Appreciation Rate Comparisons Show Surprising Results
A common and understandable perception regarding appreciation rates is that single-family residences appreciate at a higher rate than condos and townhomes. Based on the appreciation rates for the past 17 years (2000-2017), this has been the case for many cities in the Bay Area.
However, for the past six years, this has not been the case for most of the cities where DeLeon Realty sells homes. For these cities, which include Palo Alto, Los Altos, Cupertino, Sunnyvale, Mountain View, Menlo Park, and Redwood City, townhomes have appreciated more than single-family residences (see chart). The same is true for condos in every city, with the exception of Menlo Park. Prior to 2011, single-family residences had appreciated at a higher rate than townhomes in many cities such as Palo Alto, Mountain View, Sunnyvale, and Menlo Park.
The higher appreciation rates for condos and townhomes have been driven by the incredible growth of local tech companies and the corresponding increase in highly compensated and highly educated tech employees. After having helped a number of these employees buy homes in 2017, my perception is that there are three primary factors driving the higher appreciation rates for condos and townhomes: cost, time, and schools. All three of these factors are closely related.
Since the costs for condos and townhomes are roughly 50 percent and 70 percent, respectively, of the costs of single-family residences in the same city, many buyers have no choice other than to purchase a condo or a townhome due to financial constraints. Some buyers who are able to afford more are choosing to purchase condos and townhomes due to the lower purchase prices and their desire to minimizethe possibility of being overwhelmed by huge monthly house payments.
Time is another key factor that seems to be driving buyers to purchase condos and townhomes rather than single-family residences. Commuting and maintenance are two of the biggest time-consumers of the average homeowner today. Commute time is what seems to have been driving much of the incredible appreciation we have seen over the past six years. Since most tech employees are already working long hours, they prefer to minimize the amount of time it takes them to get to and from work. In order to do so, they need to purchase a home in the cities that are near their offices, which ties back to the previous factor—cost. In order to buy close to work, where prices are more expensive, condos and townhomes tend to be more accessible for these first-time homebuyers.
Another aspect of time that is contributingto the higher appreciation rate of condos and townhomes is the perceived amount of time required to maintain the home. With a single-family residence, there is typically a yard that requires maintenance. Many buyers are interested in buying a home that requires as little maintenance as possible, which is what they can expect with a condo or townhome.
As counter-intuitive as it sounds, schools are another factor that has been driving the higher appreciation rates of condos and townhomes. The reason for this is that, since many of these tech buyers are so highly educated, they place considerable value on good schools. Because home prices in good school districts are already higher than other areas, condos and townhomes are typically the only options for these first-time buyers.
While our local cities generally move in parallel, a well-advised buyer remains cognizant of market trends and projected appreciation. Regardless of which type of home you choose to purchase here in the Silicon Valley, you will most likely be pleased with its appreciation over time.
