Imbalance between Housing and Job Growth Will Continue to Put Pressure on the Housing Market
Though a number of signs point to a market slowdown, a quick check of housing inventory shows that demand clearly continues to outpace supply in Silicon Valley, and that the current market is still very much a seller’s market. One reason that demand exceeds supply by so much is the continued imbalance between job growth and housing growth. The Mountain View Voice writes: “The imbalance of jobs to housing has pushed up the cost of living in jobs-rich cities on the Peninsula and the South Bay, as residential development lags far behind the creation of office space.” To quantify the imbalance: Between 2010 and 2016, Santa Clara County added 166,800 new jobs, but only 25,440 new housing units were built, according to the California Department of Finance.
As explained in the Voice, “Elected officials often pledge their commitment to nurturing affordable housing, balanced growth, and income diversity. Yet the data shows lopsided growth tilted in favor of new office and commercial buildings.” One current example of this trend: Santa Clara’s City Place project, described as “Santana Row on steroids,” is predicted to add more than 25,000 new employees to Santa Clara, but includes at most only 1,360 housing units. The lack of new housing to offset the new jobs created by this project will not only contribute to increased demand and higher prices for existing housing, but it is also expected to “cause significant delays on highways 101 and 237” due to an estimated 10,000 extra commuters during the morning hours and 12,000 extra commuters during the evening hours.
Making matters worse, the current growth in many cities has already exceeded growth projections. For example, Mountain View’s general plan estimates that by 2030 the city will have 80,820 jobs and 86,300 residents. However, the most recent numbers for 2016 show that the city already has 81,217 jobs and 77,925 residents.
Though a number of factors will affect the real estate market, and cities are actively working to address the imbalance, the current trend points to demand continuing to outstrip supply, and supports a forecast of continued appreciation in the Bay Area real estate market.
Demand from Chinese Buyers is Slowing Down
Another sign that the real estate market is slowing down: Sales to Chinese buyers fell for the first time since 2011. The slowdown in the Chinese segment of the market is attributed to the falling value of yuan relative to the U.S. dollar (the yuan is at a 5-year low against the dollar, making real estate relatively more expensive for Chinese buyers), and to capital controls that have made it harder for people to move money out of China. The latter issue (capital controls) can be a significant roadblock, as more than 70% of Chinese buyers buy properties with all-cash transactions (i.e., no financing).
We’ll continue to monitor the market to see what kind of effect the slowdown in the Chinese segment has, particularly in locations like Palo Alto, Los Altos, and Cupertino, which have been traditionally favored by Chinese buyers.
- For buyers, there is a growing consensus that this is a good time to be in the market, with rock-bottom mortgage rates and reduced competition making it more likely to get offers accepted.
- For sellers, the slowdown in the market means it’s important to gauge demand in the neighborhood and consider pricing strategy carefully. This is also when it’s important to take the time to find and work with a skilled agent – someone who will not skimp on marketing but rather go “all in” to maximize the exposure of your home and make it stand out clearly from the competition. Your home should be the belle of the ball.
Give us a call or send us an email (firstname.lastname@example.org) if you’d like to discuss the current state of the market and how to take advantage of it.
Mortgage Rate Primer
Home buyers and sellers both care about mortgage rates:
- For home buyers: A mortgage rate increase of 1% can decrease buying power by 11%. For example, if you qualify for a maximum purchase price of $2,500,000 and mortgage rates increase from 3.5% to 4.5%, your maximum purchase price can go down to $2,225,000.
- For home sellers: A rate increase can lower demand/competition, and affect both pricing strategy and the sale process (e.g., whether to accept preemptive offers).
As such, it’s important for both buyers and sellers to track the movement of mortgage rates. Here’s a mortgage rate primer that provides a good explanation of how economic news and events affect mortgage rates.
The high-level summary:
- Mortgage rates are susceptible to economic activities, just like treasuries and other bonds. Thus, reports about jobs, the Consumer Price Index, the Gross Domestic Product, home sales, consumer confidence, and other data can influence mortgage rates significantly.
- Investors generally choose to invest in either stocks or bonds. (For a good introduction about investing in stocks, see the Stock Basics Tutorial.)
- When good economic news comes out:
- Stock prices generally rise, and investors leave bonds and invest in stocks.
- As demand for bonds goes down, bond prices decline.
- As bond prices decline, bond rates (also known as bond yields, or the interest rates offered on the bonds) go up, in order to attract more investors.
- Mortgages are generally seen as equivalent to bonds, which means that when good economic news comes out and bond rates go up, mortgage rates also go up. Think of it this way: When investors choose to invest in stocks, lenders have to offer higher mortgage interest rates in order to get investors to invest in mortgage bonds.
