(c) copyright, View from Silicon Valley, 2007. All rights reserved.
The universal belief here is Silicon Valley housing
will forever remain immune from the laws of economics. After all, everyone here has tons of ready cash from massive
appreciation in their current house, high wages, rich stock options, fantastically successful businesses or... insert
the big money propaganda item of your choice.
Since "everybody" is so rich here, a credit crunch should
have no impact on sales or prices, right?
Rates and lending standards could go to the moon and everybody
would just keep buying, right?
We did a little research. As late as June 9, 2007, a rate sheet attached to a $1,999,000 1,650-square
foot fixer upper read:
"4 WAYS TO PURCHASE THIS BEAUTIFUL HOME" (sic):
---
Monthly ---
# Down 1st Loan Rate Mort.Amt. Payment Taxes
Total
1 20% 5 Yr I/O 6.250%
$1,599K $8,320 $2,082 $10,411
2 30% 5 Yr I/O 6.250%
$1,399K $7,288 $2,082 $9,370
Oh wait, that's only 0.25% more for a $1.5M 30-year fixed mortgage!
Well maybe these rates were set too early to really reflect the effects of the so-called credit
crunch?
This rate sheet assumes you put down $1.250M cash. Even so, sub-7%
seems like very cheap financing for $1.500M.
Finally (at least for today), we pulled a rate sheet for a $1,688,000 listing on
October 14, 2007. Surely rates by this time will be much higher? Reflecting the headlines we keep reading about
how restrictive lending standards are going to kill the housing market?
---
Monthly ---
# Down 1st Loan Rate Mort.Amt. Payment Taxes
Total
1 20% 5 Yr I/O 6.250%
$1,350K $7,033 $1,759 $8,792
2 20% 7/1 ARM 6.375%
$1,350K $8,425 $1,759 $10,184
With a $338K down payment, the buyer gets that 0.25% back off the
mortgage rate. However, he (or she) does get hit up for a point ($13,500), bumping up closing costs to $18,905
to borrow $1.35M. With a monthly nut of ~$10K, who is going to call off a deal over an extra $20K? The
reality is prospective buyers will probably over-bid the asking price more than $18,905 just to get to
the closing table.
I clearly remember feeling relief when 30-year fixed rates ticked
below 8% in the late-90s when trying to buy a house (with a conforming mortgage, no less). Again in 2000,
the rate was over 8% unless you "bought" it down.
Quibble if you like, but current rates have
virtually zero impact on Silicon Valley house prices. Actual rate sheets pulled the last couple months
show buyers can still borrow $1.35M (and up) at rates below 7%.
Conclusion:
The widespread belief is "it's different this time" with Silicon Valley housing
prices. They're not driven by profitless dot.com start-ups. The stock market is not in any kind if bubble.
If credit conditions will be responsible for turning house prices
down in Silicon Valley, we still have a ways to go.
On the other hand, we think a comment in John Hussman's weekly commentary
actually hits on the key variable for Silicon Valley housing:
"suppose that the 10-Q of this possibly hypothetical
company notes that there are outstanding option grants to employees of 3.4 million shares at an average exercise price of
$152, and another 11.5 million shares of outstanding option grants at an average exercise price of $244. If the current stock
price is say, $645, you could whip out a calculator and confirm that the company has committed stock to employees
worth $6.3 billion (the value in excess of the option strike prices), which is not much less than the total amount
of earnings that
have been retained to-date."
Anybody recognize
this company? Or disagree that a turn-down in its stock price, from whatever level it finally exhausts itself, will impact Silicon
Valley real estate prices?
* * * * The above and any linked article,
website or advertisement are not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial
product or service. Buy and sell at your own risk (just like we do.)
