By Vidya Pradhan
US new home sales plunged 8.3 per cent in August of this year to their lowest level since December 1997 and well below analysts’ forecasts. While the ripple effect has been felt in other countries, the severity of the situation seems to be restricted to the US. But does that translate into good news for potential buyers in Silicon Valley and panic for mortgage holders(let’s not call ourselves owners just yet!) of million dollar homes?
Rohini Mohan is a first time home buyer in this area. “I have been looking to buy a home for two years, but I am still not over the sticker shock,” she says. “That I could have bought two 4000 sq ft homes about 40 minutes from downtown Toronto for the price of a <3000 sq ft in a decent school district in the Bay Area is not something I can stomach easily. As an Indian, it is rather difficult to overcome the fear of being in debt; and to get used to the idea of being in debt for close to a million dollars is daunting to say the least. Any hint of reduced prices will be like a breath of fresh air.”
WNI talked to Arti Miglani, an award winning realtor with Alain Pinel Realtors in Palo Alto.
Is the Valley being affected by the housing crisis in the country?
AM: We’ve had a crazy real estate market for the last 8 -9 years with multiple bidding and tight inventory. What we are seeing now is more the historical norm. The sub-prime crisis has affected the Central Valley area like Dublin, Tracy and Danville but the immediate Bay Area has largely been insulated from the housing crisis. This is because most people have the income to support their home investment. While there was a recent article on foreclosures in San Jose, this is just a pocket in the city that we are talking about. We are still seeing strong demand in the mid-Peninsula – North San Jose, areas close to San Francisco. Most of these communities are almost fully built up and the rule of thumb in real estate is that in built-up communities the demand is always strong.
Maybe now we are seeing 3 offers per house instead of the 20-30 we used to get during the hyper hot market but prices in the area have held steady and even gone up 5% from the beginning of the year. The price point where we are seeing the strongest demand is homes between 700k and 1500k. The sellers are not desperate and are willing to hold on till they get close to their asking.
What advice would you give people hoping to enter the market?
AM: Right now there is a good window of opportunity for buyers. Spring to summer is the peak buying time there is more competition. People who are selling now have a reason for doing so in the off season and may be more motivated to sell. People who are handy around the house will find some good bargains to fix up. A house which needs some superficial repairs may be open to more of negotiation in the price. In this market the buyer is also in a position to ask for some basic work done around the house instead of having to accept the house as is. Don’t expect any big bargains in the price. You can offer below asking only if the house has been on the market for a long time.
Sellers – Ask a reasonable price, make an effort to do whatever maintenance has been neglected, spruce it and stage it. Unlike the boom years where people were signing contracts on the spot, buyers can expect you to do the major repairs. Be a little more realistic.
Are school districts key to the purchasing decision?
AM:In the short term, it may not make a difference. So long as the infrastructure is ok and you intend to move on after a few years, it is fine to ignore the school criterion. But over the long term, I find the gap between areas with good school districts and without keeps widening. The good home will keep getting more unaffordable over the long term. It might be better to invest in the smallest home in the nicest neighborhood as this gives you the best return on investment.
What about investing in condos and townhomes?
AM:Traditionally in a slow market condos and townhomes usually slow down first. First of all you have to be able to get along with many neighbors. Secondly, the management of the Homeowner’s Association needs to be good or you might end up paying for their poor maintenance. Of course in places like San Francisco condos may be the best option but in the suburbs it is better to go for a detached home.
Are homes still a good investment?
AM:Absolutely. I personally believe in real estate. Homes provide a tax shelter. Stocks and bonds are a good idea for smaller amounts of money but homes are an insulation against the vagaries of the market. No matter what the prevailing economic situation, you will always have a roof over your head. You just have to time it well.
Can prices appreciate further from these levels?
AM:You have to consider it a long-term investment. Prices are sure to rise. Even for those considering it for purely investment purposes, so long as you are able to rent out the property and take care of the cash flow, it is worthwhile. That way someone else is paying the mortgage for you and you are left with a valuable asset at the end.
If that is the case, why would anyone rent?
AM:Some people are of the view that they will get a better use out of their money in the short term and that may be true.
What about interest rates?
AM:Interest rates have gone up a little. For a jumbo loan with a 7 year arm, the rates are around 6.5%. But when viewed from a historical perspective, these rates are still pretty attractive. Whether you should go for a 30 year fixed loan or a combination of fixed and adjustable rates depends on how long you plan to stay in the house. Most first time buyers will move on in 5-7 years. For them it makes sense to have a loan that is a combination of the two as the rates are usually lower.
Arti can be contacted at Amiglani@apr.com
Continues Rohini, “I keep hearing the doomsday theories about housing crises and falling prices, but I am not holding my breath. It really depends on which area you’re looking in. Given the uncertainty of the situation, I certainly feel more comfortable renting for now.”