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Where is Silicon Valley Real Estate Headed?

Have you asked yourself, “What’s going to happen to Silicon Valley real estate?,” or maybe “Is there a Silicon Valley real estate market bubble?”

If so, you’re not the only one.

Silicon Valley real estate is a topic that has been often discussed lately.

Why?

Because over the last several years, the real estate market in Silicon Valley has seen dramatic year over year price increases.

If you’re thinking of selling your home, you might be wondering when you should sell.

And if you’re thinking of buying, you may be wondering if you should buy now or wait.

I’m not going to tell you when you should sell or buy. But what I am going to do is educate you a little more about the Silicon Valley real estate market, so that you can make the best possible decision.

I’m going to dive in and discuss three things:

  1. What’s causing the dramatic increase in prices?
  2. How does this impact buyers and sellers?
  3. Where is the Silicon Valley real estate market headed?

My goal is that by the time you’re done reading this, you’re a little more savvy on the Silicon Valley real estate market than you were before.

I’m also going to give my opinion on whether we’ll see a major downturn and when.

More on that in a bit.

So, without further adieu.

What’s causing the dramatic price increase in Silicon Valley real estate?

First things first.

Real estate prices are controlled by supply and demand.

The value of something is determined by the quantity available and the number of people who want it.

For example:

  • Way back in 2010, a Picasso painting titled “Nude, Green Leaves and Bust”, sold for $106.5 million at an auction in a matter of eight minutes.

Why?

  • Supply and demand.

There’s only one of them in the world and it’s highly sought after by many collectors.

All it took is eight minutes for someone to make an astronomical offer.

What if there were 1,000 of them?

  • Chances are the price would have not even been close to $106.5 million.

The same is true in real estate.

  • The supply is the number of homes for sale.
  • The demand is the number of buyers.

A low supply of homes for sale, plus high demand, usually means an increase in prices (Also known as a “seller’s market”).

A high supply of homes for sale, with average to low demand, usually means a decrease in prices (known as a “buyer’s market”).

Can you guess which one applies to Silicon Valley real estate over the last few years?

Now that we know what causes this, let’s look at specifics here in Silicon Valley, starting with the answers to these questions:

  • Why is the supply low?
  • And where is the demand coming from?

First, I will give my reasoning for the low supply. There are few factors:

  • Silicon Valley is going through a major change in demographics – something the area hasn’t seen to this extent before.
  • As most people know, Silicon Valley is the tech capital of the world. As a result, a high percentage of the jobs here are tech related.

So, why is this important?

  • Many people of the generations that have lived in Silicon Valley for 10, 20, or 30 years or more, are not in the tech industry.
  • This is one of the main causes for the increase in Silicon Valley home prices.

How?

  • Because in order to afford a home here, you need to make a higher than average salary.
  • This means that homeowners who are not in the tech industry (or another above average paying field), can’t get a mortgage for a new home.

Meaning they can’t move. Unless…they move out of the area.

This is what many sellers in Silicon Valley are doing. Not all of them, but a much higher ratio than in previous years.

This isn’t like it was in years past where the average person could sell their home and move up to a bigger one nearby after some time.

Compared to the years prior to the great recession, where all you needed to do in order to get a mortgage was be able to fog a mirror, the lending guidelines for a home loan are now more stringent.

And…

The average Silicon Valley home seller simply can’t afford to buy here.

This is why some of the monthly numbers of homes for sale are some of the lowest they have ever been in Silicon Valley.

Ok, now what about the demand? How in the heck are there so many buyers that can afford to live here?

Not only that, but how are some of these buyers offering substantial amounts over asking price?

The answer? Tech.

Just how it affects the supply, it also has a major impact on housing demand in Silicon Valley.

Here’s how: stock options.

But not just stock options. Other things such as:

  • Salaries
  • RSUs (restricted stock units)
  • ESPPs (employee stock purchase plan)

First, let’s discuss how these buyers are qualifying for their new mortgage.

In order to get pre-approved, lenders look at three things:

  1. Credit
  2. Collateral
  3. Capacity

What exactly do these three things refer to?

  • Credit is the credit score.
  • Collateral is the down payment.
  • Capacity is the debt to income ratio.

The biggest hurdle for most buyers on getting pre-approved is the debt to income ratio.

Most lenders will allow a debt to income ratio of 43%.

This is calculated by taking into account:

  • The new principal and interest mortgage payment
  • Monthly property taxes and insurance
  • The minimum payments that show on the credit report

The sum of these is then divided by the gross monthly income before taxes.

Let me break this down a little further and give you an example. Let’s take a property listed at $1,200,000.

  • Let’s assume the normal 20% down, which would be $240,000 in this scenario.
  • That leaves a mortgage of $960,000.

Now let’s say the interest rate is 3.75%.

Here’s how the monthly mortgage payment would break down.

  • $4,446 for the principal and interest payment
  • $1,250 for property taxes (sales price x .0125% /12 months)
  • $100 for homeowners insurance

This brings a total housing payment of $5,796.

Now let’s factor in $500 for the minimum payments on the credit report.

  • This gives us a total monthly outgoing of $6,296, if the maximum debt to income ratio is 43%

This means in order to qualify on the income portion for the loan, the gross monthly income would need to be a minimum of

  • $14,700 a month
  • Or, $176,400 a year

At a minimum.

Most people in Silicon Valley aren’t making that much unless they have a great self employed business or are in tech.

And this example is based on a $1,200,000 purchase price.

Many homes are much higher than this.

Now that we know what’s needed to qualify for the capacity requirements, let’s talk about the collateral.

Where are these buyers getting their 20% down payments?

  • Stock options (mostly).

If you aren’t familiar with how stock options work, this part is important.

In my opinion, there is a key factor that will impact the future of Silicon Valley real estate: employee stock options.

Employee stock options, also known as ESOs, are stock options granted by the employer to the employee, given as extra incentives.

Here’s how they work:

  • Employees are given the right to purchase shares at a predetermined price (usually stock price at time of hire)
  • They have the option to “exercise” (sell) them after a certain period of time.
  • (Usually this timeframe is every 12 months for four years).

Let’s say a new employee just started this month and the company granted her 4,000 shares.

  • With a four year vesting period, this means she has the option to “exercise” (sell) 1,000 shares every year.

Let’s say the stock price was $100 at the time of her hire and after the first year is now $120.

  • This means she can sell 1,000 shares for a profit of $20 a share.

This equals $20,000…for the first year.

This is in addition to her salary and other incentives.

What happens if the stock price increases over the next 3 years?

  • More profit for the employee.

Now…

Let’s dig a little deeper and start seeing the actual numbers.

As you know, many tech giants have their headquarters based in Silicon Valley.

