Low inventory in Silicon Valley: it hurts more than you might know!

The news reports abound around the country that housing inventory is low. Silicon Valley home sellers know that when supply is lower than demand, home prices rise.  So it seems to be a good thing for the housing market.

But is it?

Home buyers want to buy when prices are rising (fear –> motivation).  No one wants to purchase property when the asset will be worth less tomorrow.  However, it’s not all sunshine and roses when prices rise fast.  Lots of things go wrong when it’s an overheated seller’s market:

  • Home buyers worry that they overpay, and once they are in contract, or in negotiations with what seems to be an accepted verbal offer, may panic and back out.
  • Appraisers may not be able to appraise the home to sales price, putting the escrow or sale at risk of failing (or buyers or seller may have to make up the cash difference between sale price and appraisal price).
  • With low inventory, there are fewer sales, so everyone in related industries is making less income: lenders, real estate sales people, title / escrow employees, inspectors, etc.  (This is not a small thing.  Many title and escrow workers are getting 10-20% pay cuts right now. Many Realtors have zero income because they have a lot of buyers and no sellers.)

It’s nice to have a slow or modest appreciation because buyers want to buy when prices are going up and they feel that this is a good way to spend money. But when appreciation is too rapid, it’s very stressful and causes all kinds of problems for everyone except home sellers.  We are hoping it will loosen up a little soon and come back to a moderate appreciation.  That’s where everyone is happiest!