For Silicon Valley renters, it seems like no end is in sight to rising housing prices. As long as Apple, Google, and other big players continue to recruit large numbers of well paid employees, there will be fierce competition for apartments, condos, and other rental properties, and that will put upward pressure on rental costs. I get Google alerts for a few keywords, including my town of Los Gatos. Many days I see a Craigslist ad for available homes to rent and am shocked that such small square footage could command so big a price for rent. I wonder if many long term renters do not understand that home buying is a hedge against inflation.
One of the many benefits, and perhaps most underappreciated one, of home buying is to get control of your future housing costs. Renting a home is a little bit like having an adjustable rate mortgage: you just don’t know what it may cost you in the future. Purchase a house or condo with a fixed rate loan and your mortgage cost will be set and your property tax can only go up 2% a year (unless your taxes went down for a period and then readjust upward when the market recovers).
The longer you stay put, the more of a bargain it becomes while prices appreciate. But to get to that point, it’s imperative to take the long view. Sacrifices will have to be made in terms of how nice the bought home will be (nearly always not as nice as what you could afford to rent) and the effort required to take care of a home. But look down the road 10 or 20 years and you will find that owning then is a real bargain compared to renting the vast majority of the time. Home prices here have doubled in the last 15 years! Folks who purchased then are in at half price now. You will commonly hear them say “I could not afford my own home now”. They had to make that leap then to have a comfortable cost of housing now.
Here’s an old ad from July 15, 1948, to illustrate the point about appreciation of home values over time.
Objections to home buying in Silicon Valley
Some of the most common objections that emerge regarding the topic of home buying are below. Objections are the reasons given why people may believe that home ownership is not possible for them. Often objections can be addressed, and if the person or couple wants to purchase, it can be possible.
# 1 objection: buying a house or condominium or townhouse in the San Jose area is painfully expensive. Home prices have gone up considerably since 2012. Prices are just too high!
- On the other hand, it’s always been crazy expensive here. In the 1960s, my mom was selling homes in this valley and she often mentioned that home buyers from other areas thought that San Jose area prices were unreal and “not worth it” as they went back to other parts of the country.
- Above, I posted an advertisement for Los Gatos homes for sale in the summer of 1948. I bet if you found an advertisement for St. Louis, Dallas, or other places that same week, the prices would have been less than in Los Gatos. Does that make the prices displayed here a bad deal in retrospect? And if we could track appreciation in those cities and in this area, what would the gulf between those prices be?
# 2 objection: it’s hard or maybe impossible to come up with 20% or more for the down payment.
- It’s not a law that you have to have 20% down! While there are benefits to having 20% or more to put down, every year I do get home buyers into properties with 10% or so, and 5% down loans are available also. In many cases, home prices go up faster than people can save. If you want to buy a home, talk to a good Realtor or lender now and see what the possibilities look like.
# 3 objection: what if prices drop, like they did in the second half of 2018?
- That is always a risk, and no one can ever guarantee that home prices will only go up. They do also come down, but over time, it’s more up that down.
- Back to the old Los Gatos ad, prices in this town have risen and fallen just like the rest of Santa Clara County. It’s true that prices can and do go down sometimes. But long term? More people are arriving than leaving, and that puts pressure on home values. That’s been the trend for many decades, and I don’t see it reversing.
Why do some potential (able) Silicon Valley home buyers never buy?
Some renters have plenty of money for the down payment (cash in the bank, not variable wealth tied up in stock) and have no intentions of leaving Silicon Valley in the next decade or so, they are well employed, well compensated, and sometimes think about home buying but just haven’t pulled the trigger. What is holding them back?
- Fear: They may be afraid of a looming correction or another tech bubble bursting (I suspect that is unlikely to happen with strong jobs growth in the Silicon Valley region). In some cases, they have watched their stocks not perform as hoped, or have seen the value of stock options soften.
- Lifestyle: Some area residents prefer the renting lifestyle. By renting you can often enjoy a better quality of life in the short term (nicer looking or larger home, less responsibility, less commitment). If a move is likely in the next 3 years, it’s wise to rent. But if you rent for thirty years, as I have seen people do, you lose out financially in a big way.
- Bargain hunting: Perhaps they want to buy, and are writing offers, but chronically undervalue properties and underestimate where they will sell (based not on what the home is worth but what they want it to be worth). This isn’t a market for bargain hunting. The winner is the one who gets to buy.
- Inability to prioritize: Maybe they are looking for too much value from their money: an overly restrictive “wish list” that cannot be prioritized is unlikely to result in the ability to purchase. Every home purchase requires compromise. The best way to expedite your home buying to to have a priorities list from must have to would like. If there’s a couple buying together, these priorities must match!
- Stuck on a 15 year loan: in many parts of the U.S., it is possible to buy a house with a 15 year mortgage, and many financial advisers do suggest paying with cash or 15 year mortgage ONLY. Because our prices are so high, that is usually not feasible here, though it may be a great strategy in Nashville or other wonderful places across the country. Part of the challenge is that prices sometimes rise faster than people can save. I got caught in that myself when my husband and I were looking to purchase our first home in the 80s. The great “general rule” may not work in Silicon Valley, as wise as that advice is for most of the country.
Home buying is not for everyone. Usually it’s anywhere from 60 -65% of the adult population who own their own home. For those who can save the down payment and look into the future to value where they want to be, it’s usually the best way to secure a more financially stable future, a hedge against rising home prices. If we adopt our parents’ and grandparents’ values of a little more frugality and pay off that loan in 30 years (or sooner), it also supports security in retirement.
If you are trying to purchase a home and not been successful after a few tries, ask your Realtor to be very direct and brutally honest with you as to why he or she thinks you aren’t winning the bids. Then re-strategize based on what looks doable with professional guidance. Sometimes you just need to look in a lower price point (smaller house, further commute or?). Other times you may need to reconsider your contingencies or other terms. Most people do need to begin with a “starter home”, build equity, and then move up to the forever home after a few years. Sometimes what needs adjusting is expectations.
The good news for weary home hunters: the market is quite a bit softer than a year ago. Interest rates have stopped rising. The market is more balanced than it’s been in a couple of years. It’s not a bad time to buy at all.