Today I’m working on an article for another blog of mine on the topic of saving for a down payment and residential real estate appreciation in Silicon Valley. Long story short, right now, home buyers cannot save as fast as the home prices are going up. For some, the saving effort is to get to 20% down or more. For others, the goal is to buy all cash. In both cases, though, the danger is getting priced out of the market while the would-be home owner is putting away money. For people who wanted to buy 2 years ago but decided to wait and save, that now means either not buying at all or buying in less nice home or area than they were targeting.
This is certainly true for home buyers wanting to get into Belwood of Los Gatos and nearby. Let’s look at our corner of Los Gatos and take a sampling of what has happened since 2000 (a “boom year”) for a typical 2400 square foot house on a typical 9,000 to appx 10,000 square foot lot (in Belwood, Belgatos or Surmont). For this, we will consider homes sold in 2000 and homes sold within the last 12 months. I ran the numbers this afternoon on MLS Listings, our local multiple listing service provider.
1-1-2000 through 12-31-2000: a home of about 2400 SF on a 9,000 – 10,000 SF lot averaged a sale price of $860,000 (prices ranging from a low of $750,000 to a high of $950,000). A 25% down payment would have been $215,000 and the loan amount would have been $645,000, using that average number. Many buyers would have purchased with 20% down, and some with 30% or more, though.
Fast forward to today and the last 12 months leading up to today – approximately 15 years later.
6-9-2014 through 6-9-2015: same sized home and lot averaged a sale price of $1,512,000 (prices ranging from a low of $1,350,000 to a high of $1,660,000). This does not include pending sales, of course – just those which have closed escrow.
Home prices have almost doubled in that time.
What kind of profit will these home owners who bought in 2000 see today?
Let’s say our sample buyers in 2000 sold now, paid down their loan (principal and interest payments) and made the needed repairs over time (new water heater, furnace, roof, updating as needed). Perhaps this sample home owner put $100,000 into it if baths got remodeled, pavers added, etc. – it’s not too hard to put that much into a home and yard over time. Using sale prices alone, there’d be $652,000 of equity. Subtract out the improvements and it’s $552,000. If they sell, take away about $90,000 more in commissions and closing costs (estimated). The net equity so far is around $462,000 for our sample home. (And this would be a good time to talk with their CPA, lawyer or financial planner about selling before they get past $500,000 in capital gains if it’s a couple who owns it and has it as a primary residence.)
But the net proceeds from the sale of the home would also include the fact that the mortgage would be paid down quite a bit over 15 years if it were a 30 year fixed mortgage. Very likely at least 1/3 of the original loan would have been paid down, so add at least another $200,000 to what they could clear at closing- or $662,000 more or less. This is despite the dot com bust in 2001 and despite the “Great Recession” of 2008 – 2010.
By holding onto the home, paying it down monthly (and not “using it like an ATM” with cash out refinances), these home owners might have leveraged their original down payment several times over.
Appreciation in this extended neighborhood is strong and turnover is low. For home buyers looking to put down roots in a stable area, the Surmont, Begatos, and Belwood areas of east Los Gatos are hard to beat.
