Down, Down in the Valley

The hills are alive with bargains here in the Silicon Valley. Here’s a four-bedroom palace in Hillsborough. “Baronial splendor,” reads the brochure headline. Pool, sauna, cobbled drive, inlaid floors, a kitchen so fully loaded it almost makes up for the purple dining room carpet. Was $5.6 million. Now just $3.89 million--practically “dirt value,” as the agents say.

Here’s Veranda in Willow Glen, a newly minted tract in Greater San Jose, where just last month, the Heatherbray model (“Four Bedrooms, 2.5 Baths, 2,832 Square Feet”) was “priced from $1,119,000.” Last week, as the stock market plunged, new fliers were quietly issued. Now the Heatherbray is priced “from $799,950.”

Here’s a spec house in the rolling horse country above Palo Alto, all glass and marble and coffered ceilings, designed by an architect and an artist. The view from the deck is like a postcard from Tuscany. Last year at this time, it would have gone for $12 million. Now they’re asking $8 million, and the open house last Sunday was all but unattended.

“No one but tire-kickers,” the agent sighed, slumped in the custom-made couch as a fat, Bill Gates-looking guy in running shorts jumped up and down on the Brazilian cherrywood floors, belly flopping.

“Hey! At least the floors don’t creak in this one!” the man yelled to his wife, cackling mercilessly.

After a stint of inflation so resilient that even starter homes were still selling last month in the high six figures, home prices here suddenly have begun threatening to return to something like normal. Not that “normal” here bears even the remotest resemblance, yet, to normal as it is experienced elsewhere. The Bay Area, even in mid-downturn, is still the nation’s most expensive housing market. The median sales price of a home in San Mateo County last month was still a mind-numbing $600,000, according to the real estate information firm DataQuick. In Santa Clara County, which includes the city of San Jose, it was $497,000. As of last month, the median was even higher this year than last year.

But residential real estate tends to lag behind other indicators (even behind the market for commercial real estate, which is flattening here now like a blown tire). Current home-sales statistics reflect deals that were cut in January and February, when ordinary bungalows were still drawing multiple bids.

The current softening won’t show up in the numbers until late spring or early summer, but veteran real estate agents say they are already bracing for what is being termed “an adjustment.”

Gino Blefari, whose Bay Area real estate business comprises six of the top seven Century 21 franchises, keeps a graph that tracks his company’s average sales prices against the rise and fall of the Nasdaq. As go tech stocks, so go Blefari’s sales figures, with about a month’s lag time. Anyone who wants to know what direction next month’s home prices will take in Silicon Valley need look no farther than the current stock situation, Blefari said.

So far, however, the downturn’s effect on the housing market has remained anecdotal, and those anecdotes have become Topic A, not only in Silicon Valley but throughout the Bay Area. Cocktail conversation is shot through with tales of who overpaid how much for what house that has lost hundreds of thousands of dollars in value in, oh, the last week. Or of tech workers who cashed in stock options to put down payments on houses without putting money aside for the extra income taxes. Now that the taxes are due, the remaining options are under water and the once-lucky workers are having to choose between owing the government and selling the house.

In the plush Los Altos Hills, for instance, a 15,000-square-foot mansion behind wrought-iron gates came on the market this week for $24 million--the same price the owner, an executive for a company that makes Internet routers, paid for it just 10 months ago. Privately, real estate agents say his chances of getting the asking price are slim to none.

The owner’s housemate--a 35-year-old substitute teacher who answers the door in jeans and a Hard Rock Cafe T-shirt--said the owner not only paid mostly cash for the house but also laid out between $3 million and $5 million last summer, after the purchase, to install a pool, sports court, tennis court, landscaping and other amenities for his children. “Man,” he sighed sadly, “we threw some great parties here.”

The foyer is all inlaid wood and marble. Half of one wall is a tropical fish tank. There’s a home theater downstairs. The owner’s little boy peeks around the entrance to the living room, which is done entirely in shades of white and off-white. The child dive-bombs onto the massive couch and kicks a pale cushion toward the cathedral ceiling. It whirls in a high arc and hangs, almost magically, before plummeting onto the glass coffee table. The router company’s stock was at $110 a share last summer; now it’s trading at around six bucks.

“I put everything I had into that stock,” the housemate confided, shaking his blond head. “Bought on the margin. Funny. I never even cared about money until I got some. Rags to riches. Riches to rags.”