- With bad economic news, the opposite applies: Investors leave stocks and invest in bonds, bond prices increase with greater demand, bond yields (rates) decrease, and mortgage rates correspondingly decrease.
- In short:
- With good economic news, the stock market goes up, and mortgage interest rates generally go up as well.
- With bad economic news, the stock market goes down, and mortgage interest rates generally go down as well.
- Inflation also follows this pattern: When strong economic news stokes inflation fears, mortgage rates generally increase. Since most borrowers are locked into fixed mortgage payments, lenders ask for higher interest rates in order to make their return on investment worthwhile in the face of the declining value of money.
- The rate (yield) for the 10-year U.S. Treasury Bond is generally considered the best indicator of whether mortgage rates will rise or fall. This is because most mortgages are paid off or refinanced within 10 years.
- The 10-year U.S. Treasury Bond rate is generally lower than mortgage rates, because U.S. bonds are deemed safer – they are backed by the “full faith and credit” of the United States. To gauge the approximate rate for 30-year fixed mortgages, add 170 basis points (1.70%) to the 10-year U.S. Bond rate.
- To track mortgage rates, you can also follow FreddieMac’s mortgage rate survey, a weekly survey of mortgage rates across the nation. Keep in mind that these rates are for conforming loans for prime borrowers with a loan-to-value ratio of 80% (i.e., the most credit-worthy borrowers who are putting in at least 20% down). Rates will be higher for non-conforming or “jumbo” loans (loans higher than $625,500 in San Mateo and Santa Clara counties), and loans to borrowers with lower down payments or credit-worthiness.
Give us a call or send us an email (email@example.com) if you’d like to discuss current mortgage rate predictions, and how these predictions could affect the sale of your home or the purchase of a new home.
2016 Silicon Valley Home Tour
Thinking of remodeling your home, or perhaps building a new home? Check out the 2016 Silicon Valley Home Tour to get ideas and inspiration from modern, cutting-edge residential projects in the Bay Area. Sponsored by the American Institute of Architects, this self-guided tour runs on Saturday August 6th, and takes you through a number of featured homes, which have been chosen to showcase a variety of design styles, and to demonstrate that excellence in design is not limited by size or dollars. The tour provides an opportunity to meet design teams, explore housing trends, and discover design solutions that inspire unique Bay Area living. Early-bird tickets are $65.
Google and LinkedIn Reach a Real Estate “Grand Bargain”
After having fought fiercely for office space in Mountain View over a number of years, Google and LinkedIn have struck a real estate deal. The short of it: Google will stay in Mountain View and develop the North Bayshore neighborhood into its futuristic vision. LinkedIn will consolidate its campus into an area that straddles the Mountain View and Sunnyvale border. For a visual update, see our curated map, Areas of Development in Silicon Valley.
This is a (relatively) good time to buy real estate in Silicon Valley
Whether you’re a first-time buyer or a move-up buyer, this is a relatively good time to buy real estate in Silicon Valley. We say “relatively” because the optimal time to buy would have been when the market bottomed out in 2010 – 2011. (Since that time, prices have appreciated considerably: 103% in Palo Alto, 81% in Los Altos, 90% in Menlo Park, and 87% in Mountain View.)
Despite the run-up in prices, this could be a good time to buy a new home, for a couple of reasons:
First, the market has cooled off a bit. Starting in mid-2015, prices began to level off, and inventory and days on market (the number of days between when a home is listed and when it goes into contract) have been creeping up. Homes have also been receiving fewer offers, which means you don’t have to be as aggressive with your offer price and terms (including contingencies) as would have been the case a year or two ago.
Second, current events like Brexit have driven historically low mortgage rates even lower. Here is a market commentary from Tony Guaraldi, a great mortgage advisor with Opes Advisors, to put things in perspective:
Brexit happened on June 23rd and the effect is still helping the mortgage bond market. Pricing for mortgage backed securities shot up on June 24th and has steadily increased almost every day since then. This puts mortgage bond pricing in the best territory in the past 3 years now and very close to the best pricing in history. We’re seeing Fannie Mae/Freddie Mac rates drop to all-time lows, though jumbo loans are not moving as much. Still, rates for jumbos are also among the best in history.
The jobs report for June came out today with a big headline number at 287,000 jobs created, beating expectations significantly. Typically a strong headline number will hurt the mortgage bond markets but it’s had little effect today. One reason for this may be that 90% of the jobs created were for ages 55 and older and only 10% were from the core age group of 25 to 54. Another likely reason is that the unemployment rate increased from 4.7% to 4.9%, mostly due to over 400k people entering the workforce last month. If you look at the average jobs created over the past three months, it is at 147k compared to 172k jobs created the prior six months and 229k average in 2015. So clearly the jobs market has slowed down of late.