Some of these companies include Apple, Google, Facebook, and Netflix.

Let’s use Apple as an example.

Let’s look at their stock price for the last 5 years.How stock prices affect real estate prices in Silicon Valley

  • Starting in 2013, the price hovered between $55 and $80.
  • Towards the end of 2014, it almost reached $120…

And look what it has done since.

Let’s say a new hire started in 2013 when the price was $70.

  • She was granted 5,000 shares with the option to cash in 25% (1,250 shares) every 12 months.
  • In 2014, after the first 12 months, she cashes in roughly $62,500 (1,250 shares x $50 difference in grant price of $70 and selling price of $120).
  • As the stock price increases after the second, third, and fourth years, she has the option to sell the shares and profit the difference of the stock price when she was granted the shares versus the current selling price.

This is just a rough example of how employee stock options work.

The number of options granted to each employee depends on their position, experience, how much the company wants them, among other factors.

But…

If we look at the stock prices over the last four to five years of the tech companies here in Silicon Valley, many of them have been on a persistent upward trajectory.

This is where many buyers are getting their down payments and are able to afford the homes here in Silicon Valley.

There’s no doubt that the tech industry has played a major factor in both the supply and the demand for Silicon Valley real estate.

In fact…I can prove it.

We wanted to compare the stock prices of some of Silicon Valley’s biggest companies with the real estate prices in Silicon Valley over the last three years.

So, we decided to look at the stock prices of three of the biggest tech employers here:

  1. Apple
  2. Google, and
  3. Facebook

Apple

Apple's stock prices can impact the real estate market in Silicon Valley

Google

Google's stock prices can impact the real estate market in Silicon Valley

Facebook

Facebook's stock prices can impact the real estate market in Silicon Valley

Now, take a look at the home prices in San Jose over the last three years:

Average real estate prices in Silicon Valley

Let’s put them on the same graph and see what it looks like.

Stocks impact real estate in Silicon Valley

If that doesn’t show the correlation between Silicon Valley real estate and the tech industry, I don’t know what does.

I’ve been asked numerous times how buyers are affording these prices and how they are offering so much over the asking price.

There are two answers to that question:

  1. Salaries, and
  2. Stock options

Remember the three things buyers need in order to get pre-approved?

  1. Credit
  2. Collateral, and
  3. Capacity

Here’s what is happening with Silicon Valley buyers:

  • They’re qualifying for the capacity (debt to income ratio for their loan) with the salaries
  • And they qualify for the collateral (down payment) with stock options
  • Another factor that doesn’t get talked about that much is the fact that many families who are buying have both spouses working

We’re at a point now where this is pretty much mandatory in order to buy a home in Silicon Valley.

It also helps when buyers make an offer over list price.

There’s an increase in the mortgage payment, but there are two well paying salaries instead of one.

And remember…

  • When a buyer offers over the asking price, they are not paying the full amount out of pocket.
  • The average buyer makes a 20% down payment with the lender putting in the other 80%.
  • This means that if they offer $100,000 over asking, they are putting $20,000 out of their pocket and financing the rest.

Where is the Silicon Valley real estate market headed?

Everyone wants to know what’s going to happen with home prices in Silicon Valley.

Many want to know:

  • Will they keep increasing?
  • Will they ever come down?

But the truth is…nobody knows.

All we can do is look at the data and trends and make an educated guess.

I’m going to give you my opinion on what I think will happen with Silicon Valley real estate.

But first, I’ll explain the difference between Silicon Valley home buyers now and Silicon Valley home buyers of years past.

In fact, it really applies to much of the United States, and not just Silicon Valley.

So, what’s the difference?

  • The majority of buyers get financing when they purchase a home.

Let’s look at the characteristics of a buyer today.

As we know, home buyers need:

  • A good credit score
  • A sufficient down payment, and
  • Well paying jobs

This is what the banks look at when underwriting a purchase loan.

But what about in years past, specifically before 2008. What was required then for each of the following:

Credit?

  • A minimum score of 620.

Capacity?

  • Show a business card and state your income on the loan application with no proof of pay stubs or tax returns.

Collateral?

  • It simply wasn’t something to worry about. Some banks would lend 100% up to $750,000.

So what did this mean at the time?

  • There were buyers who would have less than average credit, no money to put down, and essentially lie on their loan application about how much they made.

Any guesses as to why the great recession happened?

Going back to Silicon Valley today, I’ve seen many articles, posts, and discussions talking about a Silicon Valley real estate bubble.

Can this happen? Technically, yes. Anything can happen.

But in my opinion, this isn’t a bubble.

Why?

  • Because it’s real money
    • The buyers are real
    • Their down payments are real
    • Their salaries are real

One of the reasons for the housing crisis following the Great Recession was due to a lot of foreclosures and short sales.

Why did these occur?

  • Because many buyers purchased their home with little or no money down.
  • When they saw their home value decrease, many of them decided to simply walk away.

Some of them lost their jobs and some of them simply never should have been given a loan in the first place, because their real income fell short of what they told their lender it was.

Now let’s compare this to today’s buyers.

Let’s say the Silicon Valley real estate market slowed down and prices dropped by a large amount, like 20%.

  • The majority of buyers who have purchased over the last few years made a 20% down payment.
  • This means that their home value would be about equal to what they owe.
  • What’s more, is that many of these buyers have gained a large amount of equity appreciation as well.

What can we conclude about the Silicon Valley real estate market from this?

If the Silicon Valley real estate market was to decline by a substantial amount, the homeowners would be far less inclined to walk away from their homes compared to home buyers of the pre-recession years.

Now let me tell you where I think the Silicon Valley real estate market is headed.

I think we’re going to keep seeing a steady increase in prices (maybe not as dramatic) because of two things:

  1. Short supply
  2. High demand

As previously mentioned, many homeowners who have lived here for 10, 20, or 30 years, would love to sell, but they simply can’t unless they moved out of the area.

But, there are three things that I think could cause home prices to fall in Silicon Valley.

  1. A big catastrophe such as an earthquake or war
  2. An increase in mortgage rates
  3. Stock prices of tech companies in Silicon Valley drop

The first one is unknown if and when it would happen. If it did, home prices usually drop when wars occur out of fear, which causes less demand from buyers.

Regarding the second point, mortgage rates have been very low for almost the last 10 years or so. Eventually they will increase.

When they do, not only does that mean that a potential buyer’s payment will be higher, but it also means that they will qualify for a lower purchase price.

The debt to income ratio has the greatest impact on a buyers purchasing power, and when rates go up, their purchasing power goes down.

  • A current interest rate of 3.75% on a $1,000,000 loan amount, equals a principal and interest payment of $4,631.
  • At a 4.75% interest rate, the principal and interest payment is $5,216.
  • This is a difference of $585 a month.

