Volume 6, Issue 1 Nicholas French, Broker Associate, CRS

March 1, 2011

Quarterly Review
Are You A Gambler?
Maybe your game is poker, the horse track, or sports; each have a large degree of risk with the opportunity
of a high return being the driver. I am not one who has a stomach for such high risks, so I tend to be more
pragmatic. I look at historical trends, confidence, economic changes and forecasts when considering my
options. We are entering a stage of the real estate market where one will decide what kind of player they
Nicholas French
are. Whether a buyer or seller, you will have to answer difficult questions such as what is your time horizon,
Broker Associate, CRS
expectations, and needs. These questions should be the basis when deciding buying and selling real estate in
369 S. San Antonio Road the coming quarters and years since there is still uncertainty in the market with many competing opinions
Los Altos, CA 94022 and suggestions.

650 773 8000 (cell) The media continues to provide misleading reports of statistics. In January the Mercury News headline enti-
650 947 2999 (office) tled Silicon Valley home sales slump continues in December discussed how both transactions and prices were
down year over year. Less than one month later the same columnist wrote Silicon Valley house prices edge
650 947 3099 (fax)
higher; ‘distress sales’ dominate in Bay Area. The day which you open the paper may bias you towards one
nick@realtornickfrench.com opinion or another. The reality is that our market is relatively flat, so depending on the day, month, quarter ,
www.realtornickfrench.com or hour you compare there will be variations up and down. I continue to educate clients to be wary of statis-
tics; they are misleading and often convey specific information supporting the author’s point. I am in the
trenches every day and provide the latest and greatest updates to my clients on the real market condition.
We look at specific neighborhoods, house types, market changes and various house attributes when discuss-
Inside this issue:
ing value. For example, most people familiar with Palo Alto real estate have been seeing prices very strong
with multiple offers and low days on market. This market is very unique to its adjoining East Palo Alto
Are You A Gambler? 1 neighbor. But even in Palo Alto not all properties are the same. There is a property currently on the market
that sold in 2006 before our market peak at $1,865,000. That same property is today ready to sell at
Are You A Gambler? 2 $1,750,000 but no buyer has come to the table thus far. Is it that there are no buyers in Palo Alto? No. The
(cont)
current buyer is very savvy, particular and patient. This property has a few less than perfect features, which
Call Me When You Find 2 is causing buyers to pass even at an aggressive price. In other words, without knowing the specific property,
a Deal
location, and history the statistics may mislead many people. On the flip side, I am surprised at some of the
Call Me When You Find 3 sales and prices, specifically in communities such as Cupertino, where buyers are focusing on the statistics
a Deal (cont) (cost per foot, age, etc) and not adjusting for factors such as being on a large road, next to a freeway, etc. I
am in those trenches, so have the first hand information on motivating factors for buyers and sellers, price
Client Testimonial 3
deltas between offers, and other valuable information that I offer my clients. This information serves to
6 Years of Quarterly 4 educate and prepare whether we are buying or selling.
Newsletter
Take action now or later? This is our question for the genie – but instead of gambling or letting a fortune
Updated Neighborhood 4 teller or genie decide our fate we should consider known facts about the current market in order to help
Statistics guide our decision process. The real estate question is whether to buy/sell now or later. Some basics that
we know about our current market are: 1) prices have been relatively stable over multiple quarters, 2) inter-
est rates continue at historic lows, 3) a healthy pipeline of active, savvy, patient and fearful buyers – our
pipeline has demand for the next few years, and 4) global inflation is driving cash to investments. I think that
these known factors decrease the gambling aspect in the market. If you are considering buying or selling
real estate in the near future this is the typical market and you can expect to see similar characteristics.
Depending on whether you are buying a home for your family or investment you may adjust your strategy,
but the fundamentals remain. So if you plan to buy a home this spring you will be purchasing at a dis-
counted rate with historically low interest rates in a market where confidence is restoring and in some areas
rent values are similar to mortgage figures. I am assuming prior to purchasing you have: 1) decided the
 Quarterly Review
Page 2

