real estate bubble

Is The San Francisco Bay Area In A Real Estate Bubble?

real estate bubbleWith the incredible increase in price of homes listed and sold in many parts of the country, many real estate economists are asking themselves this question

Are These Increases Sustainable?

The last time the San Francisco East Bay real estate market experienced such increases was just before the bubble burst in 2006, 2007. Then prices came crashing down and many people who had bought homes with very questionable loan products found themselves in serious trouble. Bankruptcy filings increased and numerous people found themselves in danger of becoming homeless either because of a foreclosure or after selling their home as a short sale.

It seems unlikely that such a situation would arise again, even if home values fell considerably. Ten years or so ago it was relatively easy to buy a home with nothing down and many lenders were happy to allow “stated income” as a means of qualification for a loan. This was even accepted for people who were in regular employment because their real income was insufficient to qualify them for a loan.

Now things are very different. Lenders appear to be too cautious, if anything. The home buyer with a high credit score, a good, stable employment history and 20% down payment should have little problem getting a loan provided that their income demonstrates ability to service the loan. For lesser qualified candidates though, there can be challenges.

Why Have Prices Risen So Much And So Fast In The East Bay?

Since all these safeguards put in place by the lenders make it more difficult to finance a home purchase, you would have that the likelihood of home prices increasing significantly would be unlikely and yet this has clearly not been the case. The economy was showing signs of recovery towards the end of 2012 and the volume of short sales and bank owned foreclosures being listed for sale had shrunk to very low levels. Potential buyers began to realize that this could be a great time to make a move. Prices were still relatively affordable and interest rates were at all time lows. Investors also took note of these circumstances and so a feeding frenzy began as we moved into 2013.

The big problem then was a lack of inventory of homes for sale in most areas. Few homes were coming on to the market and those that did were deluged with multiple offers if they were nice homes in desirable locations. 10, 20 or even more offers on a home were not unusual and many homes had sales agreed 10% or more over list price.

Most of these sales required financing to some degree of course, and this generally requires the home to appraise at or above the agreed sale price. This did become a problem in some cases and as a result, some renegotiation was often required in order to consummate the sale. In many cases though, buyers were willing to increase their down payment where they were able to do so and the home sold above the appraised value. There were also quite a few cash buyers who had no requirement for an appraisal.

These multiple offer situations left many buyers frustrated with writing offers that were rejected and in order to gain leverage it became common to write offers that waived appraisal, and even inspection contingency, just to have a chance of acceptance. So prices rose even higher. These high sale prices defined new values for appraisal purposes of course and soon the low appraisal possibility became less of a problem.

Where Do We Go From Here?

As we move through the year, inventory levels are improving although they are still historically low and certainly insufficient to meet current demands. We are still seeing multiple offers on homes listed for sale at aggressively low prices but rarely more than 3 or 4 offers now and often only a couple.

As housing inventory increases, the likelihood of multiple offers will disappear and most homes listed for sale at true market value should sell within 15-30 days. Home values will then increase at a much slower rate than at present and probably even flatten out for while. It really is all about supply and demand.

Are You Thinking About Making A Move?

If you would like to have an assessment of value on your present home, please do not hesitate to contact me on (925) 997-1585 or email bernard@bernardgibbons.com. There is never any obligation and I am always happy to hear from you.

 

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