A 5.5% interest rate would be a difference of $1,047 a month ($5,678 payment).

When interest rates start to have an impact on the payments and qualifying factors for Silicon Valley home buyers, the demand will not be as high.

Thirdly, how will stock prices affect Silicon Valley real estate?

  • Stock prices of tech companies will drop.

It’s not a matter of if, but a matter of when.

It doesn’t look like it’s close to happening, but when it does, home prices in Silicon Valley should slow down and may even decline.

Why?

  • Because there will be less buyers.

How have the majority of home buyers been coming up with their down payment?

  • Stock options

The only reason why buyers have been able to do this is because of the increase in their company stock prices.

What happens when the stock price stays flat or drops over a time period of a few years?

  • There is no money to be made.

If you remember:

  • An employee is granted the shares at the stock price of when they’re hired.
  • Then, they have the option to sell them every 12 months for 4 years.
  • If the stock price when the employee goes to sell their shares is less than the stock price of when the shares were granted to them, then there is no profit.

This means the employee doesn’t make any money on their employee options, which means they don’t have a big chunk of change for the down payment.

For example, Apple’s stock price today is at $171.

Let’s say a new employee was hired today and was given employee stock options.

  • If Apple’s stock is on a decline over the next four years, the employee’s shares will not be worth anything.

The stock market has been on a tear over the last few years, but will eventually take a breather and decline.

When?

It could be next year, five years from now, or ten years from now.

But as of today, the economy is doing well and the tech market is strong. All indications point to the idea that a steady decline may not happen for a while.

In my opinion, as long as the tech market is strong, interest rates remain low, and there aren’t any major catastrophes, Silicon Valley real estate should continue to see a shortage of inventory and a high demand from home buyers.

How Does This Impact Buyers and Sellers?

The Silicon Valley real estate market has been on a roller coaster ride that has only continued to progress over the last several years.

For buyers, it’s a very competitive market. How so?

  • They’re going up against plenty of other buyers in the same position that they’re in.
  • One of the concerns that a lot of them tend to ask themselves is if they’re “overpaying,” and whether or not they should wait.

In my opinion, “overpaying” doesn’t exist in real estate.

Why?

  • Because a property is worth what someone is willing to pay for it.

A couple of months ago I sold a house in West San Jose.

  • This home was about 1,350 square feet on a 9,000 lot and needed some work.
  • We listed it for $1,299,000 and it sold for $1,500,000.

Last week, I wrote an offer for buyer clients on a home only a couple streets over from this one.

  • This home was listed at $1,395,000, had the exact same square footage as the one I sold, was on a 8,000 square foot lot, and also needed work.

These two properties were very similar in characteristics, and the home I sold was the best one to compare it to.

So, what happened?

  • My clients ended up offering $1,620,000 without any contingencies.

In my opinion, that’s a very strong offer. But we found out that it wasn’t as strong as we thought.

Why not?

  • The seller ended up receiving 22 offers with almost half of them offering over $1,600,000.

As of now, I don’t know what the final sales price is, but I wouldn’t be surprised if it ends up being close to $1,700,000.

My clients really wanted that home and were disappointed they didn’t get it.

They asked me if they should wait for the real estate market in Silicon Valley to slow down.

But if you’re looking to buy, I’ll tell you the same thing I told them: nobody knows when that’s going to happen.

It could be next month, or it could be ten years from now.

As I previously mentioned, in my opinion, as long a she tech market is strong, then Silicon Valley real estate will also remain strong.

For most people, buying a home in Silicon Valley is a long-term plan, not a short one.

Everyone wants to time the market, but nobody knows what’s going to happen.

I’ve had several clients who put off buying in 2014 and 2015 because they thought the market was at its peak.

They ended up buying in 2016 and 2017, but at much higher prices.

I will never tell someone that they “need” to buy now because prices are going up, or interest rates are increasing.

These things are factors worth considering, but there are also others, such as:

  • Would the new living situation be better than the current one?
  • Are the schools that fall within the boundaries of the new home important
  • Is the neighborhood better?
  • How much will a credit for 1% of the purchase price help the buyer?

If the pros of buying a home outweigh the cons, then you may want to consider moving forward.

But what if you’re thinking of selling?

Silicon Valley has been in a seller’s market for the last few years and it looks like it’s going to remain that way for some time.

For how long, nobody knows.

Selling a home is a big decision and a major transition for most people.

Similar to buying, I always suggest making sure the pros outweigh the cons.

Sure, maybe it makes sense to wait and see if the market goes higher, but what if doesn’t?

I just sold a home in Almaden Valley and my clients originally planned to sell in the latter part of 2018.

  • They’ve lived in the home for almost twenty years and planned on moving out of the area.
  • Their home is worth more now than it has ever been and the equity they are walking away with is a big chunk of their retirement.
  • They decided to sell sooner than originally planned because they didn’t want to get too greedy.
  • They are renting until they leave the Bay Area towards the end of 2018.

Sometimes the decision on when to sell a home is within the seller’s control, but sometimes, it’s not.

Either way, maximizing the returns when selling is almost always a top priority for most homeowners.

For many people, it’s the biggest financial transaction they’ll ever make and walking away with the highest amount for the sale is important.

Having a professional opinion to not only make the selling process less stressful but also having someone by their side and only charging 2-3.5% commission, can be a deciding factor.

Whether buying or selling, I always suggest making sure the pros outweigh the cons when deciding when and if you should move forward.

Continual Drop for Days on Market for Silicon Valley Homes

The days that Silicon Valley homes are on the market has dropped continuously over the past six months

Silicon Valley real estate is selling as quickly as ever with even lower days on the market for single-family residences. During the first six months of 2017, it’s clear that throughout this highly desirable area of the state, inventory is low and demand is incredibly high. As a result, the number of days on the market for residential real estate is becoming fewer and fewer.

When days on the market decrease, it’s a sure sign that properties are selling fast. The reasons behind this are typically due to a high demand and low supply.

Tech fuelled residents

In Silicon Valley, it’s a common trend for buyers in the area to be working in tech. As the already booming tech industry in the area continues to grow, more and more people from around the world continue to flock to Silicon Valley for career opportunities that simply don’t exist elsewhere.

But despite the influx of new residents, few homeowners are selling their property. Below are the numbers of active listings for single-family residences among Silicon Valley neighborhoods and cities this week. All of these numbers are drastically lower than they were a year ago at this time:

Almaden Valley:  25
Cambrian:    32
Campbell:    12
Cupertino:   22
Santa Clara:  27
Saratoga: 45
Willow Glen:  32
San Jose:  426

Why so few sellers?

