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 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.

Today we are seeing non-contingent offers with the home buyer having no rights to back out for any reason – not for inspection, loan, or appraisal issues – even when the buyers do have a loan!

About 15% of all houses, townhomes and condominiums in Santa Clara County are selling all cash, no loans here in late 2017 (in Feb 20123 it was about 25%), as reported by the MLS.  Many of these are either non-contingent or the contingency period is 2 or 3 days.

We have been seeing bidding wars and preemptive offers for awhile now, especially in Cupertino, Palo Alto and nearby but also in Cambrian, Almaden, and all over the county. I hate to say it, but right  now, it’s the “new normal”, as much as we agents dislike it and must advise against it.

Why is it so bad for buyers and so good for sellers right now?

  • inventory is at historically low levels
  • sellers are holding out for “peak pricing”
  • some sellers are afraid that if they sell, they will be unable to buy anything new (so they don’t sell)
  • low interest rates make home ownership possible for many who could not buy if the rates were back to the typical 6-8%
  • pent up demand: many buyers have been sitting on the fence while the market was soft – many of them cannot wait any more
  • rising prices combined with potentially rising interest rates inspire action – fear is a great motivator as many are concerned about getting priced out of the market

If this is a bubble, we don’t know when it will end.  So I am not telling you not to buy in 2017.  It’s possible that this run up in prices will continue awhile more before leveling off.  It is also possible, though, that a lot of sellers will suddenly decide to sell and that the market will reverse if we get an avalanche of new inventory. What I do advise is caution, and this is for both home owners thinking of selling and also for home buyers who want to buy now.

Sellers: if you wait, you risk putting your property on the market when everyone else does – and if that happens, it will be harder to sell and you may find buyers suddenly becoming quite picky about the condition if they have more choices.  Now is a great time to sell in most of the South Bay.  It’s impossible to time your sale for the very peak of the market, and it’s a lot more painful to sell in a downturn.  If you want to sell in 2017-2018, it would be very wise to get ready soon – while the market is red hot and strongly in your favor.  This is especially true if you do not have to buy!  (Investors, seniors downsizing to a retirement community where they do not purchase, or folks relocating out of state to areas which are not so limited in inventory.) It’s also a good market for those moving up into the luxury tier, over $3 million in most parts of the region.

Buyers: there are micro-markets and this is key for you.  While most of Santa Clara County, particularly in the lowest price ranges, is a red hot sellers’ market, there are homes that are always easier to buy than others – easier as in less competition.

Most buyers all want the same thing: the house which is easy to see, priced low for its condition, fully remodeled, in an ideal location, perfectly staged, offers stunning architectural style photos, presale inspections and disclosures which you can review before bidding, and a home that is easy to see through your Realtor.

Most buyers have 20% down.  If you can get 25% or more down, your chances of success will increase.

Buyers will have better luck with the overpriced house that’s been on the market more than a month (and is therefore unlikely to get multiple offers unless there’s a price reduction), the “hard to see” house which is appointment only, the tenant occupied property where the house is a mess and shows terribly – here you must have imagination!  There are many other categories such as the amount of work needed, too.  Here you’re not shopping as if it’s a high end department store, but instead the more unpleasant sort, but this is where the opportunity may be.  Your odds of success will increase if you can tolerate this.  If you have at least 20% down, you at least have a chance by altering your strategy a little.

These are scary times for anyone who’s been around awhile and recognizes it as something we’ve seen before, only much, much worse. What qualifies as a Silicon Valley real estate market bubble? Is it time? Is it lack of contingencies? Or overbids?

One last disclaimer: the real estate market for the Bay Area as a whole is in overdrive.  But in each county, there are places which are calmer, more buyable and less sellable. So my comments about the bubble are generic and do not apply to every area, price point, home type, school district, etc.