We’re experiencing all-time lows in mortgage rates right now and we don’t see any reason for rates to go up in the near future. With a few markets in the Bay Area slowing down a bit this is an incredible time for buyers to get in with extremely low interest rates and the opportunity to get offers accepted.
Give us a call or send us an email if you’d like more information about the current market and whether it makes sense to buy a home or sell your home at this time. If you’re a move-up buyer, we can also discuss financial options that may be available to help you buy a new home before you sell your old home.
Areas of Development in Silicon Valley
Many buyers are interested in knowing where major tech employers are developing new campuses, as such campuses are likely to affect the appreciation potential of homes near those campuses. But it’s hard to keep track of commercial developments given the dizzying rate at which companies like Apple, Google, and LinkedIn have been acquiring land and office space. We’ve put together a map of major tech employer campuses in Silicon Valley to help track such developments. Give us a call or send us an email (firstname.lastname@example.org) if you’d like to explore the sale or purchase of a home near these corporate campuses. As you would expect there are a number of important issues to consider, including timing, school districts, and pollution/environmental hazards.
Santa Clara Approves Silicon Valley’s Biggest Private Development Deal
The Mercury News reports that the Santa Clara City Council has approved City Place, a $6.5 billion development deal that has been described as the largest private development project in Silicon Valley’s history. The development will be located near Levi’s Stadium, and will include 5.7 million square feet of office space, 1.1 million square feet of retail space, 700 hotel rooms, between 200-1,860 apartments, and a 35-acre park. Billed as Santa Clara’s uptown, the mixed-use project is intended to serve as a destination to rival Santana Row, downtown Campbell, and downtown Los Gatos.
For some cool renderings and updated information on this project, see City Place Project.
Mountain View Approves Plan for Dense Housing Near Google and LinkedIn
The Mountain View City Council is in the process of revising its precise plan for the North Bayshore neighborhood, the area north of 101 that includes the Googleplex, the LinkedIn headquarters, the Intuit headquarters, and a Microsoft campus. Having previously approved a plan to add approximately 2,000,000 square feet of office space in North Bayshore, the City Council is now looking to add housing and “create a dense new neighborhood unlike any other in the region.” Here are a few interesting notes as reported in the Mountain View Voice:
- As many as 10,250 homes could be built.
- While Google and other developers are expected to primarily focus on smaller, dormitory-size apartments for young workers, the council members said they also want larger units suitable for families.
- In the neighborhood’s “central core” near Shoreline Boulevard and Plymouth Street, new apartment buildings could be allowed to go as high as 12 stories, which is close to the height limit due to the nearby Moffett Federal Airfield. Outer areas along Huff Avenue, Charleston Road, and La Avenida Street would range from four to eight stories.
- City staff also proposed that the highest-density apartments include amenities such as on-site child care, subsidized retail space, and shared community facilities.
- One council member urged the city to set aside land for a future school, police substation, and a mass-transit line.
Google Buys Eight More Buildings in Sunnyvale
Google has acquired 569,000 square feet of office space in north Sunnyvale, where up to 3,000 employees may work. A couple of interesting notes from the article:
- Sunnyvale is one of the high-priority expansion zones for Google, which leases numerous properties there. That includes 1,900,000 square feet of office space in a single rental deal in Sunnyvale in late 2014 that at the time was believed to be the largest office lease in California in 15 years.
- Google’s expansion efforts include proposals to develop big chunks of land at the NASA Ames Research Center in Mountain View, as well as a new office complex in Mountain View near its headquarters; property purchases in Palo Alto; the acquisition of much of a major office park in Redwood City; and a hunt for large office spaces in North San Jose.
A few other articles regarding Google’s expansion plans in the Bay Area:
- YouTube grabs 550,000 square feet of office space in giant San Bruno expansion.
- Google leases 1,900,000 square feet at Moffett Place in Sunnyvale. This campus sits on 55 acres and will feature six 8-story buildings. This campus is nearby the 1,700,000 square feet of office space Google currently uses at Technology Corners.
- Google buys about half of Redwood City’s mammoth Pacific Shores Center office campus. The acquisition includes six office buildings totaling nearly 1,000,000 square feet of office space.
- Google leases two buildings in North San Jose, totaling 174,000 square feet of office space.
