Should I Buy A Home Now?

Root of most questions: Should I buy a home (now)?

It is rare that I talk with someone about Silicon Valley real estate without the question "should I buy a home?" or "should I sell my home?" being part of the conversation. Yes, I believe strongly in owning real estate, both to provide a home for my family, and as an investment. I honestly believe the important question isn't whether to buy a home (you should), it is when to buy a home.

When to buy a home is a very personal issue, varying from family to family because of their needs, and strengths. I want to show you some of the factors that will help you make your own choice. You should still talk to a very experienced real estate agent, to be certain you haven't overlooked something important.

Financial benefit of owning a home

The cost of renting a home almost always covers the cost of interest, the cost of repairs, the cost of taxes, the cost of managing the rental, and provides an increase in wealth for the owner. The owner isn't renting out a home because he is generous. If you are paying the costs of owning a home, don't you want to own it?

Most of the wealth, the majority of Americans build up in their lifetime, is the equity they have in their home. You've heard the phrase "the gap between the wealthy and the poor". For America, the most significant wealth gap is between homeowners and those who don't own a home.

Silicon Valley home values

A common concern for home buyers is: will the value of my home go down? The best answer starts by looking at the past and discussing it.

Look at the times when there were major drops in the price of a Silicon Valley home.

2001 was the end of the wildly speculative dot com boom. Stock in companies, which had no profits, was being bought at high prices, on the hope that it would become much more valuable. Many people in Silicon Valley, who owned a lot of stock in dot com companies, sold their stock and bought homes. Home prices shot up. During roughly 3 months from the end of 1999 into the 1st quarter of 2000, home prices climbed by about 33%. When the dot com speculation declined, dot com stock values dropped, removing a source of wealth used to buy homes. Home prices dropped back down to the path of growth they had been on.

2007-2008 was the end of when bundles of risky mortgages were sold to other investors with poorly understood or misrepresented risk. This was done on a much larger scale and affected many more people than the previous dot com speculation. When the value of these mortgage investments was understood, many banks and investors found they had much less wealth than they thought. The loss of wealth lead to foreclosures, companies failing, and jobs being lost. House values dropped dramatically. However, if you had bought a home in 2007 at peak prices, your home would have returned to the same value by roughly 2014. Seven years is slightly shorter than the average time a homeowner keeps the same home. The average 2007 home buyer would not have lost wealth, but rather essentially payed for taxes, interest, and maintenance costs to have lived there, which is what he would have done if he were renting. On the other hand, if a homeowner bought a home in 2010, he would have seen the value of his home double by 2018, dramatically boosting his wealth.

I'm not trying to make you think there is absolutely no risk. Rather I'm trying to show you how, on average, many, many, people build up much or even most of their wealth.

How you can spot changes in real estate market trends

Most growth in home prices is driven by job growth. However, government policies and speculation can result in rapid changes in home prices.

In Silicon Valley there has been a seasonal variation in supply, demand, and for several years, prices. The seasonal swings can mask changes from other factors.

Changes in the real estate market between increasing home prices and decreasing prices are quite well matched by changes in the sales price to list price. The dot com growth of 2000 and collapse of 2001 is marked quite well as is the financial recession of 2007 and the recovery beginning in 2012. The color code of red and green emphasizes changes. (A reader pointed out a common color blindness makes that distinction hard to spot so the red is shown cross-hatched. We love feedback from our clients and readers so we can better help them!)

Silicon Valley real estate trends aren't enough by themselves

Now at the beginning of April 2020, Silicon Valley and many other places are under a "shelter in place" order. There are no open houses. People have lost their jobs. Heartbreakingly people are dying because of a virus.

To guess what these dramatic conditions might cause for home prices, consider the impact of the financial crisis of 2007-2008. Many people who were pushing themselves hard and benefiting from national policies to expand home ownership to include lower income people, were hurt the most. The "cure" to the situation was lower interest rates, which helped everyone who could buy a home or who could refinance their mortgage. Many at the edge of home ownership, were hurt. Many homeowners benefited from the cure without suffering from the problem.

