Real estate

Housing market in Silicon Valley

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:

  1. 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.
  2. 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:

  1. 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.
  2. 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).

Re-Listing Houses

I have been looking at some houses recently. In my area (San Francisco bay area), houses are sitting longer in the market. I noticed that several houses, upon reaching 60 ~ 70 days in the market were re-listed. The ironic thing is that some listing agents would add “Hot listing! This house would not last in the market for long!’ to the re-listing.

To the new house buyer, it would appear that the house is a new listing when in fact it is not. I don’t know if this is considered as advertising under false pretense. Anyhow, the following is an article discussing the re-listing of houses — Buyer Beware: Unsold Homes Are Often ‘Re-listed’:

Here’s how it works: Niece cancels house listings when they reach 70 days on the market, and then re-lists them as new, with 0 days on the market.

“So, when the buyer says, ‘Well, how long’s this one been on the market?’ And he looks at a report that normally an agent or a buyer would have when they’re showing houses, it only shows the current time on the market,” Niece said. “So a buyer’s going to be way more positive as they look through a home that says 25 days versus 125 days.”

Niece believes that re-listing is an important marketing tool in tough periods like this, because first impressions are crucial.

“The issue here is that when a re-listed home is sold, it skews the market transaction data,” he said. “When an agent typically says they can sell a home in 30 or 60 days, is that really true? If they’ve re-listed a home, that might not necessarily be true.”

“The most common outcome is probably that a buyer overpays for a home,” he said. “I think it’s only a matter of time before a buyer who buys a home under these false pretenses realizes it and perhaps sues the real estate agent for misrepresenting a house.”

Across the country in Sacramento, California, the problem got so bad that Michael Lyon, CEO of Lyon Real Estate, blew the whistle after he noticed that one third of all “new” listings were re-listings. “This is just silliness,” he said. “I’m sorry, but you can’t pull the wool over the buyer’s eyes.”

Lyon forced his regional listing service to set a new standard. “We let people see all the previous listings, period, there are no secrets,” he said. “We want the buyer to know everything about all the times it was listed, so we can allow them to truly investigate the home.”

The Sacramento listing service also requires a material change in the house if it is to be re-listed. Other regional listing services have gone one step further, forcing sellers to take their home off the market for 30 days before posting it again. But because listing services are local agencies, each makes its own rules.

The National Association of Realtors says it hasn’t seen a need for regulation on re-listing because it is not aware of a problem. Lyon says buyers should ask their agents to get the entire listing history.