There’s a lot of growing speculation among first time homebuyers that we may be experiencing another “housing bubble,” but if we are, it surely won’t be of proportion to that seen in 2006. In the not too distant past there was a time when anyone with a pulse could qualify for a home mortgage, purchase financing was available to those with little to no income or down payments, and all premised on the buyer making interest only payments with an adjustable interest rate. No wonder the housing market crashed in 2007…there was no sustainable gain being made.
Now let’s look at today’s market…Today’s engine in the housing recovery is being driven by buyers purchasing with fixed financing options, large down payments, and fully underwitten loan applications. Housing rents are increasing and home affordability hasn’t been this high for a long time…so why wouldn’t we expect a run on housing?
Welcome to the housing recovery…going strong since Spring of 2012. The current levels of appreciation seem very sustainable for the short term, especially given the continual scarce inventory available for sale, the current increased housing affordability and the incredibly low mortgage interest rates. And as long as housing affordability remains at it’s current levels, and potential homebuyers will prefer to own rather then rent, I don’t think we’re going to see a slow down.
This is especially true of Silicon Valley. Not only is our inventory naturally limited due to the geography of the South Bay Area, creating a natural imbalance between supply and demand to begin with, but there is scarce new lands available for any major new housing developments. Sure we have some small scale infill developments scattered throughout the valley, which are seeing unprecedented interest as new releases are selling out in hours rather than weeks, but our inventory for the most part is dependent on the resale of existing homes which is currently around 50% of normal inventory levels.
So let’s look at the major contributing factors that have led to our quick housing recovery. Outside of the governments interactions in our housing market that has shrunk inventory levels, the freezing of foreclosures last year and appearance of large investors purchasing pools of foreclosed homes directly from banks, there were many strong economic gains made as well. Did you know that there were 42,000 new jobs created in SIlicon Valley in 2012 alone? And according to the Index of Silicon Valley for 2012 (published by Joint Venture Silicon Valley) it seems that our innovative “tech-giants” are just getting started as there was a drastic rise in the amount of venture capital seed money available last year, an increase in patent registrations, and of course, release of new IPO’s (Facebook for example).
So, with the already limited supply of inventory and continued increase in qualified buyers entering the housing market, what may be considered to be “overbidding” on a home today could be seen as “a deal” in another few months. Compared to last summer, the “overbidding” in San Jose was close to 2-3% over asking price, while today we’re seeing close between 10-15% or more…
My two-cents…If it makes financial sense for a prospective homebuyer to own versus renting, considering their monthly housing payments and out of pocket expenses, and the purchase will be for long-term holding, then what difference does it make in the long run if they paid an extra $10k, $20k, or more out of pocket…the same opportunities today are not guaranteed to be around tomorrow. I know that I’d personally rather lock in a housing payment for 30 years at a very low rate versus leaving myself open to the ever fluctuating rental market. And if it meant putting more down from savings, again what’s the difference if my savings account is earning 0% anyways?