Tips for Silicon Valley Home Buyers
Recently a friend asked me about the way in which vendors are selected when people buy and sell homes. In some cases, Silicon Valley home buyers or home sellers know which title company, home inspector, home warranty provider or other vendor to hire. Most of the time, though, they don’t. They are hoping that we real estate professionals can put them into contact with good providers to ease the task of choosing vendors.
When working with my clients, for most vendors I provide a trusted list of sorts. For the various inspections (roof, chimney, home, pest, etc.) or other service (lender, home warranty, title company) there might be as few as two or as many as six resources listed. Most often, my clients ask me if I have one or more which I prefer, and most of the time it is one company for each category (I have a favorite termite company, favorite home warranty company, etc.).
The home buyer or seller in Santa Clara can pick or hire anyone or any company he or she pleases for these various jobs. We agents can and will assist with sharing the names and numbers of those whom we know, like and trust, but at the end of the day, it’s the client who chooses. So really it’s up to the client – he or she can do some research or not. But if they tell me (as they most often do) to go with my preferred vendor, there’s one in each category and I don’t tend to “spread the business around”. Over the years, agents tend to build relationships with people in these companies and get a sense of whom they can trust and want to work with. (We agents would hate it if a client with six homes to sell picked six different Realtors to rotate through, too. We tend to want and also to give loyalty.)
One of the best ways to get a pulse on the Cambrian Park real estate market is to see what’s selling fast. Sometimes a few low sales will make the market look more sluggish than it is. For the Cambrian housing market, though, most single family homes are selling quickly, with multiple offers, and overbids right now. But not all. So let’s separate them out by time and see how it looks.
Fast sales are stronger sales: under 14 days is best for Cambrian Park realty sales
Just now (as of March 10th) I pulled the single family home sales for Cambrian (mls area 14) for the last 30 days (mostly Feb but some Mar) and saw a huge difference between the homes that sell fast and those that do not. The turning point seems to be 14 days on the market between overbids and underbids.
Out of 42 properties sold in the last 30 days, 36 of them or about 86% sold in 14 days or less, with the average days on market (DOM) a lighting speed 5.25 days. For these fast selling homes the average list price $1,370,951 and average sale price $1,464,152 (averaging an overbid of $93,200 or approximately 106.8% of list price). Only 5 in that group sold below list with 3 selling at list price and most selling over asking.
Of the 6 remaining, which were on the market between 15 and 236 days, only 2 sold above list price, none at asking, and 4 sold below.
Have you always dreamed of buying a hillside home, one close to, or in, the western foothills in Santa Clara County, such as Almaden, Los Gatos, Monte Sereno and Saratoga? Some of the prettiest parts of Silicon Valley are snuggled into the base of the Santa Cruz Mountains. With views of downtown San Jose and the southern San Francisco Bay Area on one side, and rolling, grassy and redwood & oak filled hills on the other, its certainly scenic. Additionally, these areas all tend to have lower crime and good schools.
Hillside homes may be subject to insurance difficulties if they are deemed to be in a high fire risk zone, and property owners need to plan for how to escape in case of emergency. Trees may fall and block ingress or egress, so many mountain residents carry chainsaws. There can be wildlife living nearby, munching on carefully installed landscaping, or threatening household pets or small children in some cases (mountain lions – never leave your children unattended in hillside areas!). In terms of the structure of the hillside home, or the home near the base of the foothills, water is perhaps the risk that is least appreciated but impacts many more homes than most people realize.
Hillside home and water challenges
As a savvy foothill-area buyer, you will want to understand some of the unique issues that this geography may present. The most important of these hillside issues may well be that of water control and drainage.
The Santa Clara Valley, and most of the neighboring Silicon Valley areas, is composed of mostly expansive clay soil. This is an extremely strong substance – so much so that settlers used it, mixed only with a little straw and water, to form adobe bricks for building.
The caveat with clay soil is that when it becomes wet, it expands, and when dry, it contracts. (Hence “expansive clay soil”.) The amazing thing is that the clay is more powerful than concrete. And that is the problem for houses and other buildings if the ground is expanding, contracting, or alternating between the two.
What can a homeowner do? Its imperative to try to control the amount of water near (or under) the home as much as possible.
With the cornavirus in full swing, fear and uncertainty have given the stock market a beating this week. For many of us who are self employed, there will be no pensions, so over the years we squirrel away what we can into our retirement accounts. As I checked our online accounts this morning, it hit me how solid realty investing is overall, because real estate values do not go to zero. Stocks can.
Of course, there can be exceptions, but in most cases, even if a house is fully destroyed, there is still value in the land. For condo owners, even though the unit is just airspace between the walls, the ownership includes a fraction of all common areas, and that, too, includes land.
Real estate investing is a challenge in Silicon Valley, as it takes a large down payment of about 45-50% down to be cash flow neutral (and not losing money each month).
For many, the way to become a landlord is to purchase a first home, live there and improve it for awhile, then save for the “move up” house but keep the original one as an investment. That’s not easy to do, either, since saving the down payment is a huge challenge at all price points – unless one has great stock options, and the market is doing well when they are needed.
Just buying your own home to live in, though, is not really an investment per se, but it is a great to grow wealth over time as the mortgage is paid down, values go up (buy and hold!), and eventually the property should be mortgage free and valuable. It is also a hedge against inflation. This can be a retirement home for the owner, or the owner can sell it, cash out, and move somewhere less costly, where the proceeds from the sale can support them in retirement.