Other companies are following suit: Apple bought an 18 acre site in Sunnyvale with 777,100 square feet of office space, as well as a site in North San Jose. LinkedIn has been given approval to develop 1,500,000 square feet of office space in the North Bayshore area in Mountain View. And Microsoft also plans to expand its campus in North Bayshore with 128,000 square feet of office space.
2016 California Economic and Market Forecast
Leslie Appleton-Young, chief economist for the California Association of Realtors, recently gave her forecast for the 2016 California economy and housing market (see slides).
Here are a few of the key takeaways:
- The U.S. economy will continue to grow, albeit at an anemic rate of 2.7%.
- The Bay Area has the strongest regional economy in the nation. In the past year, there was a 4.8% increase in jobs in the San Jose market, and a total of 85,000 jobs were added across the Bay Area. See also the latest report, which states that the Bay Area added 17,300 jobs in October, with tech-heavy Santa Clara leading the boom.
- For 2016, the Bay Area will continue to lead the nation in terms of job growth, and also experience a whopping 4.5% increase in income growth.
- Mortgage rates are expected to tick up slightly in 2016, with the rate for 30-year fixed rate mortgages edging up to about 4.5%. This slight increase in rates may actually be a stimulus for the market, as people scramble to buy a home before rates increase.
- Home price appreciation has moderated since mid-2013, when we saw appreciation rates in the 30% range. Prices across California will continue to appreciate, but at a slower rate of mid- to low-single digits. (We expect appreciation to be stronger in the Bay Area, due to the continued strong demand and low supply.)
- Inventory continued to decline from the previous year, and that trend will continue for 2016.
- Key drivers for strong demand: strong job growth, strong income growth, low mortgage rates, and (new for 2015) a significant increase in the rate of household formation.
- Key drivers for limited supply: investors are renting instead of flipping, new construction is recovering but still low, and most importantly, repeat buyers are not selling their homes.
- Challenges preventing repeat buyers from selling their homes: They have a low rate locked in on their current mortgage and don’t want to give that up; they can not qualify for a mortgage under today’s stricter requirements; they don’t want to pay more in property taxes; and most importantly, they can’t afford the home they want because of the rapid run-up in prices.
- (Note: While these challenges are real, if you’re looking to up-size or down-size to a new home, or to move to a different school district or a different city, we can help you explore options, especially on the mortgage front. We can also connect you with a financial advisor who can help you see your mortgage in the financial “big picture,” so you can see what impact a new mortgage could have on your finances and your retirement.)
- This is the new normal in the housing market:
- Low mortgage rates.
- Strong job and income growth.
- Constrained supply that is well below the long-run average.
- Lack of affordability that is an increasingly key concern.
- Additional data points:
- The share of all-cash purchases decreased to 21%, due mainly to the fact that fewer investors are buying properties.
- The share of international buyers decreased to 4%, the lowest level in 8 years. Among foreign buyers, 43% are from China, 8% are from Mexico, and 8% are from South Korea.
- The market competition cooled down a bit in the second half of 2015, meaning that the number of offers for homes decreased.
More Housing Planned near Google and LinkedIn Campuses in Mountain View
Reprinted from a post by the Silicon Valley Association of Realtors (SILVAR).
North Bayshore is likely to change dramatically over the coming years after the Mountain View City Council approved studying up to 9,100 housing units in that area. Previous councils had rejected the idea of any housing there. After this last election, the new council made clear it intended to put housing in North Bayshore, although previous discussions had been in the 5,000 range.
The City Council laid out a concept of tightly packed residential buildings of up to 12 stories with the majority of the units being studios and one bedrooms. These types of structures replace space within each unit with shared amenities.
Google, which owns a significant portion of the land in North Bayshore, is likely to become a developer of some of the housing. This has been a sticking point for previous councils that did not want to create dorm-style living that was not part of the larger Mountain View community. However, given the current job boom, the need for more housing has pushed this idea to the forefront.
Buying a home is a significant financial milestone. Whether you’re considering buying your first home, a subsequent home, or even a vacation home, the prospect of hitting this milestone is likely to set you thinking about your overall financial situation and goals.
Personal financial advisors recommend working toward certain milestones as you make your way through your career and your life. Here a few short articles to help you take stock of where you are and what you can do to keep on track financially:
You may find it helpful to talk to a financial planner about your specific circumstances. We can recommend a very good financial planner who can help you build a model of your financial life. It can take a little bit of work to collect the data for this model, but after you put in that work it’s easy to change assumptions and see how that affects your circumstances (e.g., what if you change jobs, what if you send your kids to private school, etc.), and ultimately your retirement (i.e., when will you run out of money?). Here’s an example of the analysis you can get from this exercise.
Call us today if you’re interested in starting a discussion about how your home purchase fits into your overall financial life.
