The Market’s Achilles Heel?

It has been an exciting time to live in the Silicon Valley.  Over the past decade we have seen new technologies change the way we (and the world) work and live.  We have robots cleaning our floors, semi self-driving cars and drones with high-definition cameras capturing the most precarious angels.  You may wake up to your friend’s current status updates on Facebook, or check the overnight emails from your team overseas.  Either way, we are in a dynamic environment that is ever-changing, so it makes sense that real estate does the same.  Whether up, down or flat, we should expect all of these can happen depending on the given environment.  The markets, both stocks and real estate alike, have been experiencing an amazing increase to values since the Great Recession through increased confidence, job creation and high affordability thanks to the Fed Reserve.  But every market will have its ups and downs; the trick is to prepare for both and minimize overall risk as best as possible.  What will be the Achilles heel to our market: natural disaster, terrorist attack, massive job loss, affordability?  I think the most likely culprit will be affordability and I would like to discuss both sides of the argument.

You may say that the market is crazy and prices are unreasonable, but how is your monthly mortgage payment (affordability) compared to other market climates?  You may be surprised to know that the current affordability in the valley is similar to August-September 2008, with the lowest affordability on record since 1991 being the year prior, 2007.  Affordability is a calculation of median home price compared to median income by region at a given time, according to census data.

MARKET BOTTOM TO NOW

Locally, our highest affordability was the beginning of 2009, which is consistent with the bottom prices of our markets (Santa Clara, San Mateo, Alameda counties).    This information is valuable in understanding one of the key factors driving home prices.  Over the past several years it has been “affordable” — similar to the stock market, if you got in at the right time you have experienced hefty growth.  It is easy to see the past few years as unsustainable, but the key is that it started from a very low point; in Santa Clara County we went from a median price of $445,000 in February 2009, to $865,000 in August 2014.  That’s over 94% growth in less than six years.  Going forward, the question is: At what rate that growth will continue?  Will the Achilles heel be the breaking point of affording the higher price homes?

Affordability has been on a rapid decline over the past several years driven by continued low interest rates and in spite of higher salaries and compensation, which does not seem to keep up with home values.  At what point will this affect the ability to purchase homes?  As many know, I have been watching it carefully since I believe it ultimately will affect purchasing power and prices.

HOUSING AFFORDABILITY

However, when affordability does become a variable in price appreciation, it is unclear how home prices will be impacted and whether buying now will result in your lowest monthly payment or taking the risk of waiting and betting on a correction will be best.  It does not appear that the Fed Fund interest rate will dramatically change this year, so interest rates may continue sitting along the sea floor until 2016.  Home prices may continue to grow since the affordability doesn’t seem to be a popular conversation topic amongst my colleagues and many buyers I see at open houses.  If it isn’t a concern for the majority of buyers, I think you’ll see price growth through 2015 or until which time either interest rates or home values increase to a level bringing affordability to an uncomfortable point.

suzanne sarto