ours.

Articles like this can, and do, produce a poor public perception of the real estate market with folks who do not distinguish the differences from one real estate market reality to another, and who may not be as familiar with some of the lexicon of our profession.

 Here’s what’s in the article : (read it here)

• The opening sentence says its bad news, and then really bad news if you own a home in California or southern Florida.

• The article says that the source of the bad news is recent data published on Zillow.com.

• It further states that “the really bad news is that, even after a year of misery and falling prices, homes in many of these regions still aren't cheap.”

• And then it states, which is the point of the article that houses “remain wildly overvalued compared to average personal incomes.”

• The article says that Median Prices of homes in California peaked in 2006 at 13.3 times per capita incomes, but that they may now be about 11.1 times per capita income.

• The article suggests that 40% more of California's home values need be erased to "get back into line." (7 times per capita income)

• The article ends with this disclaimer: “Yes, these are projections and estimates. Time and chance will play their usual roles. And there will doubtless be different pictures within regions of the same state.”

 About the income of South Lake Tahoe Buyers :
Before we explore what’s in the article, lets understand that South Lake Tahoe is a vacation home resort real estate market.

• On average vacation / second home buyers on average make at least $200,000 a year.
• Characteristically they are overqualified financially. (In fact, we have never represented a buyer or a seller who was not financially qualified.)
• Source: NAR 2006 Profile of Second Home Buyers.

  About South Lake Tahoe Value in General :
There are a number of factors to be aware of when considering “value” in highly desirable resort communities:

• In resort areas, one is not only buying a house. One is also buying “lifestyle.”
• Additionally, one is buying location over and above house.

 Limited Dirt :
Especially here in South Lake Tahoe, with our limited supply and environmentally protective growth restrictions, one is also buying very limited “dirt”.

• Often we see a “house” sell that is worth little more than the lot it sits on.
• Some dirt is much more valuable than other dirt.  It just depends on where it is.

 

Ok. lets take a look at the facts in the article and see what we can find out:

 Accuracy of Zillow  :
According to Zillow, their data in Eldorado County California is as follows: (it is rated "2 Stars, see it here)

• 99% of the homes are estimated
• 25% of their estimates are within 5% of the sale price
• 47% are within 10% of the sale price
• 75% are within 20% of the sale price
• And they have a 10.6% median error.

Read what we found out by comparing Zillow to every home in escrow in South Lake Tahoe at present here.

When reviewing this data, it’s important to understand the difference between an “estimate” and a sale.

• When Zillow or any other source reports a recent sale, one can usually depend on the amount of the sale to be accurate.
• It’s in estimating value before a sale where difficulty comes.
• The difficulty applies not only to Zillow, but sometimes to real estate agents, and licensed appraisers as well.

Our comparison indicates that Zillow is not an accurate source for estimating real estate value for South Lake Tahoe.

• Some, possibly much of their data is right on in other places, and some isn’t, which is common knowledge throughout much of our industry.
• Where Zillow can be a valuable guide, the standard sources of accurate real estate data are reported sales from our multiple listing services, or the country recorder’s offices all across the country.
• It's our hope that Brett used sales, rather than estimated data. We suspect he did.

Median Family Income in CA : (see it here)

• The Median Family income in California in 2006 was $64,563.
• The current Median Sold Price of a California home in 2007 was 7 times that.

US Per Capita Income : (see it here)
The term is defined as “income computed for every man, woman, and child in a particular group. It is derived by dividing the total income of a particular group.”

• In other words it is the average income of every man, woman and child living in the country.
• That number comes from dividing the total US income by the US population.
• US per capita income in 2006 was $36,726. (see it here)

Note:

• Per capita income for a family of four totals $146,904. (4 people times $36,726)
• The per capita income for a young couple without child looking for a home to buy is $73,452. (2x)
• Both figures above are plenty enough to buy a median priced house.
• But both income figures are more than the US median family income.
• Per capita income need be quantified and understood when using it.

CA Per Capita Income :
California per capita income in 2006 was $38,956, slightly more than the US average. (see it here)

• The 2007 median price of a CA home is 12x 2006 per capita CA income.
• Therefore Brett Arends is accurate about the relationship of per capita income to the median price of a California house.
• But it has no bearing on the value of resort properties whose buyers characteristically make more than per capita income.

Median Home Price in CA : (see it here)
The median price of a California home in October of 2007 was $497,110.
It was $450,990 in 2004 (see it here)
In the last 365 days, the median price of a South Lake Tahoe home is $405,000.
The South Lake Tahoe home is on average priced 18.5% lower than the October 2007 California median.

About further Value Decline :
Here are the median prices in South Lake Tahoe since 2000.

• Since the market high on September 1, 2005, there has been a 12.3% decline in the median price.
• This includes all sales in the last 180 days, which has produced a little more than a third of the overall decline.
• But, this number has to be looked at carefully.
  
  • The last quarter spans the slowest time, thus the least number of sales, of our real estate year.
  • Sales in the next 180 days could bring this number up, or produce additional slight declines.
• See the chart below for further discussion.

The chart below indicates South Lake Tahoe Median Price changes by quarter since Jan. 1, 2006 (as indicated by the last 365 days starting with Jan. 1, 2007)

• Median prices per quarter have ranged from a low of $385,000 to a high of $474,000.
• Note that every quarterly result since the lowest result has been higher.
• It's our guess that median prices will continue to decline somewhat slightly and may eventually settle some where near, if not slightly higher than the 2004 median of $375,000.