Borrowers May Want to Consider Locking In Their Mortgage Rate Before the Federal Reserve Meeting on Thursday 9/17/2015
At its much-anticipated meeting on September 17th, 2015, the Federal Reserve Board will announce whether it will raise the federal funds rate (the rate at which member banks borrow money from each other). If the Federal Reserve Board does raise the federal funds rate, it will be the first time it has done so since 2006 (before the subprime mortgage crisis and the subsequent recession).
While the Federal Reserve Board controls the federal funds rate, it does not control mortgage interest rates. However, the mortgage bond market is affected by the Federal Reserve Board’s policies and their manipulation of the federal funds rate. As a result, the Federal Reserve Board’s actions do affect mortgage interest rates, albeit indirectly. In the current situation:
- If the Federal Reserve Board does raise the federal funds rate, mortgage bonds and mortgage rates are expected to react favorably.
- If the Federal Reserve Board does not raise the federal funds rate, mortgage bonds and mortgage rates are expected to react unfavorably.
The reason for this expected reaction is that bonds are basically fixed income investments, and inflation erodes the profits of bonds over time. Bond traders are therefore hoping to see a hike in the federal funds rate to keep inflation in check.
Either way – whether the Federal Reserve Board raises the federal funds rate or not – the markets are likely to have a strong reaction to the Federal Reserve Board’s decision on September 17th. Buyers who are in contract now, or who get in contract early in the week of September 14th, may want to lock in their interest rate before Thursday September 17th to avoid the likely volatility in the markets.
We can recommend good lenders who follow the markets closely and who can sort through financial options with you. These lenders may also offer a float down policy that protects you if interest rates increase, while allowing you to re-lock at a lower rate if rates decrease.
Update 9/18/2015: Federal Reserve leaves key interest rate unchanged, citing low inflation. The vote was 9 to 1 for holding the rate at its current level. The initial reaction for mortgage bonds and mortgage rates was favorable, perhaps due to the Fed’s statement that they are “reasonably confident” inflation will remain near its recent low in the near term.
Moving forward, the Federal Reserve is still expected to raise the federal funds rate, perhaps in November or December. Here’s a quote on the outlook from the article linked above: “Before year’s end, many analysts still expect the Fed to raise its key short-term rate, which it’s kept near zero since 2008. A higher Fed rate would eventually send rates up on many consumer and business loans. But any increase [in mortgage rates] will be gradual and shouldn’t climb much above 4.5 percent over the next year, said Selma Hepp, chief economist at Trulia.” To learn more about mortgage rates, see sites like bankrate.com and trulia.com.
First California Public School Test Scores Under New Curriculum Standards and Testing System Are Out
California is one of 42 states that has adopted the Common Core standards. These standards specify learning goals for what students should know and be able to do at each grade level from K-12 in mathematics and English language arts/literacy. The standards are generally considered more in-depth, and focused on critical thinking rather than rote learning. The Common Core standards emphasize group work, projects, long-form writing (even in math), explaining one’s thinking, and oral presentations. Although adopted by a majority of states, Common Core is not without controversy – it is criticized in a number of aspects, including the difficulty teachers, students, and parents have had with new and (arguably) inefficient teaching techniques that require students to understand concepts rather than come up with answers quickly.
Along with the new standards, California has adopted a new testing system called the California Assessment of Student Performance & Progress (CAASPP). The main component of CAASPP is the Smarter Balanced Assessment System. Under this new testing system, students receive an overall score between 2189–2862 in math, and 2114–2795 in English language arts/literacy. Scores fall into one of four achievement levels:
- standard exceeded,
- standard met,
- standard nearly met, and
- standard not met.
The new testing system includes three components:
- In-class activities: lessons taught by teachers to familiarize students with vocabulary and to ensure that they have basic knowledge and understanding of a topic on which they will be tested in the performance task.
- A performance task: a set of questions or activities based on a scenario or theme, which requires students to solve problems using their knowledge and skills. In math, students could be asked to read a word problem and to answer several questions related to it. In English language arts/literacy, students could be asked to read materials and to answer short questions or to write an essay based on what they have read.
- Computer-adaptive testing: computer-based testing that provides each student with a unique set of questions. Questions become more or less difficult based on how the student performs.
The first scores under California’s new testing system came out on September 9, 2015. You can see results by district or school at http://caaspp.cde.ca.gov/sb2015/default, but the consensus is that students fared poorly. However, it does not make sense to compare results under the old standards and tests with results under the new standards and tests, as that is not an apple-to-apple comparison. Rather, it makes sense to see how scores under the new system trend with time, as that will show how teachers and students are adapting to the admittedly challenging new standards and teaching techniques. It will also be interesting to see the effect of the Common Core standards on objective metrics like graduation rates and performance on tests like the SATs. If the new standards are implemented well, we should expect to see improvement in such metrics, albeit after a period of adjustment.
