All cash deals continue in Santa Clara County with nearly 33% of all homes sold year-to-date being purchased with all cash. Recently I read in an article written by Zillow, Cash Sales Decline; Still Dominate Lower-Priced Homes and wanted to compare their findings. Nationwide it is certainly logical to recognize areas like Detroit, Cleveland, and Tampa, were low prices are perfect for all cash investors to dominate the market place. In Santa Clara County the average sale price is about $1.1M year-to-date. With cities like Los Altos average sales price for a single family detached home at about $3.7M. However, taking in account the varied areas of Santa Clara County, I created the following chart of single family detached homes by price range to see the percentage of all cash home purchases. Maybe it is reflective of a more emotional 1/2 Million, Million, and a “couple of million” price decisions but this graph seems to show blocks of price points familiar to all cash buyers.
To break it down by neighborhoods in Santa Clara County, I looked at year-to-date for 2014, all cash home purchases by city. San Jose leads the way, simply because of number of available homes and square area.
Finally, I could not resist wondering where the over $2 million dollar cash buyers were purchasing homes. This graph tells me more than what we already know about our area. Yes, the brain trust of Stanford and Silicon Valley are centralized to Palo Alto and immediate areas but more importantly, the cash base of our community explains the future of jobs needed through ancillary services (home services, entertainment, shopping etc) and creates a liquidity cushion that few other areas in the country can provide.
The financial bust and recession was not created by cash. It was created by leveraging at a level of risk unprecedented via the creation of mortgage backed derivatives. It is not easy to be 1 of 20 purchase offers on a home when there is one or more all cash competitors. On the other hand, when people ask me whether or not we are heading for another real estate bubble, it is easy for me to answer: No. Why? When a 1/3rd of the county is liquid with the cash purchase of homes, meaning approximately a third of the market has 100% equity (some may have financed later after purchase), drops in the typical cyclic market have a larger buffer.
Second, when the next majority of purchases over the last 5 years have been with borrowers with 700+ credit scores, and 20% down, there is a 20% buffer of equity in the next group of home owners.
Third, the next group of buyers who placed 10% down and then finally, the FHA buyers who placed on average 5% down. We have a strong equity market built over the last 5 years. We have more documented and credit-worthy home owners, with fewer over leveraged homes with second (and sometimes 3rd) mortgages, we have job growth at 1.5% over the last 2 years, a population growth at about 1-2%, a rental occupancy at 97%, and finally 4% interest rates keeping demand high for homes.
With that paragraph of great news for our community around Silicon Valley, we must also recognize cash purchases will taper off with rising prices and the next few years will most likely return to a normal, modest appreciation of 2-6% depending on the neighborhood.
We will continue to see rents rise upward to 10% annually until the building of apartments all over the county catch up to demand sometime over the next 5 years. Expect the North and East side of Santa Clara County appreciate at a faster rate than in the last 10 years as BART moves down into San Jose. Expect Morgan Hill and Gilroy to be the destination for new housing as South County has the most land to expand neighborhoods. Expect, movement into metro areas as traffic and commutes infringe on lifestyle and expect the Millennials to recognize the meaning of diversification and recognize real estate IS a viable option. Finally, as June is National Home Ownership month, people in the United States and all around the world, will continue to recognize owning land in the United States, establish roots in our community, is a building block to one the most important needs; shelter. Owning land and a home, continues to represent freedom in the most sincere way. A place to enjoy all that we are and all we are to become.