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	Photo: Leigh Wells

    By the time you read this article, it will be completely out of date. It’s about the housing market, after all, and few things these days move faster than predictions about the dire straits of our economy brought down by the greatest bout of real estate speculation of this century. In some areas, foreclosures are outnumbering sales. There are frightening declines in housing starts, with a credit market that’s going from worse to worser, and Zestimates falling faster than the Zimbabwean dollar.
    When will it end?
    The Fed doesn’t think anytime soon, with Federal Reserve Chairman Ben Bernanke urging mortgage lenders to forgive portions of some loans. Merrill Lynch released a report in January that suggested home prices are still about 30 percent overvalued, an imbalance that should be corrected by the end of 2009. The same report says that Americans have lost nearly three-quarters of a trillion dollars in housing wealth and are about to lose at least five trillion more. Merrill Lynch is already predicting the biggest recession since the 1980s, but with energy prices creeping upward and the dollar falling, this time the lights won’t be so bright in the big city.
    As bad as the bust has been and is projected to be, the Bay Area has been faring far better than many other places in the country, in part due to a healthy economy and property that people still really, really want to buy. The bust hasn’t been felt nearly as deeply in the tony neighborhoods, for example, the ones with million dollar homes on tree-lined streets and easy access to the freeway. The more a neighborhood resembles the idealized 1950s burg, it turns out, the more likely it has retained its value. This is the oft-referenced “white hot center” of real estate investing, neighborhoods with big old houses, nice lawns and an easy commute. Their values rise first and drop last. No matter what you’ve heard about the return of urban-hipster living, the best place to invest in real estate is the home of our real—or imagined—childhoods. And the East Bay is full of them.
    When the housing market started to unravel, it happened first on the periphery, in hot, dusty places that took a frenzy to build on in the first place. Around the Bay Area, it was the margins of Central Valley cities like Stockton, Tracy and Vacaville, where there is enough open land to hold a master-planned grid of interchangeable housing units surrounded by lawns watered to a bright green sheen. The backlash of the old real estate truism about location, location, location meant that the Cleavers’ house in the hills was out of reach for the vast majority of buyers, and many people who wanted to get a deal during the boom times had to drive until they qualified. The volume of easy and cheap credit available to those on the margin meant that many did qualify for homes, ones that until recently had been out of their reach.
    To understand how this works, begin at the center. Start with the real estate agent’s dream house. John Karnay, the owner of The Grubb Company, describes the easiest home in the East Bay to sell. “It would be a traditional-style Tudor or Mediterranean,” he says. “Two stories, on a flat lot, four bedrooms, one master bedroom upstairs, half bath on the main floor, a formal dining and living room, a family room, breakfast room, with the kitchen and bathroom updated in the last five years, a two-car garage, on a tree-lined street. It would be in Kensington, the Uplands, Elmwood, Upper Rockridge, Crocker Highlands, Montclair, Oakmore or Piedmont.” These neighborhoods he describes with practiced ease are the “radiators.” As in, when a radiator gets hot, the warmth spreads slowly outward. When it gets turned off, like it did at the start of 2006, the cold begins creeping into the outlying neighborhoods first.
    In 2007, the areas in the country feeling the coldest chill were Detroit, Stockton and Las Vegas. These three had the highest foreclosure rates in the country. Detroit has had bigger problems than falling real estate for decades and didn’t have the reserves to bounce back from another economic setback, but Stockton?
    It goes like this, says John Paxton, a local real estate consultant. When housing is tight in the Bay Area, people look for housing wherever they can afford it. “Cheaper houses, better terms—and a big quality-of-life trade-off. Then the cycle turns. Buyers stop buying, foreclosures rise and builders stop building. Then the roller coaster changes direction again,” he says. Over the last decade, he’s been called several times to survey land in the Livermore and Tracy areas for potential development. It’s close enough for the steel-willed to commute to the Bay Area for work, but far enough that the only people daring enough to do it bought at the margins of affordability.
    No place epitomizes this like Mountain House. A new master-planned community squatting in the farmland outside of Tracy, Mountain House opens at the end of a wide, mile-long boulevard with a grassy median strip lined with trees. A Google Earth image of the hamlet shows a white grid of future streets laid neatly over graded farmland, but only about a third of it is currently developed. The 20-year building plan included 13 schools and a town center with stores and commercial offices designed to serve 44,000 residents in neighborhoods with names like Toscana, Stratford and Palisades. Names that evoke a vaguely European lineage, an idealized Mediterranean seaside village, say, or a British hamlet.
    The streets are so clean there isn’t an oil stain or loose blade of grass, just endless curving rows of 3,000-square-foot Italiaospanaterranean homes of bright green lawns and red tile roofs, with bulky dads in tank tops washing their white Tahoes and Denalis in the driveway. You’ve read about the fabled two-hour commutes, well, here’s where many of them begin. Mountain House is an oasis in the desert, and it’s dying.
    Now Mountain House is a ghost town, with “for sale” signs and brown lawns sprinkled among the newly finished houses. There were 50 homes that fell into some stage of foreclosure in the last half of 2007, according to the Tracy Press. Elysia Poidmore moved away from Mountain House last August, after spending less than a year there. She called it a commuter town, where the residents are isolated from spending so much time on the road. “The streets look like long lines to get into the county fair, inching up to the freeway entrance of 580. Most residents are tucked in by 9. It is a beautiful community, but who is there to enjoy it?”
    According to James Saccacio, chief executive officer of RealtyTrac, a real estate Web site specializing in foreclosures, the places that have fared the worst are metropolitan areas that boomed during the construction frenzy, yet couldn’t sustain their high prices. From the Central Valley near Stockton all the way down to Riverside, the middle of the state is suffering from too much inventory still priced too high. Areas with higher property values, according to the California Association of Realtors, will hold more of their value longer.
    The paradox, though, is that there still aren’t enough homes in the United States to accommodate expected growth. In whatever year we Americans can shake off the malaise, says Harvard’s annual The State of the Nation’s Housing 2007 report, we’ll realize that between baby boomers buying vacation homes and a million new immigrants arriving (or giving birth) a year, we’ll need almost 20 million new units by 2017. In other words, only after prices have righted will places like Mountain House begin filling back up again.
    As tough as the current market may be, it is a not-so-gentle reminder of the way real estate is supposed to function—as an investment that gains over time, not a Spanish-tiled ATM machine that outperforms the S&P. Between 1950 and 2000, nationwide home values increased 5.5 percent annually—better than a CD, but nowhere near the housing-price gains of the following five years. Americans grew accustomed to thinking of real estate as something that can be flipped, but those days are absolutely, positively over, and we have to return to the fundamentals, where some properties appreciate faster and hold their value longer than others.
    Location may always be the most important single factor contributing to home value, but good location is the result of many neighborhood and regional factors that conspire to put a premium on one area over another. Many factors contribute to a home’s value over time, from the style of a house’s construction to the neighborhood it’s in to the proximity of jobs, good schools and decent restaurants. Together these metrics can do a pretty good job of determining how well a home will fare over the long term, and how well it can withstand the inevitable dips in the market. Here are several of the most important ones to consider.