What will replace API scores?
One interesting aspect of the changes to the curriculum standards and testing system is that the California Department of Education stopped publishing test scores under the old Academic Performance Index (API) system in 2013. Up until now home buyers have relied heavily on API scores as a shorthand measure of school quality, and consequently API scores have significantly affected property values. A new index will eventually replace API scores, but it has not yet been decided what metrics will be used to calculate this new index. (Some metrics that are being considered include graduation rates and scores on Advanced Placement exams.)
The adoption of a new index will be an improvement over ranking schools by API scores, as schools will be evaluated using a more comprehensive set of criteria. Even with a more comprehensive index, however, it will be important to dig into underlying data (e.g., performance by demographics), and do additional research (e.g., talking to parents and visiting schools) to find a school that is a good fit for you and your family. As one example, the high-performance but high-stress Palo Alto school system may not be the best fit for all students.
If you need help making sense of all these changes, give us a call. We are Certified School and Real Estate Specialists (CSRES accreditation), and we can help you use tools like School Scout to sort through options and find a school and a home that make sense for you and your family.
Financial Options for Up-sizing or Down-sizing to a New Home
Home prices have appreciated rapidly over the last few years: Since the market bottomed out in 2011, prices have increased 75% in Palo Alto, 65% in Menlo Park, 59% in Los Altos, and 46% in Mountain View. With that type of appreciation, the expectation is that a fair number of homeowners would sell their home and either move up to a larger home, or move down to a smaller home and cash out some of their gains. That hasn’t happened, however – most homeowners have stayed put. The result has been exceptionally low housing inventory.
Why aren’t people selling their homes? Accoring to the 2015 Survey of California Homeowners, one of the main reasons is that homeowners are caught in an affordability squeeze. Although more than one third of homeowners (35%) have considered selling their home in the past year, the vast majority of those (64%) are reluctant to sell because they can’t afford the home they want. Add to the high prices the low inventory and the intense competition between buyers in the current market, and it’s no wonder most homeowners are staying on the sidelines.
If you own a home and have been thinking about buying a new home, one aspect that can make the process less daunting is the possibility of buying a new home before selling your current home. This strategy (buying first and selling later) lets you (1) take the time to find a home that you like, (2) avoid the expense and hassle of moving multiple times, and (3) maintain peace of mind from the knowledge that you can stay in your current home if you don’t find a new home that you like.
The problem with this strategy is that it can be difficult to qualify to carry two concurrent mortgages with a conventional lender. In this situation, it can be helpful to speak with a mortgage broker. A good broker may be able to find loans from investors who are willing to qualify you using a number of criteria outside of conventional lender guidelines, like high income, high equity in your current home, or use of non-real estate assets as collateral.
Here are some examples of loans that you may be able to use to buy a new home while still living in your current home:
- Conventional mortgage:
- Your income and reserves must support loans for both properties.
- You must have 2 years of history as a landlord in order to count potential rent from your current home as income.
- Credit union jumbo program:
- Under this program, you can have a debt-to-income ratio of up to 50% (as opposed to 43% for a conventional loan).
- You do not need 2 years of landlord history to use rental income as part of your qualification.
- Pledged assets:
- You can pledge liquid assets (e.g. stock) to cover up to 20% of your down payment. (Note that the assets can be from anyone, e.g. family members, and that you don’t need to liquidate the assets.)
- You can exclude PITI (principal, interest, taxes, and insurance) expenses from your current home if you have a signed listing agreement.
- Bridge loan:
- This is a good program for buyers who have a large amount of equity in their current home. You can finance up to 70% of the combined property values, which means you may be able to finance up to 100% of the new home.
One important consideration to keep in mind when using a non-conventional loan program is that it’s critical to have both a good mortgage broker and a good realtor on your team. Your broker and realtor must be able to explain your financing clearly to the listing agent, and put the sellers at ease that they’ve done their homework and that your financing does not involve greater risk than a conventional loan.
If you’re thinking about buying a new home, call or email us to explore options.
Google’s Engagement in Real Estate and Home Services
Here are eight ways in which Google has become engaged in the real estate industry and in technology/services for the home:
- Auction.com: Google is an investor in Auction.com, a real estate marketplace in which properties are sold through online auctions.
- CommonFloor: Google is an investor in CommonFloor, a real estate portal for both sales and rentals in India.
