After a 2016 that was plagued by uncertainty, trepidation, and general lethargy on the part of buyers, the 2017 spring season is off to a strong start. While there are a number of different factors that contribute to the newfound surge of the buyer pool, two causes seem to be the most prevalent.
First, there is a general optimism that seems to abound. The uncertainty associated with the election season in 2016 has given way to surprising optimism. Just like investors in the stock market, many buyers are optimistic that taxes and excess regulations on businesses will come down, and investments in businesses will increase. Given that Silicon Valley is so heavily influenced by investors’ sentiments, this has resulted in many people feeling optimistic while also obtaining a sense of urgency to buy in before prices increase.
The second reason is equally surprising. Over the course of the last six months, the Fed has increased the federal funds rate, which results in increased mortgage rates. The general expectation is that the rates will increase in the next 18 to 24 months. Federal Reserve Chair Janet Yellen has given clear indication that she anticipates that rates will increase by at least two percent, which should have a profound impact on mortgage rates and an indirect impact on the real estate market as well.
Interestingly, the increase in rates we have seen so far has stimulated the economy. Because virtually everyone is confident that rates are going to go up significantly, the early rate increases have made homes slightly less affordable, but they have also caused a lot of people who have been sitting on the fence for the last year to finally make a move. Most feel that they should buy a home before the rate goes up too much. This is particularly important in Silicon Valley because, unlike other parts of the country, we don’t see a direct corresponding decrease in real estate prices associated with the increase in mortgage rates.
The main reason for this is that Silicon Valley has a significant amount of cash buyers when compared to other parts of the country. Although mortgage rate increases may make homes less affordable for those who need mortgages, this will not be a concern for people who are coming from overseas who have cash, or for people who have substantial cash either from previous highly appreciated real estate sales or stock options. Therefore, many people who need mortgages feel now is the time to act, before prices continue to increase and rates make homes more unaffordable.
Although there is certainly reason for optimism, there are also some concerns out there regarding the likelihood of the various tax decreases going through. If President Trump’s proposals never come to fruition, we could see the market come back towards a softer sellers’ market, or even a softer buyers’ market. However, if the economy continues to increase like the past four or five months, we expect to see continued growth in the real estate market.