We live a bit south of Silicon Valley, within commuting distance. During the early-to-mid 2000’s our home’s price skyrocketed. Then during the recession, it plunged and business writers everwhere were saying that that previous upward climb was just a “housing bubble”.
Well, our home’s price (according to Zillow) has now climbed again to just about what it was during that last bubble. Is this another bubble, or is there some substance to it?
Ultimately, no. The Bay area is a popular place to live, and Silicon Valley is a popular place to work. There’s a lot more people who would like to live there, than there is housing for all of them. There may be short-term fluctuations, but if prices drop, it’s not like they won’t bounce back after a few years.
I think it’s a little overheated right now, but not crazy levels yet. Plenty of time to get truly bubbly, but I don’t think we’re there yet.
I bought my house in SF at about the height of the last bubble in 2006 and sold it last summer for about a 20% profit after putting not a whole lot of work into it in the intervening years, so things have been above the previous bubble for awhile. Zillow had us about 30% lower than what we actually got, by the way. And we had seven backup offers all well above Zillow estimates, and all well above asking price. The house was on the market for two days (and honestly, probably could have been on the market for an hour, but we did not accept any offers prior to the two day time period).
I don’t have an answer to your question, except to say that we took our ball and went home. We are renting again for now.
Here’s a quick and dirty test to see if your local housing market is in a bubble. Look at the total cost to buy a place to live, and break that down to a monthly payment. Next look at the total cost to rent a comparable place, and look at that monthly payment. Note that there are some variables here–the renter does not accumulate equity, but has to pay more due because they might trash the place, you often can’t directly compare properties exactly, and so on. So the costs aren’t exactly equivalent.
If the cost to own is wildly greater than the cost to rent, then you’re in a housing bubble. People aren’t buying properties to live in, they’re buying properties because they think the value of the property will go up. But they can’t rent out the property for enough to cover the mortgage. Which means that the real-world demand for that property as a place to live doesn’t exist, which means the price can’t be supported.
So if it is much cheaper to rent a place than to own a comparable place, you’re much better off renting, which should seem like obvious advice.