What’s the reason behind the lack of sellers? It may very well be because they have nowhere to move to. Of those that are selling, the majority are moving out of the area altogether. They have been priced out and unable to move up within the same area. So they’re leaving the Bay Area entirely.

The lessening number of days on the market is telling. Downtown San Jose and Rose Garden have experienced the most notable drop in the past six months. In downtown San Jose, the average number of days on the market for a single-family home was 29 in the last six months. In the past thirty days, that number has dropped to just 14 days on the market. This is less than half of its previous six month average.

Meanwhile, over in Rose Garden, the average number of days on the market over the past six months was 37. In the past thirty days, it’s been shortened to 23. That’s two weeks less than it was before.

What fewer days on the market mean

The fewer number of days on the market is indicative of the substantial jump between what a property is listed for and what the actual sales price ends up being. Over the past six months in downtown San Jose, the average list price for a single-family home came in at $775,642. But the average sales price in the same area hit $790,804 – roughly $15,000 higher.

Rose Garden saw an even greater difference, with an average list price of $1,020,841 compared to an average sales price of $1,049,210 – almost $30,000 higher.

Some areas have seen a similar or equal number of days on the market recently as they have in the past six months – but properties here continue to sell for much higher than the price indicated on the listing.

Take Cupertino as an example. The average number of days on the market for the past six months has been 14, the same number as within the past thirty days. The average list price, though, is substantially lower than the average sales price, at just $2,019,726 compared to the latter’s $2,180,054. What this means is that despite the number of days on the market remaining unchanged, prices are still continuing to go up.

How to get into Silicon Valley real estate as a buyer

So, how does one break into the Silicon Valley property market at a time when inventory is low and prices are high?

In order to qualify for a mortgage in Silicon Valley nowadays, a household will need to have at least one spouse with a strong salary, or two spouses with average to high salaries. Buyers will need to have a gross monthly income of roughly $220,000 to be able to afford a property in the $1,500,000 price range with a down payment of $300,000.

What about sellers?

As a seller, you have an advantage in the current Silicon Valley real estate market. But this alone doesn’t necessarily guarantee that your house will sell for its maximum potential. An experienced real estate agent and customized marketing plan specifically designed for your property are imperative to success. SoldNest can help make sure that your Silicon Valley home sells for the highest possible potential.

Millennial Home Buying Is On The Rise

Millennial home buying trends are changing. For many millennials, buying and owning a home once seemed completely out of reach. But this year, more and more young people are flooding the real estate market as first time owners across the country. In fact, according to the National Association of Realtors, millennials made up 34% of the real estate market in 2016, with 66% as first time homebuyers. But it’s been long time coming.

Millennial home buying is a relatively recent phenomenon. In the past, first homeowners used to average about 26 years in age. Now, the average age for a first time buyer is closer to 33. This means the millennial generation is waiting an average of seven more years to buy their first home.

Why the delay in millennial home buying?

There are many reasons that can explain why many millennials buying homes is only just really starting to happen in the past year or so.

One major factor is the recession. Many millennials found themselves graduating from university and looking to launch their careers in a time of poor job market. As a result, many moved back home with mom and dad, as opposed to into an apartment either independently or with friends. This is often a fundamental step between living at home and home ownership. For many millennials, this phase of adulthood was delayed. (Approximately one third of millennials still live at home).

The recession also caused millennials to observe what was happening with older generations, creating a lack of confidence in home ownership prospects for themselves. Many people in older generations either lost jobs, or took jobs that paid less. And many had a difficult time selling their home. This sense of economic decline did not help to accelerate millennials into home ownership.

Financial woes

Personal finances are another reason millennials have been slower than previous generations to break into the real estate market. The average amount of student debt across the country has tripled in the past two decades. This means young people of this generation don’t have money to buy homes the way that older generations once did.

In fact, millennial home buying behaviors indicate that finances are something millennials worry most about when it comes to buying a home. The two primary financial concerns are coming up with a downpayment. This is followed by actually being able to find a home that fits their budget.

A tricky market

It’s a tricky market for millennials to break in to. Many are first time buyers, and are therefore competing against repeat buyers who have more leverage and real estate experience. There’s also a shortage of homes available across the country, creating bidding wars. This is particularly true with starter homes that are more likely to fit a millennial home buying budget.

Despite the seemingly dire outlook, however, there is one silver lining to the real estate market for this generation that is different to generations past: lower interest rates.

Why have millennials decided to start buying?

Millennials are finally breaking in to the real estate market because many are getting married and starting to have children. According to the National Association of Realtors, 49% of buyers 36 years old and under have children under the age of 18 living in their home. 66% of home buying millennials are married couples, and 13% are unmarried couples – the largest share of all generations. The median age of the millennial home buyer is 31 years old.

So, even though it took some time for them to get started, now, millennials make up 64% of first time homebuyers. This is despite the fact that they only account for 13% of the population. In January of this year, millennials made up approximately 45% of all purchase loans. This represents an increase of 42% from the previous year.

What are millennial home buying preferences?

There are some who are young professionals who want a turn key home that requires little to no work. But others are willing to find a place that will involve work over time. This would, in their mind, be a home that they can make their own and add value to.

Regardless of which of the two camps they fall into, millennial home buyers often lean toward similar features in a prospective home.

An updated kitchen and bathroom

Kitchens and bathrooms are the two hardest and most costly rooms of the house to renovate. Numerous sources of plumbing and major appliances make both rooms a major project to redo. Since millennial home buyers typically have a strict budget, they are more inclined to spend their money on a down payment and furniture as opposed to big renovations.

But don’t despair if you’re thinking that your kitchen may be out of date. As a seller, it may not be worth your while to redo these two rooms either for the sole purpose of selling. The fixtures in these rooms often come down to personal taste. Something you think looks good may not appeal to a new buyer anyway, making a costly and time consuming renovation potentially more of a hassle than something beneficial.

Open concept living

Spacious kitchens and open floor plans are also appealing to millennial home buyers. The kitchen has increasingly become the place for young families to hang out. Previous generations may have had a formal dining room as part of their real estate wish list. But millennials are more likely to gravitate toward a house that has a kitchen which can transition to a TV or living room. It’s also indicative of how millennials like to entertain larger groups or host gatherings. They prefer having guests ‘flow’ through the home instead of socializing in different rooms of the house.

A home office

More than 13 million Americans currently work from home. The rise of tech that allows employees to connect from anywhere, any time. As a result, more and more companies are becoming increasingly flexible with work from home days. Having a space in the house for being able to work quietly and productively is becoming more of a priority for millennial home buyers.

Hassle free home

In an ever more ‘disposable’ society, millennial home buyers are more like to replace rather than repair. Homes that are easy to maintain are highly appealing. Features like granite countertops and hardwood floors are often desirable. In addition to being aesthetically pleasing, they are also easy to clean.