- HomeLight: Google is an investor in HomeLight, a service that matches consumers to real estate agents based on agents’ experience (transaction history).
- Google Compare: Google will soon add mortgage information to Google Compare, to help consumers compare rates and loan terms from multiple mortgage providers.
- Home Service Ads: Contractors (plumbers, electricians, etc.) can use AdWords to get prominent exposure in search results for home services. (Side note: We maintain our own list of vetted contractors – please ask us if you need recommendations for any home services.)
- Matterport: Google has partnered with Matterport to build technology that lets people use their mobile devices to capture and generate virtual 3D models.
- Project Sunroof: Google’s Project Sunroof provides a personalized roof sunlight analysis to help consumers calculate savings and select the best solar plan for their home.
- Nest: Nest is known for its connected home devices like thermostats, smoke alarms, and cameras. But Google has bigger plans: It aims to be a central player in the smart home industry, through projects like Brillo (a stripped-down version of the Android OS for connected devices), and Weave (a common language that devices can use to talk to one another in the Internet of Things).
Bay Area Homeowners Trying to Cash In on Superbowl 50
Superbowl 50 will be played at Levi’s Stadium in Santa Clara on February 7, 2016. With most hotels already booked, many Bay Area homeowners are trying to cash in on this event by renting out their homes for the Superbowl.
Hosting guests in your home through services like Airbnb, VRBO, or HomeAway does have some risk, but with a little bit of work (e.g., verifying guest reviews, communicating with guests, and removing valuables from your home), the risk can be managed. If you’re thinking about renting out your home, here are some tips for first-time hosts.
How Will China’s Weakening Economy Affect the Bay Area Real Estate Market?
Buyers from China have been a driving factor in the Bay Area real estate market – for example, in Palo Alto, an estimated 25% or more of buyers are from China, and many of them buy properties with all-cash offers that are not constrained by appraisals or other lender restrictions. How will recent developments in China affect the Bay Area real estate market? The answer is not clear.
On the other hand, the weakening economy in China makes markets in the United States relatively more attractive, and could accelerate the rate of real estate purchases by wealthy buyers from China. As Paul Krugman writes in the New York Times, Ben Bernanke was right to say that “the U.S. housing boom was in part caused by weakness in foreign economies.”
The consensus for now is that these developments may soften the very high end of the market (properties north of $10 million), but are not likely to affect other segments of the market significantly. We’ll continue to keep a close eye on how offers from foreign buyers affect the market in the Bay Area, in terms of both number of offers and the strength of the offers.
Is This a Good Time to Buy a Home in the Bay Area?
We are often asked whether now is a good time to buy real estate. The subtext to this question is, “I understand that real estate is cyclical. Am I buying near the peak, and would it be better to wait until the next crash before buying?”
Here’s our short answer: We expect to see continued appreciation for a number of years, so while it would have been best to buy during the last downturn (between 2008-2011), if you’re in the market for a home, this is still a good time to buy.
To understand why we think this is still a good time to buy a home, it’s helpful to look at two related questions:
- Historically, what have cycles looked like in the Bay Area real estate market?
- Is there economic data that indicates whether (and how) the current cycle will be different than previous cycles?
In the Bay Area, the real estate market has experienced a historical pattern that includes 7-8 years of appreciation, followed by 3-4 years of depreciation. The last crash occurred during the sub-prime mortgage crisis, from 2008-2011. Prices have recovered well since then, with most cities eclipsing their pre-recession highs.
If the historical pattern applies, the current appreciation run should continue until 2018 or 2019. The economic reports we’re reading, however, anticipate a longer run this time around. The reason is that the economic fundamentals are solid:
- Robust demand:
- Mortgage interest rates are still at historic lows, which is keeping homes relatively affordable.
- Job growth is strong. Santa Clara County reached 1,064,700 jobs in July 2015, the highest number of jobs since February 2001, and just 10,900 jobs below the all-time record set in December 2000.
- Income growth is also strong, and in fact the Bay Area leads the nation in median income growth. The combination of job growth and income growth is going to increase demand and continue to put upward pressure on prices.
- Limited supply:
- Housing inventory remains at historically low levels.
- Homeowners can afford their mortgages, so there is not going to be a wave of foreclosed and other distressed properties hitting the market like there was in 2008. Corelogic reports a 29% year-over-year decline in foreclosures, and a delinquency rate of 3.5% of all loans – the lowest level since 2008.
Taken together, this data suggests that we should expect to see increasing demand and constrained supply in the housing market, and supports a forecast of continued appreciation. A number of problems can reduce demand and derail the current run – for example, a global economic downturn led by factors such as a weak economy in China, or an increase in mortgage interest rates. Short of such significant economic developments, however, the strong market fundamentals indicate continued appreciation for the next 3-4 years, and possibly longer.
