Here’s Why the San Jose Housing Market Is Having a ‘Mini Crash’ in 2019

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Key highlights from this report:

  • The housing market in San Jose, CA is experiencing a mini crash in 2019.
  • Home prices in and around the city have dropped over the past year.
  • Forecasters predict that prices in San Jose will continue to fall into 2020.

Two or three years ago, the real estate market in San Jose, California was roaring along with home-price gains that outpaced the national average by a long way. Now, the city is experiencing a mini crash.

What is a mini crash in the housing market? It’s a term we just made up. Here’s how we define it:

A mini crash occurs when home prices decline for one or more years, typically following a period of rapid gains.

And that’s exactly what is happening within the San Jose real estate market, as of summer 2019. When measured by house values, the housing market in San Jose, California does appear to be experiencing a mini crash at the moment.

The million-dollar question is: How long will it last, and how far will prices drop? And that’s something we simply cannot answer.

Granted, we are not yet seeing a spike in home foreclosures, like the one that occurred during the real estate crash of 2008. But home prices are dropping steadily within the metro area. So in that sense, this market is experiencing a kind of crash.

In many respects, the San Jose housing scene is a story of extremes. And that story has been unfolding for over a decade now. Let’s take a look back to see how this real estate market went from boom to bust in a relatively short period of time.

San Jose Was One of the Hottest Housing Markets in 2015

Back in 2015, Trulia economist Ralph McLaughlin published a list of metro areas where homes were selling the fastest. These were hot housing markets with strong demand and limited inventory, the kinds of conditions that lead to quick home sales.

According to their research, the San Jose housing market was the second-fastest in the country. San Francisco was ranked #1. Three other California metro areas rounded out the top five.

Silicon Valley tech companies bring in high-earning employees from elsewhere around the country, and also from overseas. This boosted demand for housing at a time when inventory was very tight. That’s why the San Jose real estate market was experiencing such a frenzy of home buying back in 2015.

But a few years later, things began to change…

In 2018, the Real Estate Market Began to Cool

Home prices can only rise so far before buyers start to pull back. After a while, affordability issues and a general unwillingness to pay exorbitant prices tend to reduce demand. And when demand starts to decline, home prices are soon to follow.

Within the San Jose housing market, this kind of trend became noticeable in 2018. An October 2018 report from the national real estate brokerage Redfin listed San Jose as one of severals markets experiencing a notable slowdown.

To quote that 2018 report:

“this spring [2018] there were fourteen metro areas around the country where half or more of the homes that were listed for sale between March 5 and April 29 went under contract within two weeks … with spring’s fastest markets, namely Seattle and San Jose, California, seeing the largest declines, falling by more than 35 percentage points since spring and over 20 percentage points from a year earlier.”

Spring 2019: Home Prices Have ‘Likely Peaked’

In 2019, the housing research team at Zillow put out a report that showed home prices in some real estate markets were beginning to decline.

From March to April of 2019, home prices in the U.S. experienced their first month-to-month decline since February 2012. This marked a turning point for the nation’s housing market.

At the city and metro level, the report was even more telling. According to the press release that accounted these findings, house prices had “likely peaked” in quite a few real estate markets across the country. San Jose was listed as one of 14 cities where home values had likely peaked.

At the time, such an idea might have seemed shocking. After all, San Jose had previously been named one of the hottest and “fastest” housing markets in the country. Tech employees and investors were snatching up homes left and right. There was little inventory to go around, and steady demand from buyers. How could it peak?

Affordability is one reason. With a median home value north of $1 million, the San Jose real estate market has become unaffordable for many residents who live in the area — including those with above-average incomes. Historically, this kind of trend leads to a market “correction” in which prices start to level off and then decline.

We are now witnessing that kind of reversal within the San Jose housing market.

A Major Increase in Inventory

Affordability is one reason why San Jose’s real estate market began to cool. Inventory is another.

For years, this metro area had one of the lowest levels of housing supply in the country. There were plenty of buyers in the market, but not nearly enough homes to go around. This put upward pressure on prices and forced buyers to compete fiercely with one another.

But that began to change in 2018.

Earlier this year, the research team at Trulia published a report showing which real estate market were experiencing the most inventory growth. Specifically, they looked at inventory growth from the first quarter of 2018 to the first quarter of 2019.

Among the metro areas that were analyzed in this study, San Jose’s real estate market experienced the biggest increase in supply. Housing inventory (i.e., the number of homes for sale in an area) rose by a whopping 55% during the one-year period mentioned above.

Today: Home Values in San Jose Are Falling Steadily

The chart below, provided by Zillow, says a lot about the San Jose housing market in 2019. It shows the median home value for the city over the past 10 years or so. It also shows the company’s forecast for the next year or so (in the green shaded area).

Chart with San Jose home prices
Chart: San Jose home prices. Source:

As you can see, home prices in San Jose began a post-recession rebound in late 2012 to early 2013. In the following years, inventory levels dropped significantly. This increased demand and led to bidding wars, offers above asking price, etc.

From 2014 to 2018, the median home value within the San Jose real estate market climbed further and faster than almost every other city in the country.

But that trend began to change during the second half of 2018, when prices began to drop. Today, home values in San Jose are falling steadily and (as of summer 2019) show no signs of hitting bottom.

This is what a mini crash looks like.