Factor: Diverse Job Base

    To judge how well an area can rebound from bad economic times, look at where the jobs are. If they’re diversified over many different industries, then there’s distributed risk. The Bay Area has a robust job market in many industries, from manufacturing and high tech to biotech and financial services, which keeps unemployment low and demand for housing high, keeping your home’s value from falling too far when less well-endowed areas are plummeting.
    West Coast cities have never suffered from the company-town experience that has plagued many northeastern and rust belt cities, where a single industry (or even company) supports thousands of families, leading to regional devastation when that industry shifts. Detroit continues to be the most visible example of this and had the highest foreclosure rate in the country in 2007.
    Through 2007, the housing bust happened despite a long period of low unemployment and growing jobs and incomes. One of the great fears about the looming recession is that with job cuts increasing, it will put the United States into a funk Americans won’t be able to pull out of for a long time to come. In February, employers nationwide cut jobs by the largest amount since the dot-com bust. That’s where a diverse economic base comes in handy, by softening some of the blow in the hardest-hit sectors.

Factor: Hot Neighborhood

    Cities are back. In 2008, for the first time in human history, more people will be living in urban areas than in the suburbs, according to the United Nations Population Fund. This doesn’t mean just fast-moving city centers, but also the inner-ring suburbs and the suburbs’ suburbs, the “exurbs.” During the last decade, more than 40 percent of the biggest cities in the country saw people moving within two miles of the city centers, and perhaps not surprisingly, those people are generally younger and often renters.
    In the United States, the urban areas that began as discrete cities are bleeding into one another, blurring their borders (think Southern California). The East Bay is a good example of this thin urban spread, where a traveler on the side streets between Albany and Hayward may not know when he has left Oakland and is deep into San Lorenzo. The effect this has is to make the city less important to housing prices than the individual neighborhood—with the exception of cities that have built their reputations on a particular selling point. Emeryville, for example, attracts the EQ3 set and real estate agents know to advertise property just inside the Oakland border as “Emeryville adjacent.” Piedmont, along with being one of the leafiest enclaves in the hills, also has one of the best school districts in the state, and is rumored to do home inspections to make sure new students really do live within its bounds. Alameda is home to some of the most beautiful collections of perfect Victorians on tree-lined streets anywhere, and is often thought of as one of the best-kept secrets in the Bay Area.
    When the trendiest cities (like Oakland and Alameda, of course) become too expensive for people to live in, or people want a little more space for kids, they hit the second-tier cities, places with good weather, places they haven’t yet been priced out of. And where the people move, building booms are sure to follow. Look to the phenomenal growth (and subsequent wild decline) of Las Vegas. It is one example of the two-decades-long growth of the sunny South and Southwest, where Arizona, Nevada and Florida joined California as the states with the most newcomers.
    More than any other factor, if you want to keep your house values high, you can’t top a great neighborhood. Find one a few minutes from the freeway, on a quiet side street with a few trees, and you’ve got a good chance to stay in the money.