Update 9/11/2015: New Report Finds Waiting to Buy a Home Could Cost Thousands. This report, prepared by Jonathan Smoke, chief economist at realtor.com, quantifies the opportunity cost of waiting to buy a home in today’s rapidly appreciating market. In the San Jose/Sunnyvale/Santa Clara metro area, the penalty for buying a home in 1 year (as opposed to buying now) is $61,805. That penalty rises to $191,053 for buyers who wait 3 years before buying a home.
Significant Changes to Mortgage Disclosures and the Mortgage Process Coming on October 3, 2015
If you bought a home and took out a mortgage in the past, you’ve seen (and signed) a number of disclosures that lenders are required to give borrowers, including a Good Faith Estimate (GFE), a Truth-in-Lending Disclosure Statement, and a HUD-1 Settlement Statement. For loan applications filed on or after October 3, 2015, these disclosures are going away, and being replaced by two new disclosures.
The new disclosures are:
These new disclosures specify your loan terms, payment details, closing costs, and cash to close in a clear manner that makes it easy to understand the cost of your mortgage and the terms that you are agreeing to. The disclosures also make it easy for you to shop for loans by letting you compare costs and terms on an apple-to-apple basis.
Along with the new disclosures, the mortgage application and closing process is also changing. Here are the main changes:
- You can ask lenders to give you a Loan Estimate without providing documentation to the lenders. You must still give the lenders some basic information like your Social Security number and your annual income, but you do not have to provide documentation like tax returns. The idea is to make it easy for you to get Loan Estimates from multiple lenders once you’re in contract to buy a specific home. Note that your credit score is not affected when you shop for rates, so long as multiple credit inquiries fall within a 30-day window.
- Lenders cannot charge you fees until you express an intent to proceed. (There is one small exception – lenders can charge you a fee to pull your credit report.)
- Loan Estimates expire after 10 days. You must express an intent to proceed in writing within that time frame in order for a lender to start processing your loan application with the terms specified in your Loan Estimate.
- You must get a copy of the Closing Disclosure at least 3 business days before the close of escrow. That will give you plenty of time to review the terms of your loan, but it will also make the escrow period a little bit longer than in the past, and put offers that include financing at a slightly greater disadvantage than cash offers.
These changes are a result of the TILA-RESPA Integrated Disclosure Rule, often referred to as “TRID.” For more information about these disclosures, and many helpful resources for borrowers, see the Consumer Financial Protection Bureau sites Know Before You Owe and Owning a Home.
One thing to note is that these changes do not affect the loan pre-approval process. For your offer to be considered seriously by sellers, you must get pre-approved by a reputable lender. Getting pre-approved requires time – you must provide documentation of your income, assets, and liabilities to a lender, and give the lender an opportunity to verify that you meet their requirements. We recommend getting pre-approved early on, before you start your home search. We can provide recommendations for good lenders – lenders who offer great rates and top tier service that give your offer a leg up.
From Stanford: A Paean to the Place our Heart Resides
The Stanford Alumni Association recently published an issue of Stanford Magazine dedicated to homes. Read articles on topics like: how a home provides a sense of place, how the high cost of housing in California is making residents unhappy, and what features we might see in the “American home 2.0”.
Rising Silicon Valley Rents: A Mountain View Tale
In Mountain View, the imbalance between housing supply and demand has resulted not only in a rapid rise in home prices (8% in 2013, 18% in 2014), but also a spike in rental rates. One prominent landlord, Prometheus, which owns more than 7,000 units around Silicon Valley, has a stated policy of capping rent increases to 10% each year.
Should you buy earthquake insurance?
Most lenders do not require earthquake insurance. There are a few exceptions – most notably Stanford University. If you take advantage of Stanford’s housing assistance program, you will be required to buy earthquake insurance as a condition for your loan. If your lender does not require earthquake insurance, the decision is up to you.
Earthquake insurance can be quite expensive, and a lot of buyers forego this insurance. At a minimum, though, it’s worth doing a cost-benefit analysis. Get a quote from your insurance provider, and then compare the premium payments over the time that you plan to own the home against the risk of an earthquake in the Bay Area (“70% chance of a magnitude 6.7 or greater earthquake in the next 30 years”) and the cost of repairing or replacing your dwelling and possessions (your homeowner’s insurance policy may help you estimate those costs.)
If you live in a townhome or condo, note that some (but not all) HOAs buy earthquake insurance to cover the structures in their development.