Thanks for taking the time to comment on the site, and for your nice words about the blog! Much appreciated.

These are outstanding questions. You did a phenomenal job summarizing some of the most common questions that pertain to this market. I’ll give you my insights below:

1. You’re correct. I have been stating for months that unemployment (and the fear of unemployment) is the single biggest factor that is keeping buyers out of the market. How are the buyers who are forging ahead dealing with this issue? Some pick a price range and a down payment that will allow them to get by for an extended period of time on one income. That price may not be as high as the Median of price of $950k, but prices have dropped enough that there are more options in the $700-850k range than ever before. This may mean coming up with a much larger down payment (we’ll discuss that below.) It’s also important to note that you can now get a much more aggressive rate than 5.375 for a 30-year fixed up to $729k. One of my clients was approved at B of A for less than 4.5%…that makes a big difference too. In my opinion, this is why the sub-$1M is the most active right now.

2.) The stock market is certainly in the toilet, but as recently as 2-3 years ago it wasn’t. I know several colleagues of mine in Silicon Valley (my previous life) who took significant equity out of their positions when the market was high, and kept it as cash. I have to believe others have done so as well. It may be hard to believe, but there is still a stunning amount of cash still floating around in this area, even in spite of what the stock market has done.

3.) Most of the buyers that I’m working with who are interested in homes below $950k are actually first-time buyers who are currently renting, so they don’t have to sell before they buy. As I mentioned in the post, this wave of first-time buyers is crucial to enabling the move-up buyers to get into homes >$1M.

4.) I don’t have a good answer for you on this one, because this phenomenon isn’t new. The divergence between wages and home prices has been happening for decade, yet that hasn’t been a big factor in stopping the home market (perhaps until just now.) I really think the amount of cash that buyers are still bringing to bear is offsetting much of this.

I hope this answers your questions. Every buyer has their own unique situation, so no single explanation fits all of them. I do know that buyers are really starting to look in earnest now, so they’re comfortable with the issues you outlined above.

Thanks again for the great questions.

CG

First, I want to say how much I appreciate your efforts on this blog. I know it must be a lot of work to maintain and have been following your blog for a few months now.

My comment is that I have been really struggling with figuring out how these home buyers can afford the homes that have been sold in the past 3 months and am hoping you can shed some light on this. Here’s why:

Median house price is $950k. That means:
Conforming loan ($417k) = $533k down payment
Non-conforming ($729k) = $221k down payment

In either case, the buyer has to have a minimum of a quarter million dollars in the bank. Let’s not forget that this means $0 for an emergency fund and anything over the median house price means a dollar for dollar increase in down payment.

I find that amount of savings quite significant given:

1. Job losses are widespread and are affecting even affluent professionals: Even if one spouse is still working, it is hard to swallow a $5k mortgage (assuming 5.375% 30 year fixed including prop tax). That is $5k/mo before any utilities, food, etc. That means this single income family would have to earn $100k at least just to keep up with the bills.

2. The stock market is in the toilet: It is highly probable that those in the position to move to San Carlos would have investments in the stock market, which would have been their main source of a down payment.

3. Home values falling: A lot of those that are looking to move up from their existing homes are likely to have lost a lot of unrealized gains. So, moving up will not be an easy feat.

4. Wages have not caught up yet: Even at today’s prices in San Carlos, the rate of wage increase in the last 9 years is no where near the rate of increase in the property values. So how are all these buyers getting by?

I hope you can offer some insight.

Thanks.

K