But even if you don’t have these features in your home, don’t fret. The way you stage your home is critical to its success on the market. Even if your property doesn’t necessarily tick every box on the millennial home buying wish list, you can still stage it well. Being able to create an emotional attachment, and have your buyer envision themselves living in your space, is pivotal.

Staying connected

When it comes to a place to call home, cell phone service and wifi are both incredibly important to this generation. The priorities have shifted from previous generations, who may have asked about cable hook ups or a phone jack for a landline when viewing a property. Today, a home that is set up for tech is unanimously desirable among millennials. It’s true that internet and cell providers are not in a seller’s control. But real estate agents should be prepared to answer questions on this front regardless.

But before you even reach a point where a prospective millennial home buyer is asking you or your agent questions about the wifi set up, they probably saw the listing for your home online before even setting foot in your front door. The vast majority of homebuyers are now beginning their property search online. Having a compelling real estate listing with professional photographs is essential as a seller.

Good photographs and a descriptive listing is just the first step to selling your home to its fullest potential though. A custom marketing plan that targets the buyers most likely to take an interest in your home is critical. Understanding your millennial audience, and being able to market your home toward their needs and wants, will allow you as the seller to generate the maximum possible sales price for your home.

 

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Millennial home buyers in San Jose

San Jose is one of the top ten most desirable locations in the United States for millennials according to realtor.com.

The housing prices in the area are high. But the number of big tech companies in the area can be a key explanation for the incentive of this generation to live here. Young people flock to Silicon Valley to get to work in cutting edge tech. In San Jose, they can find industry specific career opportunities that aren’t as readily available in the rest of the country.

Downtown living combined with a suburban feel means that in San Jose, millennials can have the best of both worlds. It’s a huge draw for young first time homebuyers.

First time millennial home buyers in San Jose will often buy a condo or smaller home. They may plan to either sell it or rent it out within five to seven years, and move on to a bigger space as they grow their family.

Regardless of how soon you are thinking about selling, one thing is for sure: millennial home buying is on the rise, and more will be buying their first home now than ever before.

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High Demand, Low Inventory in the Bay Area Real Estate Market

Bay Area real estate trends show this to be one of the hottest markets in the country

There are lots of buyers looking for a home in the Bay Area real estate market. In fact, similar to recent real estate market trends across the country, there is no shortage of demand. There is, however, a lack of inventory. Home sales in the United States are at their lowest in terms of supply in seventeen years.  In other words, current trends increasingly show a small number of houses on the market for a large (and growing) population of interested buyers.

The result for the housing market nationwide is that home prices are going up – an effect certainly felt in the Bay Area real estate market as well. With so much demand on such a small number of homes, sellers are in a position of being able to list their home at price points considerably higher than usual.

Nationwide, the median sales prices for homes sits at $232,000. Despite the fact that the number of homes for sale is down by 13% year-over-year, sales growth is up by 8.9% as of last month. This reflects higher sales numbers for a fewer supply of homes throughout the United States. A total of 32 out of 90 metro areas nationwide experienced a double digit increase in sales since last year. This means that more than a third of metro areas in the U.S. saw their home prices increase dramatically.

The effects of high demand and low inventory

The increased demand and higher sales prices makes it more difficult for first time buyers to get into the market. By the end of December 2016, first time buyers represented just 32% of the market. This is noticeably below the 40% share that realtors and economists note as a benchmark for a healthy real estate market.

In 2016, a total of 37% of homes that sold were purchased by buyers who did not live in them. Instead, they were purchased by people with the intention of being rented out. What this means is that more people are becoming renters instead of buyers, and often not by choice. As of last summer, the home ownership rate in the United States was the lowest it has been in more than 50 years. The price of homes is increasing faster than incomes are rising.

The hottest real estate markets in the country include Denver, Seattle, and of course, the Bay Area market.

The Bay Area real estate market

In many parts of the Bay Area real estate market, prices stabilized somewhat from August 2016 through to the end of the year. Come January, however, prices began to increase. The high demand for a low supply of properties has not let up since.

Last month, the majority of buyers in the Bay Area real estate market paid over asking price for their home. In San Jose, 69.6% of homes went above asking, and home sales in general went up. Over in San Francisco, 66.7% of homes went above asking, and in Oakland, that number came out to 65.9%. Meanwhile, in San Jose, a -25.9% decrease of homes for sale year-over-year occurred.

According to the National Association of Realtors, the average qualifying income to be eligible for home ownership is $42,962. This corresponds to the national median home price of $232,200. But in San Jose, the median home cost is $1,00,500. This makes the qualifying salary to buy in the area $183,730. In fact, a news report this week stated that the Bay Area is now so expensive that even some six figure salaries are now supposedly “low income.” According to the U.S. department of Housing and Urban Development, a household income of $105,350 is now “low” for families of four living in San Francisco or San Mateo counties.

North of San Francisco

North of San Francisco in Marin county, the median listing price for homes as of March 31 this year hit $1,249,000. Home values in Marin county have increased by 7.5% in the past year. They are likely going to continue to rise. In fact, the median list price per square foot of homes that are on the market in Marin county is $640. Recent Bay Area real estate trends show that this is higher than the average for the metropolitan area of San Francisco. The average in San Francisco sits at $495 per square foot.

Meanwhile, Napa is ranked the seventh least affordable US housing market in March of this year. And experts say that going forward they expect Napa home prices to increase to their highest levels in eight years. The California Association of Realtors reports that the median home price for the area is $606,494.

Santa Clara County

In Santa Clara County, particularly the South Bay, there have been some interesting trends across its real estate sales. This past quarter, there were fewer properties for sale in Cambrian than there have been during Q1 of previous years. In Campbell, as is often the case in many Bay Area real estate trends, sales price records continue to be broken. Last year the Campbell real estate market saw the highest ever sold price for single-family residences. That alone is noteworthy. But during the first quarter of 2017, that record was broken by almost $100,000. This set a new benchmark for home prices in this part of the Bay Area real estate market.

Fewer days on the market

Over in Willow Glen, real estate trends indicate that there has been a significant decrease in the number of days on the market during the last quarter for condos and townhomes. In January, an average of 42 days on the market was typical for these types of properties. By the end of the quarter, 14 days became the average amount of time on the market.

Other areas, including Blossom Valley, Cupertino, Evergreen, Mountain View and Saratoga, to name a few, have also seen fewer days on the market recently in comparison to before. The only exception to the rule is Los Gatos. Properties there averaged about 46 days on the market in the last 30 days. This is a 9.5% increase in days on the market compared to the 46 day average seen in the last 180 days.

