Publication Date: Friday, October 10, 2008
A challenge for first-time homebuyers
Entry-level just keeps getting higher
The deal killer: Lenders now require 20 percent down on a home to qualify. That's a big difference from a couple of years ago when some of Pfaff's friends were able to buy homes priced at 10 percent down. Lending requirements have gone up in response to the nation's housing crisis, though locally, the price appreciation of past years has stayed, he said.
Data on the first-half of 2008, from the Silicon Valley Association of REALTORS® (SILVAR) from MLSListings Inc., lists the median price for single-family homes in Menlo Park, Palo Alto and Mountain View at $1,543,000, $1,575,000 and $1,008,000 respectively.
This means Pfaff can expect to be looking at houses that require between $200,000 and $300,000 for just the down payment. He has effectively been pushed out of the local home market.
"Certainly the discussion has come up more often: Should we leave the Bay Area? If we don't have the ability to buy the house now, when?" he said.
What complicates Pfaff's decision further is that he is firmly rooted in Menlo Park. "We want to live here. The industry that I work in, pharmaceutical devices, is primarily here; [I have] lived here for 15 years, my wife, 10 years. Between the two of us we have a lot of friends here," he said.
Pfaff is also competing with families that are not first-time home buyers. Previous homeowners in the Silicon Valley are likely to have increased capital because of the home equity they gained over the years. In Menlo Park, where Pfaff is primarily looking, the median single-family home price went up from $1,255,000 in 2005, to its current median price in the first-half of 2008 of $1,575,000, according to SILVAR.
The current housing market makes it an opportune time for previous homeowners to "move up," but the competition is further prohibiting first-time buyers from entering the local housing market, he said.
The desire to be in Palo Alto and the surrounding cities has created an almost recession-proof area, and what Lupita Terlau, a real estate consultant with Prudential California Realty, San Bruno, calls a "micro-market."
"There are only six houses today, single-family homes under a million, in all of Palo Alto. And it has been the case for the past three months," Terlau said, with the average time on the market less than 30 days in Palo Alto, "which is crazy."
"Palo Alto has the things people want. Quality education, Palo Alto's got it; a strong city government that is responsive to the community, Palo Alto's got it," Tommy Derrick, an independent broker in Palo Alto, said.
Top-performing schools have also had a strong influence on the value of properties as "a vast majority of families take in account the school system," Derrick said. Feras Faraj, a mortgage advisor in Foster City, said that "in regards to housing appreciation versus depreciation, you'll find [areas with] the best schools held their prices."
Even within a city there can be dramatic price differences. Rick Stern, of Stern Mortgage Company in Palo Alto, points out the price difference between Old Palo Alto and South Palo Alto is "a little crazy as you go across Oregon. There's probably a $100,000 to $500,000 difference, within a block; Old Palo Alto has a panache."
Stern made a broad calculation that if you earned $100,000 annually, you could afford a $700,000 property, based upon a recommended 50 percent of before-tax gross income going to monthly expenses -- which would include loan payments, property taxes, insurance, credit-card debit, student loans, car loans and any other fixed expenses.
"The cost is prohibitive for most people. Palo Alto has been gentrified out of affordable housing pretty much," Stern said.
Paul Saba, another potential first-time home buyer, has been looking in Palo Alto -- where he grew up -- for the last four months. He's in the insurance profession, and is a not-long-ago college graduate.
However, due to the resilient micro-market in Palo Alto, Saba said he believes nearby cities offer better-valued homes because they have been more affected by the declining home market.
Other opportunities to find a good value are short sales and foreclosures where homeowners are unable to afford their mortgage payments and have to forfeit the sale of their houses to the lender or bank.
Saba cautioned potential buyers toward these lower-cost alternatives, as they tend to present more hurdles to overcome. Homes usually require extensive repairs, have complicated financial tie-ups, and problems could arise even after making an offer, as "banks tend to run you into circles getting into verbiage," he said.
Saba has approached the home-buying process with a wary eye; his parents looked for two years before finally settling on the right house. He stressed the importance of finding the right loan officer, mortgage broker and real estate agent, through references and research.
And once he finds a house he is interested in, he recommends looking at comparables -- houses with similar characteristics that sold in the area. The key is not to depend solely on the advice of others, because the purchase is in your interest not theirs, he said.
"Nobody has sufficient data to say whether the market is going up and down. There are factors that are way beyond the people that are buying a small house," Derrick said.
Despite careful planning, this insight may be the hardest realization for people looking to buy their first house. Pfaff and Saba have made offers on multiple homes but still haven't found the right house. With time they might find luck shift their way.
Editorial Intern Kris Young can be reached at firstname.lastname@example.org