“This time it’s different.”

Those who cannot remember the past are doomed to repeat it.

George Santayana

It was as predictable as a Silicon Valley boom: as soon as local real estate at large, and not just a handful of favorite neighborhoods, finds itself in the throes of yet another upsurge, the skeptics step forward. Some people just don’t deal well with change.

No, I’m not saying that this boom will last forever. I’m not even saying that it’s hit every market segment, although it will, sooner or later. Nor am I saying that, even during the boom, the price trajectory will always be upwards ever upwards. We’ll have our mini-peaks and mini-valleys, and maybe some of them won’t be mini.

But I am saying that we should all wrap our minds around the idea that Silicon Valley real estate has helacious booms. We attract people with lots of money. These people are often intensely competitive, or they wouldn’t be where they are. And this area has its charms. So do the math: lots of money + competitiveness + quality of life = bidding wars. And the developers can raze all the obsolete unleaseable office buildings they want and build all the condos they want, in all the second-tier markets they want, next to all the freeways they want. But we’ll never have enough here of what most home buyers really want, a single-family home in a safe neighborhood with good schools, parks and shopping. We won’t, because there’s no place to build them.

That’s a fact. The most popular cities on the mid-Peninsula were built out by 1960. The South Bay? 1970. Want to do anything more complicated that replace a small old home with a large new one? Then get ready for a years-long all-out war with the neighborhood. Which means that until and if the Silicon Valley dream/money-making machine goes belly up, each wave of highly-paid, highly-competitive, highly-motivated home buyers will bid up the price of a limited number of housing units.

Yet people have been denying this simple fact for years. Every time we have a boom, bet on them to say, “This time it’s different. This time it’s all smoke and mirrors. This time Silicon Valley is nothing more than a paper tiger with holes in it.” If reality doesn’t fit their spreadsheets, it’s shown the door. If reality blocks their path, they invent some magical mystery tour around it. So here we are again, kicking off the third boom of my fourteen-year career. And here we go again: “This time it’s different”.

I don’t blame the newbies for not knowing history. I don’t blame them for not seeing the old familiar patterns play again. I don’t blame them for retreating from the market “until things settle down”. But I do wonder about the old timers, the people who’ve been through a boom or three and still deny this one. How electric does the real estate market have to feel before they pick up on it? How much off-the-wall energy, winning-bidder heroics, losing-bidder dismay and all-around milling-about market confusion has to smack them upside the head before they say “this is real”?

Are we in a bubble now? Yes, we’re in a bubble, but it’s the kind of bubble that raises home prices over time. Is this bubble sustainable? Yes and no. No, prices aren’t going up 10, 20 or 25 percent every quarter for the next five years. But, yes, I believe that the price increases we’re seeing now are sustainable. We’re in year one, and in some cities year two, of what will be, if history repeats itself, a five-year run. Springs like the one we’re having now, early in the up cycle, are why homes in our favorite neighborhoods cost more now than they did ten years ago. Prices don’t creep up steadily over the course of a year or a boom, at least not here. In a typical boom year prices spike, then they flatten, and they may even sag. But it’s the annual price increases in the early years of a boom that stick, and those price increases happen in the spring, when buyers always outnumber sellers.

Deny this if you wish, but at your peril. Springs like Spring 2012 may be hard to digest if you’re a home buyer or their agent. But they are a legitimate and organic feature of local real estate.

So what could deflate this bubble? Inventory, and lots of it. Where will this inventory come from? Some are convinced it’ll come from the masses of homeowners allegedly waiting for Facebook’s IPO to crank out a few thousand extra millionaires. Can you take this theory to the bank? I don’t think so. First, does anyone really know why there’s so little inventory these days? No. They can guess all they want, and stand around and pontificate all they want, but no one has, or will, survey local homeowners to see why they aren’t putting their homes on the market. Second, even assuming that Facebook mania is the culprit, can anyone safely assume that this strategy is any more executable than any other market-timing strategy based mostly on wild-eyed wishful thinking? Can anyone safely assume that these homeowners will pull the trigger as soon as Facebook IPO money hits the streets? Or will most of them say, “yeah, it sure is a good time to sell, and I’ll call a real estate agent when I get around to it”, and get around to it in a year or three or never? Because a home is a home, not a hundred shares of Facebook to be casually liquidated in the marketplace.

“This time it’s different” reminds me of another popular way to miss the parade, the unconscious conviction that “tomorrow will be like today, only more so”. Both are just ways of denying that life here is filled with seismic shifts. Ready or not.

copyright © John Fyten 2012

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