Bay Area real estate market trends

As far as Bay Area real estate trends go, Blossom Valley saw the most dramatic drop in the number of days on the market recently. Over the last 180 days, a typical amount of time for a home in Blossom Valley to be on the market was 27 days. In the last 30 days though, this number was reduced by a whopping 51.9% – to just 13 days on the market.

Cupertino and Sunnyvale have seen the fewest number of days on the market over the past 30 days. For both these areas in the South Bay, homes are currently averaging just 9 days on the market. For Cupertino in particular, this is an especially noteworthy drop in comparison with the past 180 days. The average number of days on the market then was 17 – over a week more, and 47.1% higher than the current average.

Why is this happening?

Why is this happening all of a sudden in the Bay Area real estate market? With economists predicting that the Federal Reserve will increase interest rates a total of three times this year at a minimum, the high demand resulting in fewer days on the market could be a result of buyers wanting to lock in on a property quickly before interest rates rise. Once the Federal Reserve increases its interest rates, this can have an indirect but still noteworthy impact on mortgages for homeowners.

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A recent sale in Almaden Valley

In Almaden Valley, a recent sale by SoldNest breaks a new record in the area. Sitting in the desirable Almaden Valley Springs neighborhood, 1098 Foxhurst Way was originally listed at $1,549,000. In less than a week, an offer for $1,650,000 came through, with no contingencies. The seller accepted, breaking a record in the process and saving $33,000 by selling with SoldNest. Previously, the highest home sold on the street went for $1,600,000, and was 700 square feet larger. This recent sale breaks the record for the highest price per square foot in the Almaden Valley Spring neighborhood. It exemplifies yet again the low supply of homes and increasingly high demand in the area.

Even with a high demand, marketing your property to its highest potential is still pivotal. For 1098 Foxhurst Way, we created a custom video and narrowed in on relevant and effective digital marketing tactics. The right marketing and ability to target the buyer most likely to invest in a property like yours are key.

If you’re thinking of selling your home in the Bay Area, SoldNest can help. We have the expertise and the resources essential to creating the best possible selling price for your property, and you’ll save thousands. Demand is high and inventory is low, so many would argue that it’s a seller’s market. Despite this, it is still important to be able to optimize the marketing and final sale of your home. SoldNest can do this for just 1.5% of the listing fee.

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Silicon Valley Real Estate Market Trends

Trends in real estate throughout Silicon Valley indicate one of the country's hottest property markets

Silicon Valley real estate market trends over the past few years have shown high demand in area of low supply. The tech boom that only continues to grow brings prospective homebuyers and renters from across the globe. This article will examine recent Silicon Valley real estate market trends. It will also delve into the specifics of some of its acclaimed neighborhoods.

Over the last few years, the prices of several homes in Silicon Valley have doubled. In August 2016, data from the National Association of realtors showed that Silicon Valley real estate prices hit a new record. The median price for a home exceeded $1,000,000 in the area around San Jose. This marks the first time this has happened in any metro area in the United States. The San Jose metro area still continues to be a market with some of the highest prices in the country.

Soaring Costs

There have been instances in which residents simply cannot keep up with the cost. In open letter announcing her resignation, Kate Downing, details why she and her family were forced to relocate out of Palo Alto. Despite her and her husband’s professional incomes, recent Silicon Valley real estate market trends mean the only possible way for her to own a home would be through co-ownership.

The Impact on Renters

Renters are feeling the strain of Silicon Valley real estate market trends too. In Mountain View, renters outnumber homeowners. A November 2016 vote resulted in an approval of rent control. The rent control will apply to the majority of multi-family units that were built prior to 1995. It means that there will be a limit of 2% to 5% max on annual rent increases. The exact amount will be related to the previous year’s change in inflation in the Bay Area.

Current Silicon Valley Real Estate Market Trends

So, why exactly is this happening? The explosion of international tech companies setting up headquarters in Silicon Valley has created a continuous draw to the area. But the inventory of actual properties for sale has been extremely low. With more people moving to the area each year, there simply aren’t enough properties to keep up with the high demand. Co-ownership is not entirely uncommon.

More Days on the Market

Many houses receive multiple offers and sell quickly. Despite several years that have seen a heated market, some areas within the Silicon Valley region have cooled off in recent months. Whether or not this happens is dependent on the location, condition of the home, and other factors. Larger, more expensive homes have experienced a greater number of days on the market over the past few years. This is typical for their size and price.

Rising Interest Rates

Economists predict that the Federal Reserve will raise interest rates three times over 2017. Many also anticipate that home loan interest rates will rise. These increased rates could result in a slow down in the housing market. As a result, Silicon Valley real estate market trends may feel the impact. In higher priced regions like Silicon Valley, higher interest rates mean that buyers will not have as much spending power. This can in turn lead to a lower demand for property purchases.

In Santa Clara county, during the first nine months of 2016, the number of single family homes and condos that sold fell by 10.1% year over year. Silicon Valley real estate market trends show that sales may continue to be a bit slower than in previous years until prices adjust, or until new properties are available on the market.

But what’s been happening in Silicon Valley’s many unique cities themselves? When we consider Silicon Valley real estate market trends, a few key places come into play. Five of these include Saratoga, Cupertino, Los Gatos, Sunnyvale and San Jose.

Find out what's happening in the booming Silicon Valley real estate market
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How Home Loan Interest Rates Impact Buyers And Sellers

Paying a mortgage is one of the most fundamental aspects of home ownership, and changes in home loan interest rates impact both buyers and sellers. Whether you are looking to purchase a home in the near future, or a homeowner thinking about selling, understanding the effects of home loan interest rates for both parties in a real estate transaction is important. This article will break down what changes home loan interest rates mean for buyers and sellers, and property values overall. First, it’s essential to understand the state of home loan interest rates in today’s market.

What are Home Loan Interest Rates Like Today?

For the past decade, mortgages in the U.S. have been at an all time low. As of January 19th, interest rates on 30-year fixed-rate mortgages experienced a dip for the third week in row. They are currently at their lowest levels since the beginning of December.

Sitting at lower than 4% all year, the average rate for a 30-year mortgage was bordering on a record low. But as of last month, the average rate for the same type of mortgage reached 4.3%. A rate of this percentage hadn’t occurred since April 2014.

Even despite the jump, it’s important to remember that home loan interest rates are still quite low when compared to previous decades. In the 1980s, for example, they seldom fell below 10%. But regardless of the historical comparison, home loan interest rates today are still the highest they have been in over two and a half years.

Why the Increase in Home Loan Interest Rates?

