Hi everybody. In my opinion, there are several reasons why home prices will keep going down for at least another 6-9 months in the Silicon Vallye.
The first is the growth of unemployment in the Bay Area. In Santa Clara country the rate of unemployment is currently about 10%, and in San Mateo - about 6.7%. These are record numbers since the early 1980s and they are projected to go up for at least 9 months, so we will most likely surpass the eightees. In contrast to other CA counties, where the falling home prices have been more closely linked to the growing volumes of foreclosures, the changes in home prices in the Silicon Valley have historically been closely linked to the levels of unemployment. Just imagine, for example, how further down Palo Alto prices would go within the next year or two if the half of all venture capital firms located there would get out of business during the 2009/10 period, as projected by some analysts. (I don't know if that is going to happen, but the chances are good).
Second, there is a huge amount of "hidden" foreclosures coming out to the market after the State of California and many large lenders end let their foreclosure moratoriums this spring/summer. There are plenty of articles elsewhere about this. According to WSJ, J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks.
Third, there is a huge wave of alt-A mortgage rate resets scheduled for this summer. Given the current economic environment, this will inevitably create another big wave of foreclosures down the road.
Fourth, despite historically very low interest rates, borrowing is still a problem, unless you have a stable, well-paying job and ready to put down at least 20% cash on the house price.
Finally, if you want to see some forecasts about price trends in the Bay Area, check, for example, these modest assessments in Money Magazine: http://money.cnn.com/magazines/moneymag/moneymag_r
There are some grimmer forecasts circulated among the Wall Street analysts. Ronald Temple, for example, who co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008, according to Moody's Economy.com.
Any thoughts about this?
Regarding the timeline, 6-9 months is a very SHORT-TERM forecast. The prices will most likely be falling beyond that. And here is another big argument in favor of that. Between 2000 and 2007, the American households have doubled their outstanding debt (to $13.8 trillion) and after that in 2008 lost about 20% ($13 trillion) of their total wealth. The latter includes one fifth ($600 billion) of all 401-Ks. These numbers are mind-boggling and unprecedented in post-war history. Subsequently, the consumers are expected to reduce their spending to annual rates of 2% to 2.5% over the next years from 3.5% in the decade that ended in 2007. The process has already started (see the pic).This is truly a techtonic shift, considering the fact that consumer spending propels three quarters of this country's economic activity.
I am conservative in my assessment of the timeline because I feel a little nauseous, like in the rollercoaster, from the staggering amounts of liquidity the White House and the Fed are infusing into the economy. These guys are great. For the sake of reviving the economic growth, they are trying to reverse the inevitable slowdown in consumer spending and to push responsible buyers, like myself, to spend their savings faster - in anticipation of forthcoming high inflation and very high interest rates.
