Find a Home in Silicon Valley in Real Estate Market with Low Inventory
Real Estate Market Trends in Silicon Valley
Before anything, best wishes of health and prosperity to you and your families in 2015.
Today, I would like to write about the persistent low housing inventory in Silicon Valley. Everybody knows it, everybody talks about it, but does anyone know why and what to do about it?
Here are some clues to help you understand and navigate this type of real estate market as best as possible.
1. Drop in short sales and foreclosures
Probably the #1 reason behind the low housing inventory in Silicon Valley is simply the dramatic fall of the number of underwater home owners over the past 2 years as a result of the legislation created by the Obama Administration to help homeowners to keep their home.
Some of the most famous anti-foreclosure initiatives include the Making Home Affordable Program, the HARP II program, the Bill of Rights and the combination of threats and fines to the biggest US financial institutions to incentivize them to help home owners avoid the foreclosure of their home.
2. Home owners' concerns to find a replacement home
There is a general concern among potential home sellers to not be able to find a replacement home that might fit their needs and financial means.
With the overwhelming numbers of properties for sale during the "Foreclosure Storm", many home owners did not want to put their property for sale on the market as they knew they would have to compete with short sales and REOs properties which sold for record low prices.
As you all remember, short sales were often sold for less that they were bought for as the market stumbled. Similarly, many REO properties, which were properties that did not sell as a short sale, either sold at low prices during auctions or found their way back to the lender’s books. Under these circumstances, there was no reason for homeowners that were not upside down to sell their homes.
The interesting question is today: Why are home owners still reluctant to put their property for sale on the market? Surely, home owners that would sell their property in the current market are likely to get a very good price from the sale; On the other hand, if the same home sellers plan to say in the same area, they will most likely pay a hefty price for a new home. In a nutshell, home value is up for both buyers and sellers.
3. Many home owners lack equity
Potential home owners still have too little equity in their home to sell their property in the current real estate market in Silicon Valley. Many home owners in Silicon Valley would barely break even if they were to sell their property in the current market, in particular if they bought their home between 2004 and 2009 and overpaid for it.
This is also true for home owners who were able to escape the short sales of their home for instance by refinancing, but still owe more to the bank than the property is worth. It is likely that as a result of the threat of the short sale, home owners spend little to maintain their home. As a result, these homes probably need a fair deal of repairs that current home owners cannot afford.
But most importantly, and to echo the point made above, these homeowners would have a hard time finding a new place at a price they can afford and get the required financing to buy, especially if their credit score has been damaged during the economic downturn.
4. Why pay a higher mortgage?
Homeowners who refinanced their loans with lower interest rates would not want to pay a higher mortgage
Between 2011 and 2013, interest rates reached historical lows way under 4%. Understandably, home owners who refinanced with lower interest rates will think twice before selling their property as the loan cost for a new acquisition may be higher.
5. Real Estate investors are not ready to sell
During the recession, many homeowners were forced into short selling their investment properties. For those who did not have to do so, the rents and returns are so high today that there is no incentive for them outside of personal circumstances to sell an investment property in this market.
With that understanding, the question is now: How should home owners and buyers tread in this market?
From experience, sellers have a few options to reach equitable deals in this type of real estate market:
- Negotiate a rent back: This will allow the sellers to stay in the property after the close of escrow for a few months, usually 2 to 3 months. It is even possible, given market conditions, that sellers can stay without paying any rent at all for the first month.
- Sell contingent on finding a replacement home: In this configuration the contract between buyers and sellers will enter into effect only if sellers find a new home. As a buyer, this can be a viable solution as long as you place a limit on how long you will delay the closing of sale in order for the sellers to find another house.
As for potential home buyers, your best bet today is to look for investment properties. Most sellers will welcome the opportunity to stay in the property as long as they pay an agreed rent and sign a lease on a month to month basis. This option will allow sellers to get money immediately after the close of escrow and spare them the cost and disruption inherent to a move.