In December 2016, the Federal Reserve increased its interest rate, impacting the amount of money that banks are able to lend one another overnight. This in turn has a ripple effect on home loan interest rates. If banks are being charged a higher interest rate to lend money between themselves, it will impact the interest rate that they then charge to their customers. Credit card rates, home equity and lines of credit are immediately affected – and while mortgages aren’t impacted right away, they are typically quick to follow.

Mortgage lenders determine interest rates based on what they anticipate in future with regards to inflation and changes in the Federal Reserve’s interest rates. Additionally, the supply and demand of mortgage-backed securities also plays a role in home loan interest rates.

It essentially boils down to sharing the interest rate increase amongst all the parties involved. While it may not be a direct correlation, there will be a slight domino effect on mortgage rates from the rise of the interest rate of the Federal Reserve.

What Does it Mean for Homebuyers?

The lower that home loan interest rates are, the more spending power potential buyers have to purchase a home. Paying less interest means buyers can consider homes that they may not have otherwise been able to afford. While there are numerous other factors involved, the outcome of lower interest rates and more potential buyers is that the price of property usually goes up. This is caused by a greater demand from home buyers. As demand increases, usually home prices follow. In fact, one of the main reasons for the increase in home values over the past four to five years in Silicon Valley and throughout the country is due to low home loan interest rates.

The opposite is also true. When home loan interest rates rise, mortgage payments become higher, reducing the spending power of buyers. Property prices can drop, because there are less buyers looking, and supply (the number of homes for sale) is potentially greater than demand.

What Does This Look Like in Actual Dollars?

Toward the end of October 2016, the rate of a 30-year fixed mortgage was 3.47%. Compare this to today’s 4.3%, and it’s there’s a noteworthy spike in monthly mortgage payments.

Assume you purchased a home for $268,000, which was the median home price in the United States in October, and made a 20% down payment. An average monthly mortgage payment would be $1,280, at a home loan interest rate of 3.47%. But by December, just a few months later, the rate rose to 4.16%. The same mortgage payment thus increases by $86 per month to $1,366. It would be even higher with today’s rate of 4.3%.

In Silicon Valley, a single-family residence may sell at $1,300,000. With a 20% downpayment, that would lead to a $1,040,000 mortgage. At an interest rate of 3.47% would equate to a monthly payment $5,175.96. But with an interest rate increase up to 4.16%, the monthly mortgage payment suddenly jumps to $5,561.19. The interest rate increase results in an extra $385 that must be put toward a mortgage payment each month.

Changes in interest rates can result in noticeable differences in monthly home loan payments

What do lenders look for in qualifying a buyer?

When deciding whether to approve a prospective homebuyer for a loan, a financial institution always considers the “Three C’s”:

  • Collateral
  • Credit
  • Capacity

Collateral refers the down payment that the potential client is able to make. Credit refers to their credit scores, and capacity to their debt-to-income ratios.

Capacity (the ratio of the prospective homebuyer’s debt to their income) is what is affected by home loan interest rates.

Debt-to-income ratio is a formula that banks use to make sure that a buyer can repay their loan. First, they take into consideration that person’s total monthly debt. This includes the potential new mortgage payment, principal, interest, property taxes and insurance, and all the minimum payments that show up on the person’s credit report. Then, the bank will divide this amount by the person’s gross monthly income. Most lenders will allow for a maximum 45% debt to income ratio. If a potential buyer’s debt to income ratio is greater than 45%, the bank will not approve them.

What does this have to do with home loan interest rates? The higher these are, the higher the monthly mortgage payments are. The higher the monthly mortgage payments are, the greater the amount of debt to calculate when figuring out a potential buyer’s debt to income ratio. This subsequently impacts their chances of getting an approval for a loan.

Sometimes potential buyers will be very close to the maximum percentage allowed for the debt to income ratio. If the home loan interest rates increase, they may have to look at lower priced homes.

What Does it Mean for Sellers?

It’s not just buyers feeling the effects of changes in home loan interest rates. Sellers will also feel the impacts of these fluctuations.

When home loan interest rates rise, buyers can immediately qualify for a lesser amount than they would have before if their debt to income ratio is close to the maximum allowable percentage. This means they have less spending power. With less spending power in the hands of buyers, there can be less of a demand for properties. What may have been a feasible option for a buyer before the increase in rates will suddenly become unaffordable.

For the seller, this can mean less demand for their particular property. This is because a fewer number of buyers are able to actively look for a home, and maybe more importantly, get approved for their asking price. With less demand, the only way for a homeowner to improve the likelihood of selling their property may have to be a decrease in price.

What’s the Current Home Loan Interest Rate Situation Like for Sellers?

Economists speculate that the Federal Reserve will raise rates three times in 2017. This will lead to a rate of 1.4% by the end of the year. Last December marked the second time that the Federal Reserve raised interest rates in a decade. The impact is already noticeable.

Since many economists predict and expect rates to rise, this could mean a slow down for the housing market. This is especially true in high priced areas like Silicon Valley. Higher home loan interest rates mean that buyers aren’t able to exercise as much spending power. This leads to the potential for lower demand for property purchases.

To Sell, or Not to Sell?

If you are considering selling your property in the next little while, now may be the time to do so.

Predictions show that rates will increase in 2017 more than in the past several years. Property values are already at all time highs, and Silicon Valley contains some of highest priced real estate in the country. This means that higher home loan interest rates will make many already high value homes out of reach for prospective buyers who may have been able to afford them a few months ago. If this is the case, then sellers will experience less demand for their home, meaning they will likely need to consider reducing their listing price.

The pros of selling soon could very well outweigh the cons of waiting. Although nobody can predict what the future holds, it may be possible to obtain a higher sales price for your property now than later in the year. With a seasoned agent, customized marketing plan, and a 1.5% listing fee, it’s possible to generate an even higher sales price for your home, while putting more money in your pocket. A digital brokerage will reach a greater number of potential buyers compared to a brokerage or agent who advertises in print or applies the minimum when advertising a home for sale.

By using the SoldNest Home Sale Calculator, it’s easy to find out the potential amount you could net on the sale of your home in a few quick steps.

The Bottom Line

Changes in mortgage rates impact both buyers and sellers. For buyers, increased rates mean less spending power and a higher monthly mortgage payment than they may have otherwise anticipated. Lower rates allow for an opportunity to consider more property options.

For sellers, increased rates mean fewer people that are able to afford their particular property. Lower rates mean an increased demand and the possibility of setting a higher listing price for their home.

Whether you’re buying or selling, understanding home loan interest rates is important to making an informed decision in any real estate transaction. With rates set to increase over the coming months, now might just be the best possible time to put your home on the market.