There are many good things about buying realty, whether for investment or for one’s own future. When I look at my retirement accounts this week, I’m grateful that we also bought our first home in 1989 and our move-up home in 1999. Even when home values fell during the great recession, the value did not disappear entirely. Real estate is tangible. Many consider it a safer place for their hard earned dollars, since real estate values don’t go to zero.
Right now we are in one of those periods of steep, rapid appreciation of real estate values in Silicon Valley. It is nearly impossible for first time home buyers to save as fast as the market is going up, so what ends up happening is that affordability falls, and home buyers are priced out of the market. I have seen this throughout my career whenever we have a steep seller’s market, multiple offers and bidding wars. In fact, Jim and I were in that same kind of market in the late 1980s when we were trying to purchase our first house.
Awhile back I heard about some nice folks who’ve been renting for more than 15 years while they saved their 20% down payment. In that length of years, home values have doubled or tripled throughout Los Gatos, San Jose, and Silicon Valley.
Although it would have been hard to buy a home here with a 5% down payment in 2000 or 2005 (it was an ultra hot market then, like today), there were periods when it would have been possible. We had a couple of corrections in the market when it shifted to a buyer’s market, and at those times, sellers were not so fussy about large downs.
You cannot save as fast as the market is going up when appreciation is this steep
For most people, saving a few thousand a month is a great goal. Unless you have stock options which will be available soon, though, most people cannot save fast enough to compensate for San Jose area home appreciation.
Today I logged on to MLS Listings and did some research. For this study, I pulled sales of single family homes in Willow Glen with 1000 – 1500 square feet on lots of 5000 – 7500 square feet, zip code 95125, San Jose Unified Schools. Here are the average sale prices, month over month, for that segment of the local Silicon Valley real estate market.
Please note in the graph below that the average sale price for February (so far – the month is not yet over) is higher than at any other point, even more than the peak of the market in Spring 2018. The graph provides a good “sense of the market” generally. It’s clear that average home prices are up more than $100,000 over the last month or two.
Many of you readers really love the data, so here are the month over month numbers, for a more precise picture of what is happening. I’ve put a red box around all of the February entries, and a blue-purple one for January and February 2020.
In 2012 and 2013, Santa Clara County saw many single family homes selling for all cash, no loans. The peak may have been in March 2012, when the percentage of all cash sales was a whopping 25%. That was the beginning of a long housing boom, and today the percentage of all cash sales in Santa Clara County has settled down significantly, though it is still in double digits.
Today I crunched the numbers on MLSListings.com (first pulling the number of sales per month, then the number of cash sales, and after exporting the data to excel, did the math to get the percentages).
All cash sales, month by month, in Santa Clara County (single family homes)
February is almost over so I included this month in the formula for all cash sales. Our market is red hot, and it’s interesting to see that we have the largest percentage of cash sales in almost 3 years.
I also spot checked the last 30 days for condos and townhomes, and on average the townhomes had 13% selling all cash, no loans, and the condos were at 17%. For all of these home types combined, the average of all cash sales was at 18%.
During the early part of the downturn, the percentage of all cash buyers was not only in single digits, but for the couple of windows I pulled up, it was in the 3% to 4% range (spring 2006 and spring 2007).
I think you could read the percentage of all cash buyers as a data point of home buyer’s confidence in the real estate market. Right now, the market is hotter than a year ago – and I don’t see that trend changing soon.
Just a quick post to warn prospective home buyers that in many cases, the sale price is going to be far above the list price right now, and that’s what I call a price mirage. It’s not really available to many of the home buyers who are excited about it.
What is a price mirage?
Sometimes the listing agent and sellers very intentionally deeply under-price a property by 10-15% or more (to see how far the market will bid it up). I can think of a few local Realtors who are well aware that most of the buyers they attract with artificially low prices cannot truly afford their listings. But those buyers will crowd the open house and make offers which are low (a waste of many people’s time).
Other times, the home is priced a hair low, but so many buyers pounce that the price gets driven up and out of reach, and that can surprise everyone. In these cases, let’s say a house looks like it should be worth $1,035,000, but the home goes on the market at $1 mil even, but buyers are so desperate that it gets many offers and sells for a little over $1.1 mil. That is happening a lot right now.
What should home buyers do about cheap looking homes that might be a price mirage?
When you are shopping, please be aware that sometimes the house may be listed just below a price point (such as $1 million, with a list price of $998,000) even when the home is clearly worth much more (such as the $1 mil house being worth $1.3 mil). I frequently see homes placed at or a little under major price points such as $1 or $2 million, even if the property is worth a couple of hundred thousand – or more – higher than that. So first, pay attention to price breaks!
Secondly, have your buyer’s agent help you with the comparable solds and market activity to determine the probable buyer’s value. This is one place where you really want your own agent in your corner (rather than just working with whoever the listing agent happens to be).
Often, the ultimate sale price (and terms) will be influenced in large part by the number of offers presented. Your buyer’s agent can assist you in trying to decipher that type of info so you can get a better idea of the likely competition.
It is frustrating, it’s a tease, and it’s a mirage. It is not the likely sales price – it’s a teaser to get you in the door.
It’s best to remember that old adage: “if it looks too good to be true, it probably is”. That is precisely what happens with a price mirage.