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.