Some Like It Hot

While summer temperatures are going up, what is rising more rapidly are local home prices. Even after 4 years of appreciation, this year’s market shows no signs of weakening with multiple offers for many homes resulting in double-digit appreciation for the majority of prime Silicon Valley cities in the first half of 2014.

Historically, the local housing market appreciates in 7-year cycles, so we would typically expect another 2-3 years of appreciation before leveling off (or a slight decline). However, we project that the current period of appreciation will be of longer duration, fueled by an amazingly strong local economy, continued venture capital investment, the upturn in Silicon Valley hiring, low interest rates, and expanding in-bound investment. While this overall upward appreciation has received considerable attention, several of the micro trends impacting the market have not been spotlighted. A savvy home owner should be aware of these.

Trend One: The Escalating Premium for New Construction 

Though the influx of overseas investors, particularly Chinese, has received a lot of attention, little focus has been paid to how this has affected various segments of the market place. Chinese buyers, as well as buyers with high-tech occupations, are now particularly focused on new construction. Though new homes have always commanded a premium, this premium has shot up as buyers from China and elsewhere desire both open floor plans and homes that have never been lived in. Consequently, the value of a tear down property has spiked up as builders, both custom (building for themselves) and speculators (building for profit), are purchasing parcels for their projects. The rising premium for new construction has translated into greater appreciation in cities such as Atherton (up over 33% in the last 6.5 years (2008-June 2014)) where building is relatively easy. In contrast, Woodside, where building regulations are very strict and building expenses are nearly cost prohibitive, is up only 5% in the same time period.

Trend Two: Top Schools Fuel Soaring Property Values 

The premium for great schools, particularly in communities with top primary and secondary programs, is also appreciating. For stark contrast, in the last 6.5 years Palo Alto has increased by over 53%; whereas Redwood City experienced a much lower appreciation of 30% during this same period. While there are many intangibles incorporated into these numbers, a major reason for this discrepancy is that buyers who work in the technology industry and others know their current success stems from an excellent education.

Trend Three: Urban Amenities Yield a Walkability Dividend 

Another factor that influences value in buyers’ minds is walkability. The majority of buyers today come from other urban centers where they prize the ability to walk easily and safely to parks, stores, and schools. This holds true not only for domestic buyers coming from other tech centers such as Boston, New York, Austin, Seattle, or San Diego, but also for international buyers coming from Shanghai, Mumbai, or London. This desire for a walk-friendly environment transcends city boundaries, and has even created huge disparities in appreciation between neighborhoods.

For example, downtown Mountain View, with its cosmopolitan restaurants and shops has seen its home prices surge relative to other parts of town. Specifically, the downtown area saw over 40% appreciation compared to the Sylvan Dale and Whisman neighborhoods, which saw appreciation of 2% and 10% respectively in the last 6.5-year period. Similarly, the downtown revitalization movement in North Los Altos, spearheaded by Google cofounder Sergey Brin, has translated into above-average appreciation, rising nearly 42% in 2014 versus 28% for more removed South Los Altos.

Directly correlated to the premium paid for walkability is another continuing trend: hillside communities are less desirable compared to pedestrian-friendly communities in the flats. For example, Palo Alto appreciated 53% in the 2008-June 2014 time period; whereas, Portola Valley and Woodside grew 22% and 5% respectively. Given the disparity in appreciation, buyers will perceive hillside communities to be relative bargains.

This desire to live in close proximity to shops and restaurants has culminated in the migration of many Generation Y buyers to San Francisco. Many of the Facebook and Google Millennials prefer the chic urban environment of the Marina and SOMA over the suburban Peninsula or sprawling city of San Jose. As both job creation and wealth creation by market-cap-growth become increasingly focused on search and social networking, and away from semiconductors and heavy research and development, we project greater appreciation for San Francisco and the prime Silicon Valley areas of Mountain View (Google, LinkedIn), Menlo Park (Facebook) and Palo Alto (VMware, Skype, Palantir, Tesla, and others).

Trend Four: Rising Prices Result in Lower Inventories, Which Result in Higher Prices… 

Whereas an increase in pricing typically results in an increase in supply, the converse is true in Silicon Valley real estate. Rising prices generally result in a reduced housing inventory. A major reason for this paradox is that increased housing prices result in more capital gains being paid. Many sellers are choosing to hold on to their properties whenever possible so that when they pass away, their heirs can avoid capital gains through a stepped-up basis. Palo Alto experienced a more than 21% increase in median home price in 2013. Over the same period, there was a 17% decrease in the number of homes coming to market. The same pattern is occurring again this year. This downward pressure on supply minimizes the probability of any large decline in prices in Silicon Valley.

With all of the excitement of this recent appreciation, we have heard residents voice concerns over the possibility of another housing bubble. We do not foresee any likely drop in local real estate values for several years due to the positive fundamentals driving our market. The booming local economy, strong local schools, exceptional demographics of the fastest growing county in California (Santa Clara), continued job growth, and low interest rates will continue to exert upward pressure on the local housing market. In addition to spurring demand, the lack of supply also provides a buffer against any large drop in housing prices.

Although the months ahead will bring sunshine and heat, they are nothing compared to our red hot housing market!

 

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