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Has Silicon Valley Peaked?

Written by on Monday, 17 April 2000 7:00 pm

Market statistics eerily reminiscent of the last decade's realty market crash are converging on California, forcing some buyers to think twice about taking the home ownership plunge.

A sudden, marked increase in inventories, longer listing periods, record prices and a plunge in affordability -- exacerbated last week by a bull market that's became a bear -- have already combined to force some home buyers out of the market.

"One buyer is trying to back out of escrow and buy in a lower price range. She was going to use a margin account as part of the down payment. She had signed off on all the contingencies and may walk away from the deposit. It's 3 percent on $750,000. That's $22,500," said Dan Ross, a loan officer with Online Capital in Los Gatos, CA.

Such activity could simply mean curtailed offers above the asking price and truer values in the Golden State's over-heated markets, much as the California Association of Realtors predicted for this year.

A prolonged bear market, however, could further decelerate Silicon Valley's housing market.

Stock market proceeds were used in 23.9 percent of fourth quarter 1999 home purchases in the San Francisco Bay Area, more often than anywhere else in the state, according to the California Association of Realtors.

That's largely because it's commonplace for technology industry employers to partially compensate workers with stock options and discounted stock purchase plans. Investment portfolios heavy in technology stocks were particularly vulnerable to last week's Wall Street sell off.

"The difference is now they have a house payment, rather than a home free and clear. There are several loan programs that have no prepayment penalty. Should they have more stock to sell in the future, they can always pay the loan off then," said Christine Mohammed, a broker with Los Gatos-based Elliot Ames.

"I really don't think you should sell all of your stock to be property rich and cash poor. It's important to work with lenders who will design around your life, to tailor loan products to your needs and work to advise you on all the possibilities. Include financial planners and tax consultants," in home buying transactions affected by market changes, said Mohammed.

Suffering its worst point loss ever, the technology-industry heavy Nasdaq composite index was down nearly 10 percent Friday, April 14, after shedding more than 1,000 points in five days. After its worst week ever, the index was off more than 34 percent from a record high set March 10. With some panic selling setting in, the DOW also suffered a record point loss on Friday as the bear market swatted off almost 700 points, a more than 5 percent loss. Even the broader Standard & Poors 500 index fell more than 60 points.

Real estate transactions on Main Street immediately revealed the Wall Street losses.

"I have had preapprovals with 20 percent down or more reduce their shopping range because of less equity. I have had many move from a solid 20 percent down to 5 or 10 percent down. I have also had preapprovals back out," said Alan Russell, of OnLine Capital.

On Monday, April 17, bargain shoppers helped Wall Street regain some, but not most, of it's losses from the previous week.

Wall Street's woes wasn't the only bad economic news last week as the dollar weakened against the euro and the yen,treasury securities edged lower and, exceeding forecasts, the Commerce Department reported consumer prices jumped 0.7 percent in March, the biggest since April 1999 -- all raising fears of inflation and the likelihood the Federal Reserve will raise interest rates.

That could urge lenders to increase mortgage rates in anticipation of a Fed move, as they often do, continuing the slow, but steady upward trend in the cost of financing homes. Higher mortgage rates will worsen the effects of a continued stock sell off and seriously crimp plans of many Silicon Valley home buyers.

Already beleaguered by mounting statistical evidence, some buyers are afraid the market is ready for a slide.

  • Inventories of homes for sale in Silicon Valley have more than doubled from 540 single family homes in December to 1,168 by mid April, according to Richard Calhoun, broker/owner of Creekside Realty in San Jose. Calhoun regularly surveys local multiple listing service data and says the "days of inventory" count is up from 21.3 in December to 29.1 in mid April. Days of inventory is a theoretical number indicating how many days the current inventory would remain if no new homes came on the market and sales continued at the current pace.

  • The nation's top five most expensive housing markets, including Silicon Valley and the city of San Francisco are in or near the San Francisco Bay area, according to a survey released last week by the National Association of Home Builders. The median price of homes in Silicon Valley was just $50 short of the half million mark in March, according to the Santa Clara County Association of Realtors, which tracks list prices. Closed sale prices are higher, when actual offer prices are considered.

  • With incomes lagging behind increases in mortgage rates and home prices, the housing affordability rate had its sharpest decline in more than a decade. In February, California's housing affordability fell 11 percentage points to 32 percent, according to CAR. The affordability percentage rate is the percentage of households that can afford to purchase a median-priced home, according to CAR. The 11-point decline was the sharpest annual deterioration in the state's housing affordability since May 1989, when it dropped 12 percent. The following year, the state's housing market crashed and values plummeted.

    San Francisco was the least affordable county in the state with a 13 percent affordability rate, followed by 15 percent for both San Mateo and Marin counties in the Bay Area.

    Silicon Valley's rate was 20 percent in February, a bit higher that other Bay Area regions because of the higher stock-driven incomes. Silicon Valley's rate is, however, already below the 23 percent rate in January, 1989 -- the beginning of a two-year crash that eventually saw affordability rate drop to 13 percent, it's lowest point in June, 1989.

    Experts say the indicators won't stop the demand for housing in a state facing a housing crisis, but they could quickly bring sanity back to the market.

    "Maybe with a little less money in the market (that which formerly belonged to 21-year-old multi-millionaires) someone might get the idea that house shopping should be performed with a more cautious attitude," said Ken Willis, president of the League of California Homeowners.

    "In other words, my guess is that housing prices could come down a bit (adjusting just like the stock market), but the demand will remain fairly strong," he added.

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      About the author, Broderick Perkins

    Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.