Is the Silicon Valley Market About to Peak?

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What is happening with Silicon Valley real estate in the early months of 2016? To find out, it’s important to look at what drives the industry, the economy, and jobs. Nationally, we’ve seen strong job growth, and here in Silicon Valley, it’s been amazing. Here’s what we’ve seen in the last year:

• 55,000 jobs were created.
• 34,000 people moved here.
• 5,559 new permits were issued for construction.

As you can see, the amount of permits for construction falls well below the number of people who have moved to the Silicon Valley area. This has resulted in a shortage of 25,000 homes, which has only exacerbated our already low inventory. The result was the big run up in prices we’ve seen so far this year.

I'm expecting the Silicon Valley market to top either late this year or early next year.

If you want to know where the market is heading, it’s important to take at the five things that drive real estate:

1. Sales: The number of sales in our area spiked in 2012 when the real estate market bottomed. We’ve seen a decreasing number of sales since then.
2. Available inventory: The reason sales were so high in 2012 was that there were many homes available. The recession forced many homeowners to sell their homes, and many were scooped up cheaply through short sales and foreclosures. Since then, we’ve been hovering around 1.5 months of inventory, which is astonishingly low.
3. Prices: As mentioned before, home prices bottomed out in 2012; the median price of a Silicon Valley home at that time was only $551,000. As the market recovered, home prices appreciated rapidly up until 2015, when the median homes price was all the way up to $845,000. That’s a 40% increase in housing prices in only three years, a number that is not sustainable in the long run.
4. Interest rates: The reason prices have been able to run up is because interest rates have remained relatively low. However, now that the market has made a strong recovery, the Fed has announced their plans to start raising rates -- the only question is when. Most experts anticipate rates to increase throughout 2016 and into 2017.
5. Affordability: Rising interest rates, of course, will negatively affect buying power. Back in 2013, 36% of first-time home buyers could afford to purchase a home. That number has decreased each year to the current number of only 16% affordability. Last time we saw this kind of decline, affordability dropped to 11% and the market topped.

So, what does all of this mean for 2016? First, I think that sales will continue at a steady pace (+2%); second, I predict prices to continue their rise (+7%) because of the low supply and high demand of homes; third, interest rates are going to continue to steadily rise through the 4% ranges; and lastly, I think that the rise in home prices is going to drop the affordability rate below 15%. I’m expecting the Silicon Valley market to top either late this year or early next year.

Historically, the US economy goes through seven-year cycles. Since the last market top was 2008, we’re due for another one. If you are a buyer, we highly advise against trying to time the market because the longer you wait, the higher interest rates are going to increase. Think of it this way: If the market dips by 10%, and interest rates only rise 1%, your monthly rates will be the same. In other words, if you’re ready to buy, there’s no reason to wait -- get in the market now while rates are low.

If you plan on selling, this year would be a great time to do so. Prices are on the rise and there is a massive shortage of homes in the Silicon Valley area. This demand doesn’t seem to be going anywhere, so we recommend selling your home before affordability drops and home prices peak.

If you would like additional advice, information, or real estate assistance of any kind, don’t hesitate to reach out to us. We’re always available to help you make a better life through real estate!