There’s a lot for those of us in Silicon Valley to be feeling stressed out about lately. Between the stock market’s wild ride and sinking home values in Santa Clara County (and around the country), it’s a little nerve-wracking. These times are especially upsetting if you’re a senior and plan to retire soon. For years, people looked at their homes with the fond sense of “this is my retirement fund” – or at least a good part of it. Some of that value is now gone.

It’s also stressful for those of us who’ve put money into retirement funds or college savings plans and need it soon. Here in California, the 529 College Savings Plan is an “index fund”. That means it’s a combination of stocks, mutual funds, and bonds. In my house, we have one kid who’s a freshman in college and one who’s a senior in high school, and we’re seeing the 529 Plan shrink right when we need it.

The stock market, the financial crisis and the housing market are bigger than all of us. We are on the verge of a recession, if not already in one now. There’s a lot that’s beyond our control. But what CAN we do to maximize the current situation?

I cannot say what to do about the stock market, though my hunch is that when people advise “buy low”, they are talking about today. I can say something about the housing market in the San Jose area, though, because I’ve got experience with it, both professionally and personally. There are opportunities in this market for those who are able to act on them.

What are the available opportunities in the Silicon Valley real estate market?

Prices have rolled back several years, so for homebuyers who were priced out of the market previously, this is a great time to buy a home, whether as a first time home buyer or to purchase an investment property. Investment purchases are especially rewarding now as rents are high while purchase prices are soft. For the most part, this opportunity is for those who’ve had the discipline to put away savings for investment purposes – not for everyone. That said, though, FHA loans have arrived and it is possible to now buy some lower priced homes in San Jose with FHA loan funding. The FHA loans do not require a huge downpayment. Either way, though, prepare to have good credit and all your documentation. Cash is king. If you have saved a good downpayment, you may be able to negotiate a great price on your purchase.

For people needing more space, it may be possible to do a “move up” from an area that is not so badly hit to one that has been worse hit with price reductions and make a net gain. Awhile back, I was speaking with a homeowner in the Mountain View – Los Altos area who has a starter home that is now a little too small. This homeowner is considering selling a home in a “hotter” area and moving to one where there has been more of a price decline, such as to Cambrian Park or Campbell. Likewise, I’ve spoken with people in Los Gatos (a hotter area) who may move to the south county areas of Gilroy or Morgan Hill. Those are all great moves for getting more home for your money and maximizing the current market conditions.

What about seniors who planned to sell soon and move to assisted living? This issue is more complex so I would suggest talking to a tax advisor, but a couple of things do come to mind that might help. One possibility is to move to assisted living and rent out the home, having the rents supplement the cost of assisted living if possible. Rents are good and prices will likely come back up. If they come back up fairly soon, the better (tax consequences are different for selling owner occupied vs rental). Some areas are still fairly strong, too, so don’t just assume that if you live in Silicon Valley, your home has lost a ton of value.

Silicon Valley Real Estate is not a Quick Investment: Plan to Buy & Hold

What about those who are simply feeling queasy because they’re upside down in their house? I do know how this feels. We bought our first home in Cambrian Park in late 1989 and it wasn’t long before we would have lost money had we needed to sell during that period when prices were correcting. Luckily, we did not have to sell, but we were “upside down” for awhile and it was a bad feelilng. We stayed and improved the house and 10 years later sold it for 150% of what we’d bought it for – despite the fact that we purchased at the beginning of a correction – and made the jump to our move-up home in Los Gatos. “Buy and hold” is the sage advice. Perhaps “buy, improve and hold” would be even better.

So as an example, let’s look at the profile of a Cambrian starter home, similar to the one we first bought in 1989. For this exercise, I looked at a small section of Cambrian Park, cloe to Leigh High School. Homes for this view are around 40 years old and appx 1200-1300 square feet, 3 bedrooms, 2 bathrooms. Below please see a 10 year view of such a home, with numbers taken from September of each year dating back to 1998. (To give a little more of a perspective, we bought our home in late 1989 at $180 per SF. Values dropped about 10-15% over the next few years – a long, slow slide in values – and finally recovered by the mid 1990’s and then took off. Prices doubled about a dozen years after we bought, but we had sold before prices rose that far – which was a good thing since we got into our next home less expensively.)

The above graph includes ALL the solds in Sept 2008. But below, see what happens in 2008 if we only consider the non bank owned properties:

And finally, a graph showing both all of Cambrian Park sales for this time of each year as well as this starter home subset of homes there over ten years (please excuse the numbers that sometimes land on each other):

The above graph only goes to 2001 since it’s difficult to get the price per SF data prior to that without spending a lot of time crunching the numbers, but you get the idea. The numbers are more generous when going back further in time, as the charts further up display. For the most part, thouse who “buy and hold” for a more than 5 years have done fine in this market. Those who bought 10 years ago have about doubled their investment. For those who bought and needed to sell soon after, it is a huge problem. But that is actually the case in most markets, whether a buyers or sellers market.

So to return to the original question, “what CAN we do to maximize the current situation?”, I would say that if possible, where real estate is concerned, look into ways you can “buy and hold” rather than buy and sell over short periods of time. This will not be possible for everyone, but just selling now (rather than also buying) could be a case of “selling low”. However, if you are doing a move-up, this could be an ideal time because even if you are selling low, there’s a good chance that you are more than making up for it on the next home – plus you get the lower price basis for taxes and other costs connected to sales price.

Thinking of buying a home in Silicon Valley? The old adage about location still holds. Buy the most home in the best area you can afford. What to beware? Disfunctional floor plans, homes in need of major renovations (foundation, roof, other big-ticket items). House in bad area vs townhouse in good area – go with the location, generally (but you’ll have to evaluate everything).

Of course, “don’t sell now” is the same advice our financial planner is giving us with retirement money in the markets. Retirement isn’t around the corner for us, so I’m just going to not worry about it right now. I wish we had the same luxury with the college fund! I am hoping that it will bounce back up before our kids have graduated from college, so we won’t have invested and taken a loss. I’ve been watching YahooFinance for a few weeks now and the market keeps bouncing within a range that’s far lower than where we bought into the college plan’s index fund before. “Big sale on college plan index fund!” is one way to look at it. I think one of the ways I’ll cope with this market is to buy more shares. Yes, they might go down further. But it seems to me that this is a “low” price point, and while it’s a little scary to buy in this type of market, it’s probably a great opportunity too.

Another blog post on the general state of things in Silicon Valley that is worth reading:
Silicon Valley: Financial Crisis or Opportunity by attorney Mark Radcliffe