Is This the Top of the Market?

Why Housing Prices May Continue to Climb

In my 21 years as a real estate agent I have never seen prices rise so high, so fast as they have over the last three years. Indeed, most Peninsula communities have seen an annual percentage increase in the double digits year after year. Right now, there is one question that’s on everyone’s mind:

Is this the top of the market for home prices?

Homeowners who may be thinking of selling in the next couple of years want to know because they don’t want to delay selling and miss out on these record-breaking prices.

Buyers want to know because there may be an advantage to waiting until prices level off, or even dip a bit, and there’s less competition.

To understand our market, let’s take a look at some of the reasons for these dramatic price increases:

Booming Economy

Silicon Valley has one of the lowest unemployment rates in the country, measured at just 4% in April 2015. The success of high-tech companies like Google, Apple and Facebook, as well as their generous stock options, have put a lot of money into the hands of employees, and consequently into the local housing market. I am seeing more “regular people,” putting 30, 40 or 50% cash down, much of it coming from rich stock options and tremendous gains in the stock market.

Increased Foreign Investment

International buyers, especially from Asia, have increased competition and driven up prices.  It’s estimated that Chinese investors spent $22 billion in U.S. real estate in 2014, up 72% from the previous year, and 76% of them paid cash. Approximately 35% of Chinese buyers are purchasing property in California, and Silicon Valley is one of their favorite places to buy.

Low Inventory

In spite of the booming prices, the inventory of homes for sale has been extremely low. With fewer houses for sale, and more buyers, it’s a classic case of supply and demand and prices are skyrocketing.

Low Interest Rates

As I write this, mortgage interest rates are around 4.5%–near historic lows. These low rates bring down monthly mortgage costs, meaning that buyers can afford higher priced homes.

It is conventional wisdom that real estate runs in seven-year cycles of boom, cycle slump and recovery. Sure enough, I’ve been in real estate for 21 years and I’ve seen two crashes—the first during the dot.com bust in 2000, and the more recent one, beginning in 2007. If conventional wisdom is true, we are nearing the end of our boom and due for the beginning of another cycle.

However, the factors that usually lead to a drop in real estate prices—high unemployment, inflation and interest rates, and low consumer confidence—are not on the horizon at all, at least not here on the Peninsula. Lenders are being careful, requiring more money down and better-qualified buyers, unlike the lax lending policies of the early 2000’s that led to the previous slump. These factors, combined with the robust economy, the influx of foreign buyers, scarce inventory and low interest rates, are strong evidence toward a continued increase in prices.

So, maybe the sellers with the rose-colored glasses are right and we have a lot of steam left in this market. Of course, as we know from our most recent recession, things can change quickly, often due to circumstances that are unpredictable and out of our control.

Next week, my thoughts about Why This Might Be the Top of The Market.

 

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