A well-know real estate economist for the Bay Area spoke this week about the outlook for the Silicon Valley real estate market. An interesting perspective.

She said our local economy is growing 3-4 times faster than the national average. Santa Clara County is growing ~7% per year. The other Bay Area counties, such as Alameda, Contra Costa, Sonoma, are growing around 4% per year. By comparison, the national economy is growing slightly less than 2%. Point being that we live in a different world than what you hear on the news.

National economic growth probably goes either faster or slower. The new administration is hoping to generate a 50% increase to 3% with reduced taxes, reduced regulations and $1 trillion in stimulus spending. The down scenario is that this doesn’t workout and the actions result in inflation and a national recession. Even if there is a recession, Silicon Valley’s growth might slow to 4%, which is still twice as fast as the nation today. It is very unlikely that Silicon Valley experiences negative growth any time soon.

High-tech companies in Silicon Valley continue to bring new employees and their families into our local real estate market. The new Apple HQ just opened. The new Google HQ just started construction. Facebook is adding 3,000 employees to fight fake news. LinkedIn is building a new HQ. NIVIDA is the hot new chip company. There are new technologies fueling long-term growth, such as robotics and artificial intelligence. On top of this, the Millennial generation is starting families and looking to trade-in their San Francisco condos for homes closer to work.

As you know, there is very little land to grow the supply of housing. Most of the new construction is high-density apartments and condos to replace commercial and industrial zoning. Not the most desirable family environment. The lack of new homes is compounded with a 40% decline in the supply of new listings for single family residences. Existing homeowners are deciding to stay-put and not move. Why leave one of the most desirable areas in the world?

You think home prices are too high? Forget it. Take San Francisco. It is an international city. Its “sky-high” prices are dramatically lower than other key international cities, such as New York, London, Paris and Hong Kong. Globalization is also driving our local real estate markets. The Bay Area is one of the most desirable areas, especially from mainland China, to invest and live (not necessarily at the same time). Our top schools and universities, clean air, quality food and family-oriented communities will continue to attract worldwide buyers/families/investors.

Home prices are expected to continue rising by nearly 10% per year. Our local economy is growing 3-4 times faster than the national average. High-tech companies continue to hire the best and the brightest. There is no land to build new homes. Local cities are trying to limit new construction.
What is the first-time home buyer to do? Her advice is to buy-in any way you can as soon as possible. Use the still historically low interest rates to leverage a 20% downpayment at 3% (7yr ARM) to realize a nearly 10% per year increase in your total investment. This is one of the few ways to build the wealth necessary to buy the real home of your dreams.

This sounds true to me. Even if you worry about future growth rates, you will have an investment/asset that retains its relative value with our unique real estate market. For example, if/when the market experiences a downturn, the purchasing power of your home remains the same. While the value of your first home may be down, so are the values for the second home. You have built-up equity which empowers you with a larger downpayment and most likely your salary has increased so you qualify for a larger loan.

An interesting perspective. More to follow with future newsletters on this topic.

Bryan

Economic Outlook for Silicon Valley Real Estate
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