How long could we go before receiving some good news about the housing market?

Faint as the light may be, data services company DataQuick reported this week that California experienced the first monthly sales gain in six months, the largest rise for that time period since 1988.

Digging for a more local interpretation of new data, I did a market search on Trendgraphics going back 6 months on homes in the city of Napa between $300,000 and $499,999, with the following results:    

• Home sales increased from 11 to 24

• Homes in contract to be sold increased from 13 to 22

• Months of inventory based on sold homes was reduced from 11.2 months to 6 months

• Days on the market decreased from 135 days to 110  

This correction was inevitable as money sources for home loans return to the market and declining home prices hit bottom. The Napa home market has reached “book value.”

In the world of securities, there is a difference between the “speculative value” and the “book value” of a share of stock. One doesn’t need to be an experienced investor to remember the incredible market price increases in the early dot-com stocks that had neither assets nor earnings. Built on anticipated profits, these companies rose to stock price highs on promises and projections.  

The “book value” of a stock is described as a company’s value as it appears on a balance sheet; its assets minus its debts and intangibles such as goodwill. It can be thought of as the dollar value of the company, or its stock, that would be left if the company were to be sold or go out of business.

This explains why investors seeking security would favor a “book-valued” stock while the growth investors would seek a stock with greater “speculative value” in anticipation of increased earnings..

An interesting study is to suggest that real estate, just like stocks, has the same or similar “speculative value” versus “book value.”  A large number of homes and investment real estate properties were purchased between 1999 and 2005 simply because the values were going up. In real estate it could be attributed to demand and scarcity and in stocks it was anticipation of future profits. In both cases, buyers had a single thought — it is going to cost me more tomorrow.

The “book value” of real estate is anchored by a set of facts. Everyone needs a place to live. Populations continue to grow. There is scarcity of land. The home serves as an investment and a place to live, even if it never appreciates. Our country encourages and provides financing programs for home ownership. Homeowners pay less income tax than non homeowners. You can live in your home, grow food on your land and create your own space.

These and other intangible factors have and will retain the long-term value of real estate, just as good management and profitability retain the long term value of a quality stock. Ultimately, the frenzy of speculative investment gives way to reality of “book value.”

Bogue is a broker with Coldwell Banker Brokers of the Valley in Napa. He can be reached at 258-5221 or cbogue@cbnapavalley.com.