GREAT question; we’re glad you asked! The answer is relatively simple; you need to carefully differentiate between media reports about the national real estate market and the local real estate market.

It’s important to remember, real estate follows true principles of economic supply and demand. When supply is low, demand for each available home is increased, which pushes prices upward; when supply is high, demand for each available home is decreased, which results in lower prices.
Also remember, our local market seems to operate on a different planet than the national market.

Nationally, it’s pretty much gloom and doom in most areas. Inventory is rising close to all-time highs in many areas. Prices are declining in the vast majority of them. The number of homes heading into foreclosure, where the owners are falling behind in the mortgage payments, is increasing each month. And the number of homes being foreclosed on and auctioned off is on the rise.

Locally, however, it’s a different story. We do have rising inventory, and fewer transactions, but it’s not across the board. In Santa Clara County, areas which have high performing schools, such as Los Gatos, Saratoga, Cupertino, Sunnyvale, Los Altos, Mountain View, and Palo Alto, have not had huge increases in inventory. Those areas are (and may always be) in high demand, so the listings sell before they have the chance to pile up and increase in number. This demand has also kept the prices from slipping very much.

As you head south, the story follows the national headlines. In many areas of San Jose, and further south in Morgan Hill and Gilroy, the market is VERY slow. There are large numbers of foreclosed homes coming on the market, and numerous short sales. The prices have dropped and are continuing to drop. These areas were in the prime price range for the “no qualification, no verification” loans that were so popular with first time buyers. Most of those loans were at adjustable rates, and as the adjustments kicked in, many homeowners couldn’t handle the larger, adjusted payment, and went into foreclosure. As the foreclosed homes come back on the market, the inventory naturally rises.

The secret is that not all properties hit rock bottom at the same time. Many properties have already hit bottom and they have already been purchased. Somebody else got the deal. Some properties will never hit bottom; the sellers will simply remove them from the market and re-list then in better, more expensive times. You can describe the market like this: If you threw a handful of small rubber balls in the air, they would not all hit the ground at the same time. They’d all bounce at different times, just like individual house prices.

Not every seller will come to the same conclusion at the same time. A     property is not worth what the seller wants, what the seller paid or what somebody else paid. A property is worth what a willing and qualified buyer will pay today, and not a penny more. The good news is sellers are starting to figure that out, one at a time.

The trick is identifying the bounce — and when to buy a specific property. This is particularly important with investment properties. As an investor looking to maximize profits, the price of a specific property is at rock bottom when the return on investment is better if you buy the property than if you leave your money where it is. Compare the real estate rental income and positive cash flow to the other investment options we all have, i.e. stocks, bonds, savings accounts, etc. As real estate prices come down, and consequently the mortgage payments and taxes come down, while at the same time the demand for rentals is growing, at some point the positive cash flow will make the investment irresistible. That is the bottom for an investor.

You must ignore everybody else and their investments. What we see now in hindsight is that many people paid too much when they invested in a seller’s market. Remember, for you to win, somebody else has to lose. Because so many people are losing so much of their equity, it makes your ability to win much easier in a buyer’s market like we’re in right now.

In a stable market, real estate prices are not driven up by investors. Home owners should be the predominant driving force. When a renter sees that their rent is higher than what they would be paying if they were to buy a similar property, the tenants tend to once again convert to homeowners. That is the bottom line for tenants. We know not all tenants have what it takes (income, savings and credit) to secure the American dream of home-ownership. Consequently, there will always be tenants and they will always need investors like us to provide them with a home.

It’s been years since we’ve seen prices low enough that we could invest in nice properties in great locations. If you’ve ever been tired of hearing, “I remember when I could” or “I should have bought them all when I had the chance.” Now you can. You have a second chance — take advantage of it!