Why not overbid?
Bombarded with the unwelcome news that almost everyone, including you, has decided that now is a great time to buy real estate, you may be thinking that it's prudent to wait until there's less competition and more inventory. Until the market has cooled off, until things are back to normal.
Which raises an interesting question: is the Silicon Valley real estate market ever "normal"? To you, "normal" probably means "prices have stopped going up, but they're not going down, and I don't have to compete". But to me, "normal" means "prices going up, usually insanely, with everyone competing, or prices going down, sometimes moderately, sometimes insanely, depending on how real the driver was for that particular price range, but rarely prices flattening for long periods of time". To you, "normal" probably means stable, predictable and certain, a comfortable market, an idyllic lull between the equally scary anomalies of boom and bust—which are not, in fact, anomalies but inevitable events: the real twin normals of this market. To me, "normal" is "volatile in the short term, but always trending up over the long term, and always making buyers uncomfortable, whatever it's doing".
Which raises another question: would you ever feel comfortable buying a home in what has typically been the only alternative to this current market of rising prices: a market of declining prices? Because, as I say, it's usually one or the other, feast or moderate-to-severe famine. As I look back over the past fourteen years, it strikes me that we've rarely had periods of calm, periods when buyers could say, "whew!, I still feel good about buying but now I don't have to compete". This isn't Buffalo, held up as a model of price consistency by some economists when, in fact, its consistency owes a great deal to declining population and truckloads of snow.
But for now we won't get into the quest for a comfy normality that exists infrequently if at all, and into the common temptation for buyers to try timing the market. Instead, we'll just see what the financial consequences are of buying a home when buyers compete fiercely for the very limited inventory available.
First, let's look at the average sales price of condos and townhomes, by quarter, in Palo Alto, Mountain View, Sunnyvale, Santa Clara and Campbell since the market for these kinds of (often) entry-level homes ignited last year.
Wow! Great for sellers, but not so great for buyers, right?! Well, it gets even more not-so-great!
Wowsers! Buyers had to pony up some serious extra money over list price to get a home last year. Were successful buyers paying too much?
Let's look at "buyers paid too much in 2012" analytically. What if these homes appreciated faster last year than buyers threw money at them? In other words, what if successful buyers—buyers who "paid too much"—still ended up ahead, and not in years but in a matter of months, even after they "imprudently" out-bid competing buyers?
And, in fact, that's what happened, in the segment of the market we're looking at, in the first three quarters of last year. Quarterly appreciation far outstripped average overbid in Q1 and Q2, and was 1.5 percent greater in Q3. And, if this year is a repeat of last—and it seems to be shaping up that way—we'll see another year of appreciation often giving overbidding buyers a cushion.
Of course, there's no guarantee that appreciation will always cover your overbid in a matter of months. It won't forever, obviously, although it's more likely to now than in a few years when this boom has just about run its course and depreciation is lurking, unseen and unexpected, just around the corner.
But that's not the lesson here. No, the lesson is that inaction carries just much risk as action. Sitting on the sidelines, waiting for more selection and less competition, doesn't eliminate risk, it simply presents you with another kind of risk. Two risks, in fact:
"Inaction carries risk" isn't an obvious lesson—like most great lessons, it's counter-intuitive—but it's a handy lesson nonetheless.