Joe Wilson's Silicon Valley Real Estate Blog

I have lots of clients in various stages of the buying process and that's the most common question I'm asked.  What it hints at is a lack of confidence in the economy in general and the housing market in particular. And who can blame them with the media constantly blaring the collapse of the housing market.  I'm not saying the newspapers and news programs are stretching the truth, but I do feel strongly that they make huge generalizations about the market without considering that "all real estate is local".  For example, you may see a headline in the Mercury news proclaiming "Median Home Prices Plummet".  Now, my reaction to that headline is that suddenly home prices in the Silicon Valley took a sharp downturn.  But if you take the time to read all the way through the article, you find that 1) The data is for Santa Clara County, not for the Silicon Valley in particular and 2) the "plummet" is a drop in prices between the current month and the same month last year. So what difference does that make? Well, the Silicon Valley is doing considerably better than Santa Clara County in aggregate because the Silicon Valley doesn't include many of the areas that have been hardest hit by foreclosures and short sales. For instance, the Silicon Valley doesn't include Holister, Morgan Hill, Gilroy or the Santa Cruz mountains, areas which have been suffering from a huge excess of inventory. Secondly, while median price may have been down compared to that same month last year, median price for most West Valley communities was actually up from the year ago levels. Thirdly, for the month in question, median price for Santa Clara County homes had actually risen from the prior month making you question why the Mercury News would use the eye catching word "plummet".

Now, I'm not claiming to be clairvoyant about where the market is heading short term but I prefer to draw my conclusions from facts and hard data rather than the emotional headlines of the media.  So here's how I see it right now:

1) The Silicon Valley housing market has been bifurcated into two separate markets for at least a year now.  The west valley areas are doing pretty well while the east, central and south valley areas are still doing poorly due to an excess of inventory and sluggish sales.

2) Micro markets exist even within a particular city. For example, median price for single family homes in San Jose has been falling for several months now, but certain areas of San Jose remain pretty stable. So while areas like south San Jose, East San Jose and Central San Jose are still hurting, other areas like Cambrian and Almaden Valley are holding up quite well.

3) If you wait to buy in anticipation that home prices will fall further, you're also gambling that interest rates won't move higher. How big a difference could that make? With interest rates currently in the 6.5% range, a rate increase of only 1% (to 7.5%) will raise your mortgage payment about 15%. So, with Santa Clara County median home price currently down about 15% from its all time peak in 2007, you have to ask yourself what's more likely; a further drop of 15% in prices or a rise in interest rates of 1%. You have to make your own call on this but it's hard for me to forsee any reasonably probable event that would force prices down another 15% but it's not too hard to envision that rising inflation fears could drive long term rates up by 1%. For some reason Buyers are much more focused on the possibility that prices may drop a bit more than they are on the more likely probability that rising rates will completely wipe out any savings from a further decline in prices. 

4) Homes represent both an investment and a lifestyle choice. As an investment, homes should be treated as a long-term investment just like the stock market. Can you time the market and buy at the absolute bottom?  Only if you're extremely lucky. More likely you'll miss the absolute bottom and also miss out on a good portion of the gain on the way back up. Meanwhile while you're waiting for the absolute bottom you're paying rent, losing out on huge tax benefits and postponing the lifestyle benefits of owning. Will prices drop a bit more? Very likely...particularly over the winter holiday season...they almost always do. Does that mean you should wait until winter to buy? Are you feeling lucky??

Let me know YOUR thoughts.  That's the nice thing about real estate...everyone has an opinion!