Right lessons, wrong lessons.

CNBC says “7 major housing markets now ‘overvalued'”.  Amazingly, Silicon Valley isn’t one of them.  Maybe the Valley has finally turned the economists into believers.  Or maybe it’s finally worn them down.

Cities that are on the “overvalued” list?  You’ll never guess.  None are in California!!!  Let me repeat that:  none are in California!!!  Four–Austin, Houston, Dallas and San Antonio–are in Texas.  The remaining three are Charleston (huh?), Miami and Washington D.C.  While Texas housing markets are at “historic highs”, Charleston, Miami and Washington D.C. “are still well below their 2007 levels”.

Meanwhile, Silicon Valley is well above its 2007 levels.  Way well above.  Way way well above.

Here’s a pearl of wisdom that might persuade the skeptics that Silicon Valley home prices aren’t completely out of touch with reality, even though they’re far beyond the reach of anyone earning the Valley’s median income:  “Miami is being fueled by foreign cash, which accounts for the gap in home prices and local median incomes”.  In other words, home sellers don’t care where the money comes from–from here, or from abroad.  They’re funny that way.


And it’s not just foreign investors that are driving median wage earners out of the Silicon Valley real estate market.  With its barbell-shaped demographics–a large population of techies and their camp followers at the top, a shrinking middle class, and a large population of service workers at the bottom–Silicon Valley’s median income is becoming increasingly irrelevant as a real estate metric.  If the middle class isn’t buying–can’t buy–homes, it doesn’t matter what its income is.

But what I find most instructive is a comment on this article when it was reposted to Realtor.com:  “…if the economy fails again for any reason, these markets are overvalued”.  The same could be said, and is being said, about the Silicon Valley real estate market.  It makes a great bumper sticker, but a lousy market insight.

Because the lesson of the last bust isn’t that real estate is too risky–“people lost their homes!”.  And the lesson of the last bust isn’t that what goes up must come down, and the more it goes up, the more it must come down.  If that were true, Silicon Valley homes would be selling these days at 1994 prices instead of five times that.

trumpet fanfare

The lesson of the last bust (trumpet flourish please) is that:

  1. real estate is cyclical, and
  2. real estate cycles are driven by economic cycles, which is why
  3. when a local economy softens, home prices soften
  4. and, furthermore, cyclical booms and busts can be exaggerated by other external influences, such as too-easy credit, but!
  5. in resilient, diversified areas like Silicon Valley, homes prices have always gone up over the long term.

What’s ironic is that the people who learned the wrong lesson from the real estate downturn–this will all end in catastrophe!–are convinced that today’s eager, motivated home buyers didn’t learn any lesson.

copyright © John Fyten 2015






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