Are You A Gambler? (cont)

neighborhood where you want to live for the next several years, 2) saved a down payment, and 3) have excellent credit scores. If you said
no to any of these items you will have to wait and be the gambler. Now why do I say you are a gambler? We currently know all of the char-
acteristics above, but what happens when interest rates rise, or the stock market has a pullback, or the slow job market lowers confidence,
or inflation runs amuck? We know the market now and that homes are soft compared to 2008 prices such as described previously in Palo
Alto. Another example is a newer construction home in a prime Cupertino neighborhood. In the peak of 2008 the home value was approxi-
mately $2,100,000 and is now in the $1,850,000 range. We experienced a rather quick adjustment in prices within the affluent communities
seeing the lowest prices in 2009 and 2010. This year appears to continue a similar course with values maintaining relatively flat with what
may be the calm before the storm or just the calm before the hurricane. I am anxiously awaiting higher interest rates and how the signifi-
cant changes to affordability will affect the current confidence and market. With $200,000 income a 1% change in the interest rates causes a
$100,000 delta in lending power. In other words, instead of borrowing $1,100,000 you can only borrow $1,000,000, so if the home stays at
the same price you have to come up with an additional $100,000 of down payment.

We know the affordability will be affected by the higher rates; consumers will borrow less having
Affordability Scenario the same expense. The unknown is whether the market can sustain the higher borrowing costs
Income Level $ 200,000.00 by maintaining or raising prices while affordability decreases solely through higher interest rates.
Interest Rate Loan Amount Remember a few years ago when gasoline prices skyrocketed? During that period the economy
5% $ 1,057,148.00 was spiraling down, consumer confidence was at a low and most families had little discretionary
6% $ 946,542.00 income. Families were forced to adjust their driving habits: walked to work, parked the SUV,
carpool, used public transportation, etc. During that time the consumer was unable to sustain
the higher cost so they adjusted their habits to maintain a similar affordability level within their
Add'l Down Pay-
$ 110,606.00 budget. Fast forward a few years and gas prices are again up significantly in a short time period,
ment
but this time I’m not hearing the same lifestyle changes by the consumer. How can this be possi-
ble? For various reasons the consumer is absorbing their additional cost without much lifestyle change. Now take the real estate market –
what is going to happen when the affordability decreases? Will the market be able to absorb the increased cost or will the market adjust to
the consumer’s ability or level of purchasing power? This is the gamblers dilemma because there are three scenarios: as interest rates in-
crease 1) prices increase, 2) prices remain static, 3) prices decrease. What do you think is going to happen? I think the market will have
enough strength to withstand the lowered affordability given the anticipated scenario and that we will continue to see a fairly flat, albeit
stable market. Stay tuned through these newsletters as I will update my forecast based on local and global market changes. It is crucial to
have representation that does their homework and knows the market intimately. The lending market is anticipating lower rates through
most of this year with discussion of higher rates on the horizon. I am already seeing slight increases from the bottom rates, but that hasn’t
shocked the system yet. The risk is whether this will occur and how the affordability will affect prices. As I mentioned previously the safest
scenario is the current market, but if you want to be the gambler you can share your hypothesis and place your bet.

Call Me When You Find a Deal

Whether standing in line at Starbucks, having a sandwich at lunch or talking around the office we are hearing talk about buying investment
property. We are hearing firsthand accounts of huge positive cash flow on low end properties, the media is telling us bank owned properties
are selling an average of 36% less than normal sales (according to RealtyTrac), and it all sounds so simple – if I can buy a home 36% less than
a normal sale with strong positive cash flow it sounds like a great investment, right? Buying and owning real estate is not as simple as run-
ning an algorithm to calculate price, tenant makeup, vacancy rate, etc. After the market crash I had many clients come to me asking what
real estate to buy with $100,000 investment. For the clients that were looking for little to no headache with a good return I suggested they
consider REITs as an alternative to brick and mortar which I discussed in a previous newsletter. At the time it was another way of saying
there are many investment vehicles available and my goal is to help put the right client in the right vehicle. A recent report on REITs indi-
cated total returns outperformed the S&P 500 since the financial crisis; did you buy any REITs after the crash? Now I am changing my strat-
egy – see how important it is to read my newsletters :) Now that the media has pointed out this great investment tool I don’t think it is the
best investment. We don’t like the herd mentality, right. Instead, it is time to discuss brick and mortar real estate investments and doing
that is not as simple as saying: Nick, call me when you find a deal. As the investor you will have some homework as well. (cont. pg3)
 Volume 6, Issue 1
Page 3

