Booms and busts. Booms are many times caused by rapid growth. Some booms are completely generated by speculation. All are bets. None are guaranteed. The difference in the housing market for Silicon Valley now, compared to 2005, is the foundation upon which it was built. Prior to the 2007 bust, exotic loan products were trying to fill a gap a lack of affordability created. No down payments, no documentation of income were necessary to purchase a home in Silicon Valley. Easy to obtain home equity loans provided average working folks a carrot to use any equity they may have in their homes to spend on vacations and buy “toys” even when their mortgages were more than 50% of their income. In a nutshell, an entire market was created with no real buffer to the very predictable swings in the historically cyclic real estate market.
Now, the last 5 years present a very different market place. First, since 2008, all cash purchases have been running, on average, 20-30% of home sales. That represents 20-30% of the market with a potential of 100% equity buffer against a down turn. The next 20-30% of home purchases were purchased with 20-50% down payment. With these two categories, nearly half of the homes purchased have a 20-100% equity buffer. In other words, any “next” crash would need to drop 50% or more to have the same impact of the 2007 drop in the housing market. Is it possible? Sure. Anything is possible. The probability of the possibility is in understanding the cycle length which is absolutely correlated to the global economy more than ever.
The graph below shows the the Silicon Valley housing market prior to the bust and after the bust to present. This information was compiled from MLSListings.com data and demonstrates, how a solid foundation, limited supply, growing employment, and demographic increase builds a recovering market plus some. Only two neighborhoods have yet to hit pre-bust highs: Gilroy and Morgan Hill. What is that old saying? “Drive a little, save a lot.” Maybe in this case; “Drive a lot, save a little” ?
I have used this graph in consultation with buyers who ask me to find them a “deal”. This is a great conversation. More on that concept in my next blog post. In the meantime, if you have questions about the Silicon Valley real estate market or a particular neighborhood, call (408.406.6035) or email me. I am happy to talk real estate with you!