Factor: College Town

    Recent college graduates bring more to a town than fifth-generation couches and a parade of bottle recyclers. They also attract the kinds of stores that make neighborhoods popular—coffee shops, bars and chaat houses. Not to mention an open-minded sensibility that attracts the kind of diverse people that really make a collection of buildings into a place—artists, foodies, designers of all kinds, and a sizeable gay population. First popularized by business professor Richard Florida in his 2002 book, The Rise of the Creative Class, this group of intellectuals (or at least intellectual strivers) brings an appetite for new experiences and a tolerance for false starts that foster innovation, nurturing a kind of constant urban reinvention and making the share of college-educated residents a valuable metric in predicting future economic growth. The more educated, the more excited about ideas, the more prone to self-expression, the more open to new experiences—even of the money-making kind: Whammo, IPO.
    The Bay Area, of course, is a hot pocket of this class, the influence of which Florida has more recently quantified as the “Bohemian-Gay Index,” where income plus amenities plus that culture of openness equals regional housing values. San Francisco is the No. 1 Creative Class city, followed by Austin, Boston, San Diego and Seattle. Rounding out the bottom of the list are Las Vegas, Virginia Beach, Va. (those Navy boys don’t know what they’re missing), and Memphis.

Factor: Limited-Edition Models

    Housing prices are set at the intersection of housing supply and demand, so if developers aren’t building any more in an area, the existing inventory usually goes up in value. Except for Oakland’s downtown and Alameda Point, there are few places in either community that has room to build new housing. Sometimes the barriers to new construction are geographic (there’s a big bay full of water in your way) or political, where zoning or public sentiment keeps housing from being built. Zoning laws are rarely explicit about forbidding growth, but instead talk about addressing problems like congestion and quality of life, or preserving the character of historic neighborhoods. They do this by capping the heights on new buildings or putting limitations on where they can be built—effectively putting the brakes on new construction. This is just the kind of NIMBYism that turns urban planners’ hair white, as they try to find ways to build “infill” (new housing in mature neighborhoods) so developers don’t have to build housing so far away.
    The Stockton metro area had nearly one foreclosure for every 25 households last year, and unlimited land to spread out on was only part of its problem, in case you’ve never been to Stockton. But the rule holds fast—if you want something to retain its value, make sure it’s a limited edition. Buy in an area where it is unlikely that the value of your investment will look just like that of 43,999 others.

Factor: The School-District Test

    Talk to any parent of a toddler about the weather, and soon you’ll be talking about school districts.
If you could bottle good Academic Performance Index (API) scores, you’d have parents heading to Costco with a forklift and backing up their Best Value U-Hauls to the loading dock. Parents can be myopic when house shopping, and now that current and historic data for every district in California is available online (at dq.cde.ca.gov), there’s yet another way to break a tie. The Oakland Unified School District draws out the district lines at mapstacker.ousd.k12.ca.us (Alameda does the same at www.alameda.k12.ca.us under “School Boundary Map”).
    Remember that API scores aren’t always the best indicator of school performance—small schools can be heavily affected during flu season when a few kids stay home, and wealthy districts have students that are often already well-prepared enough to overcome mediocre teachers—but the scores are still the most accessible way for potential homeowners to grade their new neighborhood. In fact, realtors say, parents often won’t even look at a house that’s not in a good district—it’s part of the must-have criteria.
    As tough as the market might be today, remember that you live in the Bay Area, a place with all the fundamentals for keeping property values in the stratosphere. Real estate agent John Karnay has been in the business since the early 1980s, and he tells his new agents, the ones who haven’t been through a downcycle before, to be patient. “This isn’t the first downcycle I’ve seen, it’s just a different one. The one thing that’s sure is, I might not know when it will pass, but I know it will.”
    Whenever we recover from the housing doldrums, whether it’s this year or next, hopefully we will have relearned an old lesson. Our homes are not meant to be a path to instant riches but a solid, mostly boring investment that should be slowly paid off through an old-fashioned fully amortized 30-year mortgage. It’s not very sexy, but it’s the way the market is meant to work.