Valley of Heart's Delight Blog

Timing the Silicon Valley Real Estate Market:Buy or Sell Now, or Wait?

Timing the real estate market is even harder than trying to time the stock market. Why? In real estate sales, not only do you have to buy or sell a home, but the cost of the loan has to be factored in too. Buyers are really buying two things: a property and a loan. (We just don't think of loans as something we purchase).

When interest rates hit bottom, what happened to home prices? They rose.

Prices now are falling for homes in Silicon Valley, and what are interest rates doing? They're rising.

If you are selling, you only indirectly worry about the loan situation. Buyers, though, are counting their nickles and dimes and for them the pricing of the loan is a very direct issue.

Many of my buyer clients for the San Jose area are "on the fence" right now because they feel that prices may drop further. And I can't argue - I suspect they will. But I also believe that our economic situation is worsening right now and that loans are going to become more expensive.  So I am not convinced at all that affordability will improve. At the end of the day, unless you are a cash buyer, your main concern will be the payment. Will it be less in 6 months? No one knows, but I suspect not.

Home buying is not a quick investment. I tell my buyers that if they can't be in their new home for 3 years, don't bother. Rent. It's cheaper. Transactional costs in buying, and especially in selling, add up fast so you need to be ahead by about 8% from your purchase price just to break even when you sell. If you can be in a home for 5 years, you are likely to make money, and at 10 years, may well double your initial investment or downpayment - or better.

Everyone asks me when I think the bottom of the market's going to hit. I don't know, but I have heard that the peak of short sales will hit in December, so foreclosures should be 2-4 months after that. Once we're past that point, things should begin to improve. But I would not wait for that point, because again, we don't know what interest rates will be doing.

Finally, right now the federal government has given us a little gift of the "jumbo conforming" loan limits. These are set to expire the end of 2008. Right now, that's about a half percent benefit for home buying in Silicon Valley. It is a great opportunity to buy at a more affordable rate and it should not be squandered!

Sellers, I think it's going to get worse before it gets better. If you can wait 2-3 years to sell, that might be best. On the other hand, if you are downsizing, you may do very very well to sell your more expensive home now and buy a smaller, less expensive one immediately. The lower priced homes are taking a beating in this market - so it's the ideal time to downsize.

Is A Silicon Valley Short Sale For You?

Yesterday I met with some seller prospects - actually, I consider them clients since I've been assisting them, updating them, and giving them staging advice for about six months now. Their Blossom Valley home has been sliding in value and I have been concerned about the situation and trying to get them on the market sooner rather than later since they do want to sell.  A couple of months ago, I told one of them that they'd now have to bring money to closing; I asked if they knew this and if they planned to do it. "I think we'll be OK" I was told.

But now it's the middle of March and prices have slid about 10% over the six months we have been chatting about their home sale. They'd told me that they were ready to list so I had spent hours getting comps and stats and trends pulled together as well as the listing paperwork. But I knew the issue of "bringing cash to closing" was the major hurdle.

So that's where we started. One of them was clear that this was an issue, but one appeared surprised. Before I said the amount, I heard "well we might be a short sale".

"A short sale?" I was just surprised to hear that idea even floated.

Both of them are very gainfully employed. They want to move, but I don't see a "have to move" situation. It was clear to me that the short sale concept was not well understood, nor the punishment it brings appreciated.

I guess it sounded like an easy answer. After all, wasn't everyone else doing it?

Certainly, in this particular area of San Jose, and in this particular price point, a good 80% to 90% of the homes appear to be short sales - and they are dragging values down for everyone else.

Let me briefly explain what a short sale is and isn't:

(1) What it is:

• it is a pre-foreclosure situation
• the buyer cannot continue to make the payments and will go into foreclosure if the short sale doesn't happen
• there is a "hardship" (job loss, sickness, death, divorce) causing financial problems
• the owner wants to sell the home but cannot pay off the lender in full because the home has declined in value - there's not enough equity
• it is going to hurt one's credit badly, but only half as badly as a foreclosure
• short sales often do not go through - most of the time, they end up becoming full blown foreclosures

(2) what it isn't:

• it isn't a help to people who simply want to upgrade and don't want to pay off the bank
• it isn't an option if you have other assets (like other properties or money in the bank)
• it isn't a "get out of jail free" card - there are built in punishments for those who must resort to doing a short sale (trashed credit AND paying taxes on any amount "forgiven")
• a short sale is never a happy thing - it is always the lesser of two evils (vs foreclosure)

I explained to these nice folks that it didn't appear that they would qualify for a short sale (no hardship, no inability to pay the loan etc.).

What options exist for Silicon Valley folks who want to move but have no equity?

Here are a few thoughts:

• A promise was made to repay the loan, so the obvious first answer is to wait out the market or come up with the cash to buy out of the situation.
• Walking away:  In some parts of the country, we are again hearing about "jingle mail", in which owners simply turn in their keys to the bank and walk away. I remember decades ago that happened in Alaska when the market there tanked. Now it's happening here too.
  
  In Sacramento, where some owners bought a home at 50% more than the identical house is selling for now, some folks are first purchasing the new home (same floorplan as current one) at the cheaper rate, then walking away from their old home. In effect, they get a home with half as much mortgage.   No, it's not very nice. It's defaulting on their promise to repay a loan. The lenders could potentially persue them for losses. Will they? I don't know - this is a crisis of epic proportions!
• Renting it out: another possibility is to simply rent out the house (rents are rising due to increasing demand) and to move to the next house. 

I don't think anyone now doubts that we are in a recession which is fueled by the housing crisis. For every person who just "walks away" from a house, that's the recession deepening for everyone. I'm not going to encourage it - it worsens the economy and trashes the borrower's credit.

Rents are increasing with this crisis. So my suggestion: rent out your house and move on. Give it a few years, Then call me when you're ahead of the market and we'll sell it for you. Or keep it until you have kids going to college and you can then use it to pay tuition.

Eventually, the market will improve. You don't have to sell when it's at a low point.

What Will It Cost to Get A Loan?

A lender friend of mine, Les Wible, has a website that explains some of the terms lenders use regarding the way they are compensated for getting buyers (or homeowners) a loan. We don't normally think of a loan as something we purchase, but that's what it is.

And whenever we buy something, there is, of course, a cost.

Lenders are compensated when borrowers get (or buy) a loan, and they should be since that's how they make their living. At his site, SuchALoan.com, you can learn about the yield-spread premium and other fees. I invite you to have a peek - it's very informative!