Bubble? What bubble? Bubble? What bubble? (July 29, 2005)

Rents are down and housing prices up -- but that's not stopping buyers from snapping up rental properties in Mountain View

By Kathy Schrenk

If soaring real estate prices have you thinking about buying investment properties, you've got company -- not to mention competition.

It's no secret to real estate trend-watchers that people from the Bay Area have been snapping up houses and apartment buildings in cheaper markets in the American West for several years. But local real estate agents say the pace of such purchases right in our backyard is reaching a fever pitch.

Tom Correia of Alain Pinel is one of a number of local agents who has noticed the trend just in the past few months. In the Mountain View area, duplexes, triplexes and fourplexes, especially, have been selling shortly after they go on the market, he said.

Correia believes the trend has to do with the rise in single-family-home prices. As more potential home-buyers get priced out of the market, they turn to renting. Investors figure there will be a rise in rental occupancy rates and rent costs, he said.

After the soaring rents and nil vacancy rates of the dot-com boom era, rents declined. But they are starting to rebound, albeit very slowly, according to the California Apartment Association. Tri County Division executive director Eric Wiegers said rents for Santa Clara County are still lower than they were two to three years ago, but are up about 1.5 percent over last year. Occupancy rates are down, but by a statistically insignificant amount of one-tenth of one percent -- from 94.4 percent last year to 94.3 this year, he said.

Chuck and Tori Atwell, a husband-and-wife team of agents in Alain Pinel's Mountain View office, have been surprised by the sudden surge in income-property buying. Chuck Atwell thinks people are encouraged by the economic recovery and the fact that the continued increase in house prices means more people have to rent.

"They're very desirable right now because rents are due to go up," he said.

In the past, apartment buildings with a small number of units used to stay on the market for three to five weeks, even if they were priced well, Tori Atwell said. "But now, they're like houses. I myself was looking for a two- to six-unit property, and they go like that," she said.

The trend doesn't appear to apply to houses, however. Most people find that Silicon Valley is too expensive an area to invest in, said Debbie Iturralde of Prudential. Rents haven't kept pace with sale prices, which means the monthly mortgage payments would be much greater than the rental income during the first years of ownership. This is one reason some experts believe Bay Area home prices aren't sustainable.

Those with an eye toward investing locally may take a long-term approach, buying a condo or small house to begin with, with the intent of eventually buying a bigger house to live in and renting the smaller one out, Iturralde said. But more people have been looking in other markets -- Sacramento, Las Vegas and parts of Southern California -- for investment opportunities, even as far back as 2000, she added.

Despite the imbalance between rents and housing prices -- and dire warnings of a bubble and its some-say-impending burst -- sale prices show no signs of slowing.

Real estate information clearinghouse DataQuick reports that median home prices in Santa Clara County are up 17.5 percent from last year. In June 2004 the median was $549,000, and this June it was $645,000.

DataQuick forecasters expect the strong numbers to continue throughout the summer. Several predictors indicate the market is unlikely to falter: Interest rates are still low, demand is strong, foreclosure rates are low and down payment sizes are stable.

"We expect the rest of the summer to be like this," said DataQuick president Marshall Prentice.

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