Buying a house in northern CA: a bad idea?
Question: A friend of mine is considering buying a house in northern California, in the San Jose area. He can only afford an “adjustable rate mortgage”, i.e. one with a fixed rate for the first three years and a floating rate afterwards. I think this is a bad idea, because with interest rates likely to go up and house prices likely to go down, he might have serious difficulties paying or refinancing his mortgage three years from now. What do you think?
Answer: I think your friend will have lots of company.
It will be interesting to hear the rationalizations those people come up with when the s*** hits the fan. Perhaps we should start a “rationalizations” thread so we can send them good rationalizations to make them feel better while they go through bankruptcy. I bought two properties in Northern California, one in 1990 and one in 1993, and in those days people told me it was a bad idea. But it turned out to be a very good idea, because prices just kept on going up and up. Nowadays a lot of people are still saying investment in California is a bad idea. True, things could be different, who knows. Anything could happen. While it the premise that interest rates may go up in three years may be true, the argument about house prices going down is not. San Jose/Silicon Valley economy is rebounding but more importantly the real estate market is based on the basic fundamentals of supply and demand. The fact is that there are more buyers in the area than sellers most of the time since the area has high paying jobs, great weather, and interesting in many ways to live in. The fate of the area is tied to innovation and innovation pipeline is still flowing. More than one fifth of the world venture capital is the area etc. Innovators from through out the world are still coming to Silicon Valley to launch their products and companies. The doomsayers have been saying that the housing market will crash in Silicon Valley for the past four years. They have been wrong for four years but more importantly they have missed many profitable opportunities to own real estate in San Jose/Silicon Valley. Who knows may be they will continue to miss the point or they may get some wisdom and start getting to know the real estate market better and clear their misinformation that they disseminate freely to friends and others.
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