Call Me When You Find a Deal (cont)

The good news is that deals are all around us right now. The difficulty Pre-Investment Property Shopping Questions
comes in finding your needle in the haystack. In other words you need to
How much money are you investing?
determine the right investment for you. This is the homework that will
What is your expected return on investment (cash flow)?
help me help you get your investment in a market that has been heating
Desired property type: single family, townhouse/condo, multi-
up, albeit prices still relatively flat by approximately 5%.
unit?
How much involvement do you plan to have (low, medium,
According to RealtyTrac foreclosures are making up 26% of home sales and
high)?
distressed properties in California are approximately 44% plus, respectively.
Do you have a preference to new or older homes?
So maybe you want to grab this distressed market. I am continuingly edu-
cating buyers about the pitfalls, delays, risks and conditions of these prop- What type of neighborhood and tenants would you like (i.e. stu-
dents, professionals, long-term tenants)?
erties and how it plays into the decision process. If you are a buyer it is
important to understand that homes today are selling at prices that the What is your exit strategy (i.e. how long do you plan to keep the
market can bare, irrespective of being a normal or distressed property. investment and what will you do with the cash?)
These statistics are misleading because distressed properties tend to have significant deferred maintenance, unfinished or unpermitted work,
and poor presentation with little to no improvements to maximize the selling price. There is a simple reason for this phenomenon – owners
of distressed properties are in this position for a reason and have little to no cash nor interested in improving a property which they will get
no money in return. There is no incentive for these owners and therefore homes not only lack improvements and cleanup, but they tend to
make them nearly impossible to show making it difficult to get top dollar. A home purchase is usually part emotional and if buyers do not
have the emotional side they tend not to pay as much. There are cases where even though it is a distressed sale the property shows well with
good condition and in those cases the property can get top dollar. In some cases I would argue short sales are getting more than market be-
cause there are buyers running around that “want to buy a short sale” because of what the media is saying. I educate clients in these various
scenarios and facilitate finding and closing the right investment and price.

Do you need to buy tomorrow? I do not think so. Even though investors are out in mass right now there is a healthy pipeline of inventory in
the lower price range with banks continuing to foreclose property and homeowners continuing to default. I do think it is time to be picking
up these investment homes, but you are not alone as in 2010. According to NAR all-cash sales went up to 32% from 26% a year earlier. These
investors are primarily purchasing these lower price range homes. Once you get in the investment market you know you are not alone, but
being prepared with our fundamental questions above will help guide you to make the right decision in a reasonable amount of time. Should
you buy in the Central Valley, or Phoenix, or Las Vegas? I have consistently told clients I am not a fan of these areas for several reasons in-
cluding: abundance of land, homogeneous job industry, desirability etc. In the market run these areas shot up like a rocket ship because eve-
ryone wanted a piece of the pie and said sure, a tract home in Stockton is worth $500,000+. According to Moody Analytics I have some
economists supporting my view where they forecast a market rebound in similar areas not until 2030 or later. The timeline can be argued,
but be wary buying in these undesirable locations; you may get good cash flow but there are many common overlooked issues: 1) when the
market rebounds builders tend to build new homes with the abundant land and you will compete with new homes, 2) misery loves company
– you are surrounded by other low-valued properties and will be competing for buyers and tenants with your value tied closely to the abun-
dant selection, 3) unlike our local strong rental market with diverse employment industries these areas tend to be lacking depth and you are
fighting to maintain your rental rate. Let’s stick to the fundamentals, do our homework and get you some investment property!

Client Testimonial
Thank you so much for all of your hard work and dedication. Your knowledge, advice and support are invaluable and we are so
lucky to have you helping us throughout this overwhelming process. Your patience, positive attitude and wonderful personality
have helped us keep our stress and anxiety to a minimum. It is so comforting to know that you are available anytime we have a
question or concern. You always take the time to walk us through each step and although you have many clients, we’ve never felt
rushed. The way that you fight for what we want and need, and how you look out for us and make sure we are happy, shows how
much you care and makes us feel more like good friends than clients. I hope you know how much we appreciate everything and
how grateful we are.
Page 4 Nicholas French, Broker Associate, CRS

