When buyers are looking for homes for sale in the bay area, one of the most common things I hear is:

 “We can’t afford anything we like, what happened to the big price drop? We thought prices were supposed to be at record lows?!”

My explanation will often surprise them:

 

 

Home prices in desirable areas, do not significantly drop in price!  It’s THAT simple.

If you’d like to look at homes for sale in East Palo Alto, or East San Jose … there are PLENTY of bargains to be had, but if you’re looking at homes for sale in Cupertino, prices are only slightly down off their peaks, and ONLY because the worse neighborhoods are bringing down the rest.  Don’t believe me? Here are the average sales prices in Cupertino since 2003:

Current Cupertino home prices are no different than they were in the end of 2006!

So what does this mean for you, Mr.& Mrs. Buyer that are looking to get your kids into good schools.  Can you afford a home?

The good news for you is that even though homes in desirable areas are still quite expensive, home affordability is at record highs EVERYWHERE.

First, as everyone knows, are the low interest rates.  What many people don’t know is really, HOW LOW are the rates … I mean REALLY… are they low, or is this just a Realtor sales gimmick??

Homes for Sale in the bay area - 100 years of 30-year mortgage rates

Would going back 100 years be convincing enough??   -well, the chart is definitely impactful 🙂  But how big of a difference can 1% or 2% make?? 

If we use the average Bay Area Home price of about $600K, and if you were able to put 20% down, with today’s rates, your monthly principle interest payment on a 30yr fixed conventional loan would be: $2,540.   For every 1% increase, your payments go up by about $300/month – the cost of financing a new car. 

The worst part however is not the direct expense of the rate, but what it means to “how much home you can afford”.  Since Banks lend money in a roughly 1:3 proportion to your income, in order to offset each 1% increase in rates, you will need to increase your income by $900/month to afford the same home… that might be  as much as $1500 pre-tax.

So if rates go up by 2%, you might need to find a 2nd job to be able to afford an average home in the bay are.  To me, that’s VERY compelling! 

In fact, the last time rates were almost as low was after World War II !

 

But interest rates, aren’t the only thing working in our favor.  Many people have never heard of the Home Affordability index.  This index shows how affordable homes are as compared to other years.  When the line on the chart is bellow 100, it indicates that a median income family would need more than 50% of their income to “afford” an entry level home based on the current home prices, current interest rates, and current incomes.  This is a great way of seeing the impact your salary on your purchasing power:

Homes For Sale In The Bay Area - Home Affordability

Home Affordability is at RECORD HIGHS!  The reason for that is that through the recent economic down-turn, people who were able to hold on to their jobs were actually able to keep growing their salaries, while home prices on average dropped and interest rates plummeted. 

Another interesting thing to note is the correlation between inflation adjusted real estate prices and home affordability.  Every time homes were even close to this affordable, there was a significant jump in prices.  In fact – using a chart like this, Real Estate bubble (and inverse bubbles) are so easy to spot!!  Just look at what happened in the early 90’s and then on a much larger scale in 2005 – 2007, Real Estate affordability was dropping while real estate prices kept going up – if only you had this chart in 2007 right?   But look at what’s happening now, we are in a clear inverse-bubble!!  We don’t know how long it will last, maybe a year, maybe a longer, but once it pops, housing prices will shoot up accordingly.

Even through all this, you’re going to find yourself “stretching” to buy a home you’d actually want to live in.  This is normal! All first-time buyers, and most repeat buyers stretch!!!

It’s amazing that no matter the price range, or the background of the people, buyers are never happy with what they can “comfortably afford”.  My clients that can comfortably afford a $350K condo, really want a $425K town-home, while clients who can afford a $1.7 mm single family home, really want a $2mm home.  The difference between now and previous times in history is you actually need to “stretch” much less than you would have had to in prior years.

The bottom line is if you’re looking at homes for sale in the bay area, wondering what you can afford … as long as you are buying for the long term, this may be the best time in history to buy a home!!

If you’d like more information about housing trends in your area, or if you’re thinking of buying or selling a home and would like a free consultation, contact us today!

(Graph source: MLSListings Statistics & Dr. Steve Sjuggerud’s “Best Time in History to Buy a House” 1-28-2011)

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