While a rising tide raises all boats, the wave of appreciation that is hitting Silicon Valley housing is uneven and has ebbs and flows based on consistent trends in the marketplace. Overall, most prime cities in Silicon Valley have seen double digit growth in both 2013 and in the first quarter of 2014. However, this appreciation is not uniform, and the cities that saw the most appreciation in 2013 are rising at a lower level as other housing markets race to catch up.
Generally, Palo Alto is the epicenter and leading indicator of local housing appreciation. This was the case in both 2012 and 2013, with Palo Alto leading the pack of local cities with its average price rising by approximately 17% annually – higher than any of the other surrounding cities. In the past, the trend in Silicon Valley is that one area or city, such as Palo Alto, appreciates first. This first wave of appreciation then pushes buyers to nearby cities causing Palo Alto to plateau. Then, when these nearby cities rise close to parity, buyers are pulled back into Palo Alto, which will then experience appreciation again, although less rapidly than other locales.
With Palo Alto appreciation nearly double that of adjacent cities in recent years, buyers realized that greater values and opportunities could be found elsewhere. In the recent Forbes article, Ken DeLeon, Top Silicon Valley Sales Agent: Why Chinese Buyers Love Palo Alto, I illustrated this pricing disparity by showing that in 2006, the average home sales price in Palo Alto was only 3.34% higher than Menlo Park, whereas in late 2013, that pricing gap was nearly 39 percent! While the pricing discrepancy is more extreme than normal, the trend of Palo
Alto becoming relatively overpriced, and then buyers focusing upon other cities frequently occurs. This has been the case in the first quarter of 2014.
So far, the stars of the first quarter of 2014 have been the cities that did not shine as brightly in 2013. For instance, comparing Menlo Park’s average sales price of 2014 relative to 2013 shows a jump of 28.4 percent! Los Altos, which has benefited from its revitalized downtown and rapidly improving high school test scores, saw a solid gain of 16.7% and is one of the strongest markets, with homes within walking distance to downtown jumping the most. As an extreme example, a ranch style home near downtown that was priced below $1.9 million jumped nearly 60% to $3 million.
Another example of push-pull appreciation has been that lower end homes have jumped so much in the past two years that more buyers are pushed towards buying homes over $3 million, where there are more relative bargains as you begin to exit the feeding frenzy of double digit offers. This push caused both Los Altos Hills and Atherton to see the best appreciation of any market, with average sales prices more than 35% higher than they were in the first quarter of 2013. With the jumps experienced by Menlo Park and Los Altos for mid-range homes and Los Altos Hills and Atherton for upper-end homes, I forecast that buyers will be pulled back to Palo Alto and lower-end homes. Generally, appreciation in Silicon Valley is front-loaded toward the beginning of the year, so while I anticipate continued appreciation, the rate of double digit appreciation should slow down. The long-term trend of lower inventory shows signs of continuing in 2014, pushing prices higher as supply declines. Overall, 2014 appears to be another strong year of double digit appreciation for the Silicon Valley housing market.