Silicon Valley real estate bidding wars

return of the real estate bidding warsWhat are real estate bidding wars, and why have they been happening in Silicon Valley?

First, let’s explain what it is. Bidding wars happen when multiple home buyers overbid a property that’s on the market and make increasingly stronger offers (improving price and terms) until one of them is accepted by the home owner and the bidding is over.  Sometimes home buyers get a counter offer, but return their response with even more than the seller requested.  At other times, they may not even wait for a counter offer – but up their contract’s purchase price or adjust the terms to make it more desirable to the seller.

Why does this happen?  It is a supply and demand issue. When there’s not enough supply for the demand, buyers feel desperate – especially if they have offered on many homes and been rejected each time.  With multiple offers, prices get pushed up – and sometimes up and up while the sellers are still reviewing the contracts in front of them.  The process is accelerated (or exacerbated) when multiple offers also become bidding wars.

Digging deeper with bidding wars

When a lot of home buyers want the same property and write purchase offers for it, we have multiple offers.  In some markets, multiple offers come in at or under list price (I have seen this in cooler markets, though not for many years). But when the realty market is an overheated seller’s market, inventory is too low for the demand, prices rise with those multiple bids. Additionally, the terms get so aggressive that buyers often have few, if any, rights.  Remember, it’s always price AND terms – so things like cash versus a loan, larger downpayments, shorter or no contingencies, and things like free rent backs will also impact the outcome.  It is not only price! When the offer process escalates,  we have bidding wars. (more…)

The Silicon Valley real estate market bubble – it’s back! Or is it?

Another Silicon Valley real estate market bubble?Hearing the real estate market “war stories” about dozens of offers on Silicon Valley properties and overbids ranging from 20 – 55% had convinced me that we were in a Silicon Valley real estate market bubble back in early 2013. At least, this is what a bubble looks like, sounds like, feels like, and acts like.   At the time I thought, “how much longer could this continue?”  Four years and counting – that is the answer.

I tell my family and friends that we are in “crazyland” as buyers purchase homes with no contingencies of any kind, houses sell in 10 days or less (if everything is right, which seems to be the case 75% of the time), and those same properties are selling at well over list price and with much more than 20% down.

The absorption rate, or months of inventory: it is a Silicon Valley real estate market bubble?

What do the numbers say?  I just logged into MLSListings.com and see that right now, in all of Santa Clara County there are 817 single family homes (houses + duet or attached single family homes).  The pending and contingent homes measure 1074, far more! That ratio alone suggests that the market is in overdrive.  In the last 30 days, 950 single family  homes have sold & closed escrow.  So the months of inventory is 817 divided by 950 = .86 of a month of inventory, so about 3.5 weeks of inventory. (When I originally blogged about the potential bubble, it was 1.8 months of inventory.)

In other words, things are flying off the shelves. And they have been, with only a few minor blips here and there, since early 2012. Does that sound like a Silicon Valley real estate market bubble to you – a crazy strong seller’s market lasting 4.5 years?  I could be wrong, but I think of bubbles as being something fairly swift, not a multi year trend.

Homes are selling faster than new ones are coming onto the market!

It’s one thing to say that one city, town, or school district has a very low months of inventory (or high absorption rate).  It is another altogether to say an entire county is that low.  This is a major trend, not a tiny blip in the statistics.

How soon we forget that after the outrageously deep seller’s market in 2000, we had a steep drop in 2001.  Or that all the crazy buying in the San Jose area (and other places) in 2005-06, combined with bad financial regulations, lead to the crash of 2007-2009. But perhaps that enormous “correction”, in which Santa Clara County lost about 50% of its value on average, had more room to recover than we initially realized. Jobs keep flowing in, and housing starts are not keeping up. Supply and demand – the age old equation. That would seem to refute the idea that this is a Silicon Valley real estate market bubble. Perhaps low inventory and strong demand are what we should be expecting going forward. (more…)