What Happened to the Housing Market in Silicon Valley


Notice a few interesting points:
1 – From the peak of 2007 to the bottom of June 2009, the average home price in SC County dropped by 45%.
2 – Since June 2009, we have witnessed a sharp and steady increase, bringing home prices to a level that is lower by “only” 28% from the peak.
Therefore, it seems that we have passed the bottom but prices are still attractive.
3 – The prime reason for the decline, as may be seen at the chart above, is the economic slow down and record unemployment of 12%. However, while the unemployment explains the declines, it doesn’t explain the unusual intensity of it.
4 – The “Credit Crunch” intensified the decline.

A – Why are Home Prices Going up?
Three main reasons:
A – The economy shows signs of recovery and the unemployment, while still high, is slowly declining.
B – Some of the decline in home prices was an overshoot. This happens when markets decline sharply. So part of the increase has been simply a correction of the overshoot.
C – Despite the decline in home prices, there is a strong demand for houses.

B – What is to be Expected for the Housing Market?
The housing market is not an independent market. It depends first and foremost in the economy. When the economy is good, home prices go up. When there is an economic slow down, home prices come down.
Therefore, the question is not what is expected for the housing market but what is expected of the US economy.
At this time, it is difficult to say if the current recovery is temporary or not. Should the recovery continues, home prices will continue to go up. Should we enter another slow down, home prices will decline, until there is a recovery.

It is important to note that there is a strong demand for houses in the Bay area and many other areas in the US and the world. This is the reason that home prices went up at much higher rate than the inflation, despite periods of declining prices.

C – What Caused the Recession?
Some would argue that the US economy descended into a recession because of the housing market or because of this or another action by the banks.
However, the reality is the opposite. The decline in home prices and the banking problems were CAUSED by the recession and not CAUSED it.
What happened?
The recession started, and I hope that those of us with strong political affiliation will forgive me, when Bush Jr. took office in 2001. Ever since then, the economy actually never recovered except for short and temporary periods.
First and foremost because of oil prices.
Increase in the price of oil slows down every economy, except those who produce oil.
Thus, a game of cat & mouse between the oil producing countries and the Industrial Countries ensued.
Oil prices went up. Economies slowed down. Governments reduced interest rates in order to stimulate the economies. Economies recovered a little. Then oil prices went up further and slowed down the economy, and the cycle started again.
When did this balloon burst? When in 2007 interest rates hit almost zero and oil prices hit historic high of $140 per barrel. This situation was too much for the economies to bear and an economic crisis began.
Although the crisis has been contained, it was done by printing money and not by addressing the causes of the crisis.
Again we find ourselves in a cycle that the current remedies can not solve. There is a limit to money printing as well.
Therefore, until the US explores oil and gas of its own, oil prices will not allow the economy to recover. As soon as it does, oil prices will go up and choke the economy again. Neither the Bush nor the Obama Administrations had the leadership to address hat problem.
It should be noted that the Obama Administration has recently announced the opening of some off shore areas for drilling “because current alternative solutions are not enough”. While this shows a more realistic approach, it is too little for solving the economic problems.
It should be noted that oil & gas exploration also help two critical issues of our economy: A – It creates jobs. B- It reduces the budget deficit by collecting royalties.
Important – The above has nothing to do with any political position. It is an economic analysis only.

D – How about the Future?
Because of the uncertainty of the future of the economy, there is an uncertainty regarding the future of home prices. If indeed the Administration will show leadership and implement effective solutions, similar to the Clinton, Reagan, Truman, Eisenhower and other administrations, there is a good chance for the economy to recover.

If you are interested, the attached file contains additional charts and information about specific cities in the bay Area.

E – The Mortgage Market in Improving
Mortgages availability has improved substantially in the past year, although did not reach the pre-2008 level.
* In important change was the addition, on a permanent basis, of a High Balance
Conforming of up to $729,750 in our area. $417,000 was the limit before.
* It is again possible to but homes with 10% down only.
* The minimum credit score was reduced to 680 instead of 720 (720 for 90% loan).
* Mortgages for investment properties are available at reasonable rates.
* Mortgage for loan amount of $2.0M are available again at a reasonable rates.
* Mortgages for loan amount greater than $2.0M are available higher rates.
* The 5 Yrs mortgages are available again, including Interest Only.
* Mortgage rates for most programs are at historic low.
* Home equity Line of Credit (HELOC) are available again, although limited to
75% loan.
* Current HELOC holders are willing subordinate at 90% loan.
* Mortgages for low credit score, “Hard Money”, came back, but with higher rate
and fees.

* However, income documentation are still required. Usually a gross income for which the housing and personal expenses do not exceed 45% (50% for loans up to $417K), unless a “hard money” loan is taken.

F – Relatively Low Home Prices Present a Buying Opportunity
However, we still maintain that for regular people, it is not recommended to buy properties far from the Bay Area. Not even in “close” area such as Sacramento.

Should you have question or comments, please do not hesitate to contact us.


Isaac Agam
AGI Financial, Inc.
Real Estate Loans and Investments