The "cure" for the current situation has begun with the government expanding unemployment benefits, providing payments to almost all taxpayers, and suspending foreclosures. Key people with the Federal Reserve Bank have said the efforts to cure the 2007-2008 crisis were too narrowly focused and slow to start. They intend to more aggressively fight the current financial problems. In the past increases in debt and spending have been associated with inflation which in turn can lead to higher interest rates. People at the Federal Reserve banks believe they can avoid inflation, but they only have theories. I have talked about how I started my real estate career when interest rates were 18% and learned ways to address those for home buyers. Also, we have recently seen effects on home sales from high interest rates.

The spike upward in Santa Clara home prices at the end of 2017 into the beginning of 2018 was boosted by home buyers competing to avoid an expected interest rate increase. After the increased interest rates, both demand and prices fell. Our government then pushed interest rates back down which had just begun to lead to increasing demand and increasing prices when heartbreaking deaths from a virus caused rapid changes in policies.

COVID-19 impact on real estate sales

Restrictions and doubts will result in very few home sales for a significant amount of time going forward. Coronavirus cases in California are predicted to peak around mid-May. Shelter in home requirements are unlikely to be lifted until coronavirus cases have fallen significantly from the peak.

The California Association of Realtors published a housing market perspective. Two of the key points are:

Restrictions on showing homes for sale

On March 16 a "Shelter In Place" order was issued by the Health Officer of the County of Santa Clara which took effect 12:01 Tuesday, March 17. Six Bay Area counties issued essentially identical orders.

Real estate sales were not specified as essential and were thus brought to an almost complete halt. On March 31 an updated order was issued which identified "service providers that enable residential transactions (including rentals, leases, and home sales)" as essential, but contained a key restriction:

A major point is that if someone still resides in the home, a prospective buyer cannot visit the home to view it. They must view it online. Real estate sales is not business as usual.

Buying or selling now

A lot of the work, a real estate agent does, is not done face to face. Marketing plans, advertising, inspections, disclosures, financing, finding solutions to escrow problems, listening to client concerns, resolving client needs, agent to agent negotiations, and more is most often done through email or phone calls. Real estate sales can and will continue, but almost certainly at a much lower volume. There is a lot of uncertainty which leads people to postpone decisions and action. However buyers and sellers should still pursue their plans with the expectation that progress will, most likely, be significantly slower.

We are currently in a major election year with politicians wanting to be seen as helping their potential voters. Additionally the various government agencies are striving to minimize the economic damage resulting from the coronavirus pandemic. Government spending is surely going to be at very high levels probably for the remainer of this year. New infections from the coronavirus will most likely be very low by the time elections are over. What will happen after the election is hard to predict. Don't assume waiting will result in better results. Patiently pursuing your goals now will put you in a better position to respond to changes.

Will housing choices change after the coronavirus pandemic is over?

Most of Silicon Valley housing is suburban. Any fears of increased risk associated with urban living are unlikely to have much impact. Rural areas typically have limited health care and less frequent supply of goods. A pandemic could have a more severe impact on a rural area than a suburban area.

Most Silicon Valley tech is not heavily influenced by tourism nor large group entertainment. Many businesses will be in a holding pattern for a while. Part-time employment will be volatile, shifting from one field to another. Entertainment and dining choices have been instantly changed, having an unknown future. Inflation could drive money out of stocks and into real estate.

Homes in lower price ranges are often bought by people having less financial margin. With an expected decrease in the number of sales, a few "hardship" sales are likely to skew real estate market trends downward, but there will probably be few opportunities to "buy low" especially in middle and upper price ranges. Government policy changes may cause rapid changes in our housing market. Be bold (and informed) when others are fearful.

If you are trying to compare the 2008 situation to the current problems, you must remember the 2008 problem was caused by massive home mortgage problems which damaged the economy. Today we have a health problem which has brought homes sales almost to a halt, and is hurting the economy.