Lately, I have been visiting open houses in Silicon Valley (San Francisco bay area), and I have spent quite some time talking to the real estate agents hosting the open houses. Like everywhere else in the U.S., the housing market has slowed considerably in the bay area, and I find that the agents are spending more time, trying to be friendly and talking to the guests at the open house.
Many agents I spoke to try to convince me that now is a very good time to buy. They cite the following:
- Inflation and interest rates are going up, but it is still at historical lows. You get more house for the same payment if you buy now.
- Jumbo loans are hard to come by. The higher conforming loan limits (of up to $729k) will expire at the end of 2008. You need to buy now to get these loans. (Note: Jumbo loans are almost a necessity for home buyers in the bay area because a house in a reasonably good area costs in the range of $1m.)
My arguments to them are as follows:
- Stated simply, interest rate predictions are just predictions, and not a fact. Many fund managers and professionals, sitting in front of their state-of-the-art mathematical models and computers everyday, cannot accurately predict interest rates. If interest rates can be predicted accurately, one should simply short the various interest-rate sensitive ETFs and make a fortune with no risk.
- Now that the Housing and Economic Recovery Act of 2008 has been signed into law, we know that the conforming loan limits will not drop from $729k to $417k in next year. I think at worst, it will drop to $625k. This is because, the way this limit is set is that it is 1.5x that of the GSE Single Family Loan limit of $417k. This GSE limit has not increased for the past 3 years (the historical GSE limits are shown in the table below) and is, in my opinion, due for an increase in 2009 (in spite of stagnant house prices).