March 21, 2007

 

 

(c) copyright View From Silicon Valley, 2007.  All rights reserved.

 

 

Local realtors, and even many residents, confidently recite the mantra housing prices never go down in Silicon Valley.

 

The strong house price rebound on the heels of the 2001 recession, on top of recent strength, seems to give some weight to the argument.

 

We won't counter with the usual generation-low interest rates on the heels of the once-in-a-lifetime dot-com bubble causing an RE bubble.  We won't quibble over the impact of exotic mortgages or drastically-lowered lending standards.  We won't even get into the blind faith with which people became landlords while ignoring rental value, ROI, ROE, risk or any of the other myriad calculations you don't need an MBA to make.

 

Instead, we will leave you with a single picture, courtesy of OFHEO:

 

 

 

 Buyers who closed on their slice of the California dream in 1989 spent the next decade underwater.

 

Those were the "old" days when 20% down and 30-year fixed-rate mortgages were prevalent.  1989's buyers were finally bailed out by the money flowing into the valley due to the dot-com bubble.

 

How long do you suppose today's "sophisticated" borrower using zero down (a.k.a. 80/20 loans) and/or an option ARM could hold on if they went underwater?  Once the liquidity starts to leak out of our housing bubble, will the next avalanche of free money arrive in time to "save" circa 2005 to 2007 buyers?  (Assuming the next avalanche arrives in Silicon Valley instead of in Shanghai or Mumbai or somewhere else?)

 

Oops, we promised not to rant and there we went...

 

Conclusion:  The next time somebody tells you Silicon Valley house prices never go down, give them the facts!  (Or at least the link to this page?!?)

 

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The above is not to be considered advice to buy, sell or hold and stock, bond, real estate nor any other financial product, service or strategy.  Buy or sell (or do nothing) at your own risk.