How Natural Disasters Impact Real Estate Prices

How natural disaster can have an impact on local real estate is important to understand as a homeowner

It’s often something you don’t think about until it happens. But understanding how natural disasters impact real estate prices is important for homeowners. When a natural disaster strikes, the first and foremost priority is protecting individual lives, as it should be. But what do these catastrophes mean from an economic perspective, particularly when it comes to real estate?

A 2015 report by RealtyTrac found up to 43% of homes and condos in the United States to be at high risk or very high risk of at least one type of natural disaster. This percentage accounts for a total of 35.8 million homes across the country, with an estimated market value of a whopping $6.6 trillion.

Of all the states with homes that are at high risk, California tops the list. A total of 8.4 million homes are deemed to be at a high risk should there be a natural disaster in the Golden State, compared to runner up Florida’s 6.7 million homes at similar risk levels.

A Local Phenomenon

How natural disasters impact real estate prices is certainly a local phenomenon rather than a nationwide trend. But the effects are very noticeable in that particular area, if only for a short time. Prospective buyers may lose confidence in their desired location, and mortgage operations can be slow, both of which hurt home sales. Data suggests that there is a slower rate of increase in home sale prices in higher risk areas. While low and very low risk areas experience average price increases at 6.6% and 9.5% respectively from 2005 to 2015, high risk and very high risk areas have seen prices decrease by 2.5% and 6.4% respectively in the same decade.

Despite this, however, how natural disasters impact real estate becomes different story when it comes to home value. Paradoxically, home values in high risk areas tend to be higher than in low risk areas. While they may not grow as fast, the starting point is much higher.

Home Values

Homes in very high risk counties were found to have an approximate average market value of $170,237, while homes in high risk counties had an approximate average market value of $191,244. Compare this to the lower risk areas, in which the average home value of a property in a low risk area was $154,464, versus an average approximate property value of $151,793 for a home in a very low risk area.

In the past three years, home price appreciation has been stronger in high risk counties than in lower risk ones. Home prices saw a 16.6% increase in high risk areas between 2012 and 2015, and a 20.4% increase in counties labeled as being Very High risk. Compare this to the low risk areas, where home prices increased by an average 10.1% over the past three years, or the very low risk areas which saw an average increase in home prices of 12.8% over the same time period. These trends can potentially be due to the fact that markets in high risk areas change more rapidly than others. Also, the recovery from the housing crisis has been stronger in high risk areas.

How Natural Disasters Impact Real Estate

So, what does all this mean in terms of how natural disasters impact real estate? It suggests that other factors, such as generally good weather and proximity to employment opportunities, weigh more heavily in the decision making process for prospective buyers than do the risk of natural disasters. And in many cases, while devastating at the time, a natural disaster often does not have a long lasting impact on the real estate market. This we can derive from the Loma Prieta earthquake of 1989.

A Deadly Quake

Almost exactly 27 years ago to the day, a 6.9 magnitude earthquake rocked Northern California. It ended up  leaving 63 people dead, destroying over 11,000 homes and creating roughly $6 billion in damages. Immediately following the quake, nervous buyers began to back out of real estate deals. The result? Making it impossible for lenders to process loans, and bringing mortgage operations to a grinding halt. People were fearful of the long-term threat of earthquakes in the region. In the following months, sellers began to pull their homes off the market in order to get a better sense of the situation. The greater number of days a house is on the market, the less leverage the seller has. People begin to question why the property hasn’t sold more quickly.

The Impact

Most of the properties in the San Jose area weren’t significantly damaged. The quake left hairline cracks in stucco or the concrete of a driveway in many cases. Only a few older homes in San Francisco experienced devastating damage. Most of these were properties between 80 and 100 years old. This meant that some homes were simply damaged beyond repair. Even if the buyers were still interested, lenders would not lend the necessary funds to facilitate a transaction. In other cases, buyers were willing to wait for damages to be repaired before continuing with their purchase.

As time went on, sellers started putting their homes back on the market again. Prices were relatively similar to what they had been prior to the earthquake. Some studies indicate small decreases in home values correspond to the disaster. But the economic conditions of the early 1990s had a far more significant impact on the property market. After a brief slow down, the real estate market was quick to return back to normal following the earthquake.

Risky Real Estate

Many are willing to forgo the risk of natural disasters to live in California, likely due to its natural beauty. It may be the highest risk area in the United States for earthquakes, But California also boasts some of the most striking scenery in the country, which takes precedence in minds of thousands of homebuyers.

No Surprises

But according to RealtyTrac vice president Daren Blomquist, how natural disasters impact real estate shouldn’t come as a surprise to prospective homeowners. Since information is so readily available, buyers don’t have much of an excuse nowadays to be unaware. While knowledge of a disaster risk most likely won’t stop a home sale, at least buyers will be able to make sound decision on where and what type of home to buy. (For example, in Ohio, tornados are prevalent. Many homebuyers there opt to only view properties with basements. These types of homes are at less risk of damage by a tornado).

It is also important for homeowners to understand the specific insurance coverage they should be looking into. A good realtor should be able to advise buyers on how natural disasters impact real estate prices and the home they are looking at.

Odds of Another Earthquake in the Bay Area

Even with information being easily accessible, only about 10% of California homeowners have earthquake coverage as part of their insurance plan. This is despite the fact that California is a perfect example of a place that shows how natural disaster can impact real estate. Within the next 30 years, scientists predict a 68% chance of the Bay Area experiencing a 7.0 magnitude earthquake. Unlike in Florida, where hurricane insurance is often mandatory, in California, earthquake insurance is optional.

Unaffordable Insurance

For the majority of homeowners, the earthquake of 1989 is within living memory. But with insurance premiums continually on the rise, coverage becomes increasingly more unaffordable. Since earthquake insurance premiums consist of a combination of home replacement value and proximity to a high-risk fault. Northern California has some of the most expensive real estate in the country, in an earthquake hotspot. So, it’s no surprise that affordable earthquake coverage is becoming increasingly more difficult to find.

Seismic Investments

Some argue that a good solution is investing in your home seismically. Rather than spend money on hefty premiums, it may be more economically viable to do what you can to make sure that your home is structurally sound. This includes reinforcing walls and the house’s foundation. It will also make your home ready for a future sale. In state of California it is mandatory to fill out a checklist when selling your property. This highlights whether earthquake strengthening measures have been implemented in your home.

Throughout the United States, properties that are at the highest risk of experiencing a natural disaster are predominantly along the coastlines…along with some of the country’s most picturesque settings. It’s no surprise that homebuyers flock to these beautiful regions. Despite the risks and impact on the local real estate market when disaster strikes, the economic climate does, in most cases, have a greater impact on the real estate market in these areas than natural disasters do.

Like with all matters when it comes to selling or buying a home, being fully aware of any risks is important. A good realtor will be able to educate clients about how natural disasters impact real estate prices in their area.