Market Update: Silicon Valley Housing Shortage

Welcome to our April newsletter. This month, we examine how the Silicon Valley housing shortage contributes to increasing home prices, as well as the market effects of the large increase in mortgage rates since January. To read more about the HOT market right now, check out this post.

Currently, the housing supply is so low that the demand far outpaces the number of homes on the market. The pandemic changed the direction of consumer spending from a focus on services to a focus on physical goods. It also accelerated the rate at which people built savings. With the addition of hyper low mortgage rates, home buying became more accessible to a higher number of people in 2020. 

We expect housing demand to remain high for many years. Even as offices become safer, we anticipate people will continue working remotely, even if only partially. Increased remote work changed housing priorities, contributing to the increased demand. Additionally, as COVID-19 cases continue to decline and vaccinations increase, our futures look more certain. This means that the period of all-time-low mortgage rates is ending, which may boost demand even further over the next several months as buyers try to lock in low fixed rates.

As we navigate an ever-changing economic landscape, we remain committed to providing you with the most current market information so you feel supported and informed in your buying and selling decisions. 

In this month’s newsletter, we cover the following:
  • Key Topics and Trends in April: Silicon Valley housing shortage will continue for the foreseeable future, increasing bidding wars and driving up prices. Mortgage rates have increased 50 basis points in less than three months as pandemic uncertainty wanes.
  • April Housing Market Updates: Single-family homes are massively undersupplied relative to demand, causing prices to appreciate further. Condo prices remain stable.
Key Topics and Trends in April
In order to understand the magnitude of price movements in 2020, we can look at the Case-Shiller 20-City Home Price Composite Index, the leading measure of residential real estate prices in major metro areas. As you can see from the chart below, we take a 20-year view of the housing market. This allows us to see the cumulative home price movement (purple line) and the rolling 12-month change. 
Until the late 1990s/early 2000s, homes acted as more of a store of value rather than a risk asset, in that home prices generally kept up with inflation. For instance, a home bought 30 years ago would be the same price today after adjusting for inflation pre-2000. In the early 2000s, home prices rallied due to loose lending standards/predatory lending, mismanagement of risk, and negligence of financial institutions, which led to the greatest recession since the Great Depression. 

Home prices took about six years (2006–2012) before they began to meaningfully recover, and the early stages of recovery (2012–2014) were the strongest until 2020. The last time home prices rose as sharply as 2020 was March 2006, which was the time home prices peaked prior to the 2008 financial crisis. To be clear, we aren’t comparing 2006 to 2020 in terms of risk. The housing bubble that occurred between 2004 and 2006 was largely caused by financial institutions. In 2020, homes appreciated because of market factors: a greater number of people saved more than expected, and mortgage rates fell to historic lows. This caused the supply to drop to the lowest level since the National Association of Realtors started recording inventory in 1999. 

Months of Supply Inventory (MSI) indicates how quickly all the current homes for sale would be absorbed if no new homes came to market. In more normal times, MSI usually stands at around five to six months in the United States, and three months in California. The chart below illustrates the precipitous drop in MSI starting after the early months of the pandemic. In the short term, home supply is fixed, so the spike in demand ate up the inventory.
Mortgage rates rose significantly, slightly over 50 basis points, since January 2021. This increase in mortgage rates equates to about a 6.5% rise in the monthly 30-year fixed mortgage cost. Usually, this would hamper demand—which it will—but supply is so low that it won’t matter much from the seller’s point of view. Sellers can still expect multiple offers on their listings. If rates rise another full percentage point, we could see a more dramatic drop in demand.
Although we don’t expect the same level of buying in 2021 that we saw in 2020, the environment is right for demand to outpace supply in 2021. In the short term, we may even see a demand spike as potential buyers try to purchase before rates rise higher. As a result, we anticipate a competitive landscape for buyers over the course of this year. 

While the market remains competitive for buyers, the market is making it an exceptional time for homeowners to sell. Low inventory means multiple offers and fewer concessions. Because sellers are often selling one home and buying another, it is essential that sellers work with the right agent to ensure the transition goes smoothly. 

Usually, we write these updates to educate our community with current market conditions. As more real estate agents enter the market, however, we also feel it’s prudent to mention the real estate agent surplus that has manifested over the last 12 months. A career in real estate has relatively low barriers to entry; therefore, at a time when unemployment rates are high and the real estate market is hot, we are seeing a large increase in the number of real estate agents. According to the National Association of Realtors, the supply of homes for sale stands at a little over 1 million, while real estate agents number 1.4 million. There exists a clear imbalance here. Like many careers, wisdom gained through experience becomes invaluable. During this unique time, we encourage you to hire an agent who has successfully navigated market cycles and is, therefore, able to best advise you on your buying and selling strategies.
April Housing Market Updates for Silicon Valley
In February 2021, the median single-family home price rose to an all-time high, and condo prices continued to show price stability. San Mateo had the largest month-over-month single-family home price gains. 
Year-over-year, single-family home prices increased across Silicon Valley counties, up 21% in San Mateo, 10% in Santa Clara, and 18% in Santa Cruz. 
As you can see in the graph below, median condo prices were mixed across counties. Unlike single-family homes in San Mateo, condo prices declined. Condo prices increased in Santa Clara and Santa Cruz.
Single-family home inventory remained lower through 2020 relative to 2019, and dropped even further in January 2021, which speaks to Silicon Valley’s desirability. During the pandemic, fewer people wanted to leave, and more people wanted to move to the area. New listings throughout the year were lower than normal, while sales were much higher. In February 2021, Silicon Valley inventory rose slightly, which is normal for this time of year and may indicate a reversion to historical seasonal norms. Single-family home inventory is only slightly below last year’s levels, and as we move into the spring season we will be closely following new listings and total inventory to gauge the market.
The number of condos on the market declined in February but remains higher than last year.
Both single-family home and condo Days on Market declined in February 2021. As we will see, the pace of sales has contributed to the low MSI over the past several months.
We can use MSI as a metric to judge whether the market favors buyers or sellers. The average MSI is three months in California (far lower than the national average of six months), which indicates a balanced market. An MSI lower than three means that there are more buyers than sellers on the market (that is, it is a sellers’ market), while a higher MSI means there are more sellers than buyers (that is, it is a buyers’ market). In February 2021, the MSI remained below two months of supply for single-family homes and condos, meaning that the market favors sellers.
In summary, the high demand and low supply present in Silicon Valley have driven home price appreciation. Inventory for single-family homes and condos continues to be a strong indicator of price movements, so the spring season, which is typically when sellers come to market, will likely set the tone for the rest of the year. Overall, the housing market has shown its resilience through the pandemic and remains one of the most valuable asset classes. The data show that housing has remained consistently strong throughout this period. 
We anticipate new listings to slow until sometime in April 2021. As we enter the spring season, we expect demand to remain high and new supply to be absorbed quickly. 
As always, we remain committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo. We have been selling Menlo Park real estate for decades and have the knowledge, resources, and connections to help you succeed. Call Maya at (650) 346-1228 or Jason at (650) 307-8060 to get started with the process.
To learn more about Menlo Park Real Estate, read March Update – Low Supply of Bay Area Homes is a Pressing Issue
Maya Sewald + Jason Sewald | Ovation Real Estate | Menlo Park, CA

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