This risk avoidance stuff can be risky.
Irony is good for you, as long as you're not standing near it when it blows up, and one of the most ironic situations I've run across is the risk inherent in risk avoidance.
How's that? Say you've decided, as many have, that buying a home in this market is too risky. Note the phrase "as many have", because it immediately puts you behind the eight ball. "As many have" means "trend", and a "trend" is a large group of people who create more demand for a scarce resource. This particular trend creates demand for a scarce resource called rental housing.
So now you're in the same boat as the hordes of buyers who drove up prices of another scarce resource, homes for sale, not long ago. And if you think we have plenty of rentals to meet this increase in demand, you haven't looked lately. Remember, we can't slam together another hundred thousand units like they can in Modesto.
So let's see what we have: more demand + fixed supply = higher rents. And, I might add, less selection. In a tight market you take what you can get and learn to live with it. Just like the sales market, not so long ago. So instead of offering safety, risk avoidance presents you with the risk of rising rents and less selection.
But wait, there's more! You're renting just as the local economy adds jobs. If you doubt this, just put a rental on Craigslist and count the number of calls you get from out-of-area cell phones. New hires flood this area, competing with you for that scarce resource, rentals. And if history repeats itself, in a few years many of them will be competing with you to buy a home.
So now the risk equation is: (even) more demand + fixed supply = (even) higher rents. And even less selection. And we haven't factored in what might happen in a few years, if and when you think it's safe to get back into the sales market.
But wait, there's more! You're leery of buying a house, but you're tired of living in a cramped apartment built about the year your parents were born. You want the space and privacy of a single-family home, but you want it "risk free" by renting. But here again, you're part of a trend, and by now you know what that means.
I won't revise the risk equation just yet, because I've saved the coup de grace for last. The hot sales market of the past eight years persuaded many landlords (exact number unknown and unknowable but apparently sizeable) to take the money and run. If I had a nickel for every obvious ex-rental single-family home I've seen for sale since 1998, with its Eisenhower-era kitchen and its scorched-earth landscaping...and it sold with multiple offers! Every sale of a rental inevitably meant one less rental, because they weren't being replaced: rising home prices and declining rents over the past five years have made owning a rental home a cash-hemorrhaging proposition.
So let's diagram the final risk equation: (even) more demand + (less) supply = your 2006 single-family rental market. Fierce competition. Rising demand that drives up housing costs 10 percent a year. You, pouring money into a money-losing proposition. And years of it, if it's anything like last time. (I was there. I go way back.) A wave of new arrivals to compete with in a few years when you decide it's finally safe to get back into the sales market.
This is one risk-avoidance strategy with lotsa risk.
Four lessons.
First, in real estate there's never safety or savings in numbers. The housing market isn't a Costco buying club where large groups leverage their purchasing power. Just the opposite. The advantage real estate offers is that it rewards anyone who shows up and hangs on; no market savvy is required, and that's a mighty good thing. But real estate especially rewards people who buy when common wisdom says "don't buy". Why? Because you don't beat a market by joining the stampede from one part of it (in this case, for-sale housing) to another (rental housing). In fact, these stampedes create opportunities for those willing to go in the opposite direction. Just ask the brave souls who bought right after 9/11. They'll lose their home equity about the time we're all standing in bread lines.
Second, the desire to buy Silicon Valley real estate didn't end in 2006, just as it didn't begin in 1999. People who've been through only one market cycle—or weren't paying attention during previous cycles—don't realize that demand for homes has gone up and down here since the housing market existed. Of course, some say the last boom was positively the last boom, and that it's all downhill from here. But some people always say things like that, and this area's long history of self-renewal contradicts them. The claim that Silicon Valley's prices have exceeded its desirability ignores another real but regrettable truth: the transition, since at least the mid 1990s if not before, of this area from one many can afford to one that only the technological elite and its camp followers can afford. Are we on our way to a society with only two levels, VCs and waiters, with the middle class exiled to low-overhead Oregon? It's not an uplifting story, but what might be called the "Palo Alto-ization" of Silicon Valley explains our high prices more convincingly than the "outbreak of mass stupidity" theory the bubbleheads pin their hopes to.
Third, this risk avoidance stuff is risky. Choice is never as simple as toggling between "bad" and "good", "risk" and "no risk". No, decision-making is more like turning a potentiometer, with "extreme risk" at both ends of the range and blends of risk in the middle. Each point in the range has consequences, often unintended and unforeseen. That's particularly true of home buying, where there is no perfect time to buy, only shifting markets offering shifting combinations of risk and reward.
And finally, risk isn't something inherently to be avoided. I'm thinking of the renter I met at an open house who looked me straight in the eye and announced "I'll never put my money in something that can lose value". Sound smart? Think about it. Think of all the things he's bought—clothes, appliances, cars—that lost value the minute he left the store. Think of the investment strategy—CDs that don't even keep up with inflation—this kind of risk avoidance forces him into. Think of the rent he pays that creates long-term wealth for the person who accepted the risk of buying the condo he rents.
So instead of rigidly avoiding risk, base your decision on whether the reward appears to equal or exceed the risk. Home buying always involves risk, as well as reward, in any market, buyer's or seller's.
As does renting.
Which brings you to the question every qualified homebuyer asks and answers every day, knowingly or not: do you think the rewards of homeownership equal or exceed its risks?
In other words, are you ready to buy?