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Silicon Valley's median home price? $800,000!

By Broderick Perkins

Silicon Valley's housing market is a lot like global warming. It's not clear how much of it is manmade and how much is simply, well, the environmental norm.

Do buyers pay whatever it takes to assure home ownership in one of the nation's most sought-after locations, even if they turn the market into an affordability wasteland? Or are ever-higher prices simply the norm in an atmosphere with a thin supply of housing?

One thing's for sure: Baby, it's hot outside.

In May, based on 1,098 closed sales, the median price of single-family homes left the ozone, skyrocketing to $800,000, smoking the previous one-month-old record of $775,000 and leaving potential buyers twisting in the cinders. The May median is up from $749,000 a year ago, according to Richard Calhoun, broker/owner of Creekside Realty in San Jose and publisher of the Bay Area Real Estate Market Newsletter.

Condos remained at the half million dollar mark, matching the $500,000 median from April and besting the $490,000 median from May of 2005, according to Calhoun, who crunches numbers supplied by the regional multiple-listing service, R.E. InfoLink in Campbell.

Can the $1 million median be far behind in a market with a growing shortage of superlatives to describe it?

"I wish I had an answer. Inventories are up, sales are down and prices are rising. The perception is that the market is soft and homes aren't selling," said Mary Pope-Handy, a Las Gatos real estate agent with Intero Real Estate Services. It is and they aren't, but that hasn't stopped the upward march of prices.

The combined inventory of single-family homes and condos rose seasonally to 4,729 in May this year, up from 4,284 a month earlier and up from 3,570 a year ago. Meanwhile, total closed sales went flat at 1,558 in May, compared to 1,535 a month earlier, revealing a weak seasonal swing. Last May, the number of closed sales reached 2,035, according to Calhoun.

It's also taking longer to sell homes--an average 37 days for single-family homes in May, compared to 36 days in April this year and only 22 days a year ago. Condos sales were only slightly faster, taking an average 33 days in May, compared to 34 a month earlier and 15 days this time last year.

Nina Yamaguchi, managing broker at Coldwell Banker's Cupertino office, says two forces are at work. Buyers faced with a greater selection are taking their time. That's slowing sales and giving inventories time to mount.

When buyers decide to buy, they choose cream-of-the-crop, ready-to-go properties in the best neighborhoods to hedge their bets against any market softening. That pushes up the median.

"People are buying the really safe properties, the three-bedroom, two-bath Sunnyvale home for $850,000. The four-bedroom, two-bath Cupertino home for $1.2 million or $1.3 million. If anything is odd or the school is not terrific, the home is much harder to sell," she said.

There are fewer purchases, but when buyers do buy, they pay top dollar. Sellers are getting, on the average, 100.2 percent of their asking price, according to Calhoun.

"There's a feeling of uncertainty with interest rates, with [Dr. Ben Bernanke, chairman of the Federal Reserve] speaking, the stock market tumbling, reporters writing about the bubble, a slow leak, a soft landing," Yamaguchi said.

She also said many buyers come largely from the high-paying technology industry with few buyers transferring in from out of state.

"There are a fair number of first-time home buyers spending $800,000," she said.

First American Real Estate Solutions' recent report, "The Real Estate Cycle in 2006: Evaluating Market Position, Identifying Turning Points and Constructing Scenarios," says, as alarming as it may seem, markets like Silicon Valley are behaving normally due largely to the persistent short supply of affordable homes.

"We are way behind on housing, and not everybody wants to live above the Starbucks on The Alameda or along the light rail and train tracks. Most of the good land was built up years ago. Now where builders go is not the most desirable locations," Pope-Handy said.

Real Estate Cycle author Christopher Cagan, director of research and analytics at First American, says the short supply in "cyclical" markets such as Silicon Valley force a business-cycle pattern that induces a wave-like motion over 10- to 15-year periods. Prices can fluctuate by large percentages--20 to 40 percent--above and below smaller long-term growth rates.

For example, Silicon Valley's median home price is only 6.8 percent higher than it was a year ago, but from May 2004 to May 2005 prices rose from $635,000 to $749,000, about 18 percent.

Calhoun said many of the county's hottest markets are the most expensive markets in the northwest--Cupertino, Sunnyvale, Mountain View, Palo Alto and Los Altos. In some of those cities, the average time on the market is only 20 days, compared to the overall county average of 37 days.

"Ninety percent of the homes are selling for more than $635,000," Calhoun said.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.