Updated Neighborhood Statistics

6
No. of Closed % of List Median Average Average
City Year Qtr
Sales Price Price Price DOM
Campbell 2010 Q4 52 97.05 685,000 719,094 87
years Campbell 2010 Q3 64 98.20 667,500 707,401 66
Campbell 2010 Q2 76 100.13 689,500 713,758 45
Campbell 2009 Q4 70 96.56 671,500 721,522 63
Cupertino 2010 Q4 93 97.78 1,074,000 1,109,364 47
Cupertino 2010 Q3 103 99.04 1,090,000 1,113,362 33
Cupertino 2010 Q2 134 100.77 1,059,100 1,108,475 32
Cupertino 2009 Q4 80 98.33 1,130,000 1,200,789 71
I am proud that this is the Los Altos 2010 Q4 84 96.55 1,605,000 1,732,927 65
Los Altos 2010 Q3 89 96.96 1,565,000 1,707,914 47
sixth year of providing my
Los Altos 2010 Q2 98 98.21 1,500,000 1,636,253 41
quarterly newsletter to cli- Los Altos 2009 Q4 80 95.64 1,510,000 1,650,578 71
ents, friends and family. My Los Altos Hills 2010 Q4 25 91.91 2,150,000 2,492,875 146
Los Altos Hills 2010 Q3 25 93.61 2,500,000 2,835,825 97
newsletters have included Los Altos Hills 2010 Q2 19 94.63 2,400,000 2,618,800 115
the most up to date informa- Los Altos Hills 2009 Q4 26 94.76 2,391,944 2,368,124 107
Los Gatos 2010 Q4 86 95.35 1,080,000 1,263,714 92
tion in the market and accu-
Los Gatos 2010 Q3 93 97.28 1,226,000 1,337,039 72
rate information for clients Los Gatos 2010 Q2 102 96.53 1,265,000 1,371,235 61
looking to buy or sell. You Los Gatos 2009 Q4 81 95.35 1,249,675 1,332,355 84
Menlo Park 2010 Q4 81 97.80 1,250,000 1,288,323 57
can review my previous Menlo Park 2010 Q3 110 98.37 1,234,250 1,367,116 48
newsletters on my website Menlo Park 2010 Q2 105 99.01 1,249,000 1,351,570 42
Menlo Park 2009 Q4 86 96.66 1,150,000 1,233,613 75
at
Monte Sereno 2010 Q4 9 94.31 1,875,000 2,176,611 91
www.realtornickfrench.com Monte Sereno 2010 Q3 8 91.71 1,787,500 1,958,750 103
Monte Sereno 2010 Q2 13 96.73 1,755,000 2,030,129 93
I appreciate your support Monte Sereno 2009 Q4 5 94.87 1,655,000 1,760,600 160
and will continue to provide Mountain View 2010 Q4 78 98.01 917,500 972,110 56
Mountain View 2010 Q3 73 99.94 892,000 964,293 43
the latest and greatest infor- Mountain View 2010 Q2 102 100.13 923,750 965,718 32
mation. If you have any top- Mountain View 2009 Q4 75 99.24 905,000 965,774 61
Palo Alto 2010 Q4 124 100.86 1,315,000 1,406,402 45
ics you would like me to dis-
Palo Alto 2010 Q3 119 101.26 1,385,000 1,555,295 35
cuss or have family, friends Palo Alto 2010 Q2 123 99.91 1,468,000 1,681,872 36
or colleagues that can bene- Palo Alto 2009 Q4 109 99.16 1,370,000 1,547,801 47
Saratoga 2010 Q4 59 96.18 1,249,000 1,407,171 52
fit from my services feel free
Saratoga 2010 Q3 77 95.93 1,650,000 1,795,243 70
to pass along my newsletter Saratoga 2010 Q2 110 97.0 1,499,000 1,618,118 61

and contact information Saratoga 2009 Q4 53 93.51 1,395,000 1,593,660 88

Sunnyvale 2010 Q4 124 99.46 716,000 686,617 54
Sunnyvale 2010 Q3 169 99.23 805,000 777,051 41
Sunnyvale 2010 Q2 177 100.95 851,000 815,204 43
Sunnyvale 2009 Q4 141 99.44 760,000 740,857 52