Existing Home Sales Across U.S. Plummet: Silicon Valley Take

Local station CBS5.com reports that existing home sales dropped sharply in 2006 across the country. 

Image of Bubble
Image of Bubble

2005 was the peak of this recent real estate boom and during that year a whopping 40% of all home sales were to investors or people buying vacation homes, even according to David Lereah, chief economist for the National Association of Realtors.

The dip in 2006 makes perfect sense.  As Lereah says, "A lot of those people have left the market."

Impact on Silicon Valley: Look Around at the Central Valley

The article mentions that analysts have predicted prices will continue to fall in "formerly red-hot markets" like California.  Are you waiting for a large price decrease in Silicon Valley?

The number one factor in real estate pricing is jobs.  Places that have been the hardest hit often lack the number of high-paying jobs needed to support high real estate prices.

For example, the Central Valley markets in California experienced a crushing drop in prices because outside investors, many within driving distance from Silicon Valley, pulled out.

Prices retreated to levels closer to what locals could stretch to afford.  That in combination with housing developers unloading their over-built inventory led to a precipitous drop in home prices.

According to the San Jose Mercury News, though, some jobs are migrating inland in California, which may provide stabilization and future growth prospects.

Now Look at Your Neighbors and Co-Workers

If you live in Silicon Valley, though, you'll need to ask yourself, "Would my co-workers buy that house at that price?" when looking at real estate in the area.

If you ask that question enough times, the answer becomes what the market will bear, setting the general pricing strategy for homes here.

The rule of thumb for real estate, without going into the math, is that prices should never exceed what you can make back in renting it.  

This is rarely the case in Silicon Valley because buyers compete in a market for the scarce land clustered around this high-tech Mecca, with people who make six-figures before stock options.

And since the turn of the century, there has been a general willingness to assume real estate in Silicon Valley will always appreciate --- and pay a premium for the privilege. 

Is This Premium a Bubble?

People call this premium, the artificial difference between the "book price" based on rents and the market price a bubble. 

The questions I pose to you are: 

(1) Despite what your neighbors or co-workers think about a bubble, if they can afford it, would they still consider buying a house in Silicon Valley?

(2) Do you believe a large number of high-paying jobs will stay in Silicon Valley?

(3) Do you believe companies will continue investment in Northern California?