In San Francisco, where, as recently as last month, young tech executives in the hipper districts were getting into bidding wars over condos, Edwardian flats are now meekly going for asking price.

“I have a loft South of Market I’m trying to move now, and I’ve had three price reductions, and the seller’s ready to commit hara-kiri, but nobody’s buying,” said one San Francisco real estate agent. Only a few months ago, lofts in SOMA were inspiring not only bidding wars, but also protests by outraged slow-growthers. No longer.

The Market for Lofts

Dropped 20%, Agent Says

“Something like 29 lofts came on the market in the space of two weeks,” the agent said. “This one, it’s, like, 900 square feet--little, but dressed to the nines--and the person who owns it bought it for $500,000 last year. Well, it’s on the market now for $429,000 and--nothing. You can’t give these things away. The loft market has dropped 20%. Easily.”

Anne Riley, who has sold real estate for 18 years in such upscale suburbs as San Mateo, Burlingame and Hillsborough, said the market is being whipsawed between “caution and paralysis.”

The caution, she said, is on the part of “smart people who’ve earned big money, and who’ve managed to keep it, and who don’t want to appear stupid” by overpaying for real estate when prices are dropping. The paralysis is among sellers who don’t want to move, but don’t want to stand by while their equity flies out the window.

She took two houses off the market just last week, she said, and has cut the price of a third even before its first showing.

“Some people want to believe [this economy] will bounce back,” she said, “but I just don’t see it happening any time soon.”

But, she and others caution, for all the panic, home prices may never fall to pre-tech-boom levels, because the established lot values throughout the valley have been so thoroughly bid up. Once that happens, the bedrock price is harder to erode.

Moreover, the law of supply and demand could keep prices up, even in a recession. Silicon Valley, for all its fame, is only a chain of suburbs on a peninsula between San Francisco and San Jose. Development is constrained by water and mountains. There aren’t that many homes, even in the most populous cities.

Low Home Supply

Could Keep Prices Up

David Martz, a San Jose agent, said that even now, with people rushing to cash out, there are only 3,900 homes and condos for sale in all of Santa Clara County (out of a total of about 382,000).

Hillsborough, which had 11 homes for sale at this time last year, has loosened up immensely, Riley said, but that still only translates to 48 listings.

Prices may be dropping on “the bungalows redone to look like Taco Bells,” Riley said, but such homes were still going for upward of $1 million in some communities as recently as last week.

At an open house in upscale San Mateo Park, for instance, Riley was on the way out the door this week when the selling agent nabbed her. “Whaddaya think of the price, Anne? Be honest,” she called nervously.

Riley paused. The house was small, the floor plan choppy, the kitchen tired, the lot substandard. In suburban Los Angeles, this house would be worth a few hundred thousand dollars--$400,000 in, say, Fullerton, maybe $750,000 in a place like La Canada Flintridge. Here in San Mateo Park, the owners were asking $2.3 million.

“I think it’s a little aggressive,” Riley tactfully offered. Then, still more quietly: “I’d get it a little closer to 2.”

Later she explained how a bungalow in a far-flung suburb can command a Beverly Hills-style price tag: On one hand, this is obviously a seller with a head full of last year’s market. On the other, there are only a few houses for sale, even now, in San Mateo Park. A house down the street is on the market for just under $2 million.

The market is falling, but no one knows for sure where it will find its level. Money has been lost, up and down the valley, but that doesn’t mean it’s all gone. She points to home after home bought by venture capitalists and investors who pulled out of tech as long ago as last May. Those who got out early, she said, have done well.

Hence the half-empty, half-full dilemma, even in this nervous-making, talk-of-the-town market.

“Hey, even if prices go way down, I still can’t buy a house here,” sighed Riley’s assistant, looking up from her desk.

The assistant, 32-year-old Stacy Keller, earns as much as some agents and still can’t afford more than a rented house in Redwood City. (“It’s itty-bitty,” she said, “and I mean like 25-foot frontage. Itty. Bitty.”)

“So some tiny starter house that was $700,000 goes down to $500,000,” Keller postulated, blue eyes rolling.

“So, so what? Like I could even afford that?”

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Home Sales Track Nasdaq

Here is a look at monthly averages of Nasdaq’s daily closes and home sale prices in Silicon Valley