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…)

You say you are an “all cash home buyer”? Be prepared to perform like one!

In our overheated Silicon Valley real estate market with so many multiple offers, a lot of properties are selling to “all cash buyers”*.  Some of the contracts are written as all cash when in fact the buyers are actually trying to get a loan (for all kinds of reasons, perhaps including tax reasons). Listing agents and home sellers are wary of the promise of an all cash offer when the close of escrow is long.  Really buying all cash?  You can close in a few days, not a few weeks, if that’s the case.

Home buying all cash but not really

What’s the problem with getting a loan, anyhow?

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Biggest home buying challenges in Silicon Valley today

As previously reported, it is an extraordinarily deep seller’s market in Silicon Valley today.  Some buyers are able to purchase a home – but it isn’t easy and it sure isn’t pretty, especially if the property has only been on the market for a week or two. The toughest home buying challenges really boil down to just one or two main things, which we’ll explore here.

There are two particularly enormous challenges which face most San Jose area home buyers in today’s market. This is in addition to price overbids (sale price to list price ratio often in excess of 10%, sometimes much more, as well as things like free rent backs for sellers).   The crazy low level of available inventory has home buyers competing in ways seldom expected.

Competition challenges: cash and zero contingencies

  1. Cash competition – buyers with a large down payment or all cash.   Depending on the location and price point, about 15% of all offers are “all cash, no loans”.  These are not all $200k 1 bedroom condos being bought for investment purposes, either.  Many of them are well in excess of $1 million and the intention is to live in them, not rent them out.  While some cash buyers still try to low-ball the price, we’re not seeing as much of that now, those days of being successful with a low price are pretty much over.  Many times the cash buyers also offer the strongest terms – a winning combination that sellers cannot resist. To read more on that topic, please see “Why do sellers care if the offer has a loan or is all cash?
  2. Offers with no contingencies of any kind – not for inspection, appraisal, or loan – even when there is a loan! For Silicon Valley home owners trying to sell, the best combination is the all cash, no contingencies offer because it’s the least amount of risk to them. But for home buyers, it’s a nightmare – often both not possible and far too risky. (I do not recommend writing an offer with no contingencies. At the same time, if there are a few offers on a home, the odds are good that some or all of them will be written that way, and that’s the competition.)

Not every buyer is drafting contracts without contingencies, but enough are doing it that if you are going to bid in a multiple offer situation, you want to be aware that competing bids may be all cash, or without any contingencies, or both.   If the offer is a tie, many times the seller will elect to work with the one which is less risky for the sale to fall apart, and that means shorter contingency periods.

This puts a lot of pressure on lenders.  Normally they want 2-3 weeks for full loan approval, but if they tell their buyers to request 21 days for the loan contingency, it’s likely to get those buyers eliminated from potential winners.

Cash is king, so if you’re able to put down more cash, the better your odds are of success. If the listing agent has a full complement of presale inspections, it would be wise to read them and the disclosures thoroughly and understand them prior to making an offer with short contingencies for property condition/inspections.  This includes HOA docs.  There could be information in those papers which reveal an upcoming special assessment or rise in monthly dues, so you want to know about it before giving it your stamp of approval.

 

For more reading on all cash, non-contingent offers in Silicon Valley:

Why do sellers care if the offer has a loan or is all cash?

Cash offers: what do you need to know if buying “all cash”?

Should you write an offer with no contingencies? What is the risk with a non-contingent offer?