San Jose Housing Forecast: A Supply-and-Demand Imbalance in 2021

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With a median home price already exceeding $1 million, it’s hard to imagine that home values in San Jose could continue rising into 2021. And yet, that’s exactly what is expected.

Recent reports and forecasts for the San Jose real estate market in 2021 suggest that prices in the area could keep climbing for the foreseeable future.

As of fall 2020, home values across Santa Clara County (and much of California) are rising steadily due to strong demand from buyers. Inventory shortages are playing a key role here, as well. In housing markets like San Jose, there just aren’t enough homes available to meet the demand from buyers. And that’s boosting house values.

On the mortgage front, record-low mortgage rates are giving hesitant home buyers a strong reason to enter the market. Rates could inch up a bit, as we head into 2021. But they are expected to hover in the low 3% range for much of next year.

Here’s a roundup of the latest trends, reports and predictions for the San Jose housing market, extending into 2021.

Home Prices Up Across Santa Clara County

In November 2020, the California Association of Realtors® (C.A.R.) published a statewide housing market update that showed significant home-price gains for most counties across the state.

According to that report:

“At the regional level, all major regions posted double-digit, year-over-year median price increases, and all regions, except the Far North, set a new record high median price in October … The San Francisco Bay Area had the second largest price increase of 17 percent…”

The San Jose housing market has also experienced steadily rising home values throughout 2020. The same goes for Santa Clara County as a whole.

According to the C.A.R. report mentioned above, the median selling price for existing single-family homes in Santa Clara County rose by nearly 17% in October 2020, compared to a year earlier. That was the biggest year-over-year increase of any of the nine counties within the San Francisco Bay Area.

Santa Clara also experienced a sharp increase in the number of sales. From October 2019 to October 2020, home sales in the area rose by a whopping 32.4% — more than any other Bay Area county.

The chart below shows the median house price for San Jose, California, going back several years. It’s based on Zillow’s proprietary home value index. You can see how this housing market appreciated steadily from 2012 through the summer of 2018, after which prices dipped a bit.

San Jose prices, November 2020
House value index for San Jose, California | Source: Zillow.com

The green shaded area to the right shows Zillow’s positive home-price forecast for the San Jose real estate market, extending into the fall of 2021.

Many of these same trends are occurring in other parts of Santa Clara County as well. Low inventory, stiff competition, and rising home values are common conditions in cities like Cupertino, Los Altos, Palo Alta and Sunnyvale. All of those South Bay cities posted double-digit price gains over the past year or so, according to Zillow.

Forecast for San Jose Housing Market in 2021

No one can predict future real estate or economic conditions with complete accuracy, especially in unpredictable times like these. But housing analysts and economists can offer predictions based on current real estate trends.

And for the San Jose housing market, most forecasts point to one overarching trend — rising house prices.

In November, the real estate data company Zillow predicted that home values in the San Jose area would continue to climb at an above-average pace for the foreseeable future.

The company’s researchers wrote: “San Jose home values have gone up 14.2% over the past year and Zillow predicts they will rise 9.2% in the next year.”

The real estate market has been surprisingly strong over the past few months, despite the stumbling blocks in other aspects of the economy. Thus far, the coronavirus crisis has had little impact on home sales.

Throughout the pandemic, economists have referred to the U.S. real estate market as one of the only bright spots in the economy. This trend could carry into the first part of 2021 as well, with housing propping up the broader economy.

In the South Bay Area, there are several reasons for the real estate market’s surprising and ongoing strength:

  • Many home buyers in San Jose and the surrounding area work in tech, finance, or other jobs that can be performed remotely. That has shielded them from the layoffs that have plagued other sectors of the economy.
  • Record-low mortgage rates have pulled a lot of would-be home buyers off the fence and into the housing market.
  • We’ve seen an increase in moves and relocations during the coronavirus pandemic, as people put a premium on space, home offices, and the like.
  • Within the San Jose housing market — and much of the Bay Area — low inventory is forcing home buyers to compete fiercely with one another.

All of these trends combined are putting sustained upward pressure on home values. This is why we are seeing positive, strong forecasts for the San Jose real estate market into 2021.

Low Inventory Has Made Things Competitive

Inventory within the San Jose housing market has been tight for the past few years. And it hasn’t gotten any better. In fact, the number of unsold homes on the market right now is even lower than it was a year ago. The same is true for most of Santa Clara County.

This has made things challenging for home buyers, to say the least.

According to the C.A.R. housing market report cited earlier, the “Unsold Inventory Index” for Santa Clara county had fallen to a meager 1.6 months in October 2020. That was down from a 2.1-month supply a year ago, and it’s well below what is considered to be a “balanced” market.

And all of this comes at a time when there are a lot of active home buyers in the area, seeking properties to buy.

According to a November 2020 report from Irvine, California-based ATTOM Data Solutions, San Jose was one of the top cities in the country for mortgage loan activity during Q3 2020. This indicates a high level of demand for homes in the area.

To quote that report (with bolding added):

“Metro areas with at least 1 million people and the biggest quarterly increases in purchase [loan] originations were Boston, MA(up 75.3 percent); Hartford, CT (up 52.6 percent); San Jose, CA (up 49.8 percent); Los Angeles, CA (up 43.3 percent) and St. Louis, MO (up 42.2 percent).”

Buyers Can Expect Stiff Competition, Bidding Wars

Given the recent trends and predictions for the San Jose housing market, it’s probably not surprising that bidding wars have made a comeback.

From a supply-and-demand perspective, this real estate market currently favors sellers over buyers. The same is true for many cities across the nine-county Bay Area region.

According to a November news release from the national real estate brokerage Redfin, San Jose is one of the top housing markets in the country for bidding wars. That report looked at the share of offers handled by Redfin agents that ended up in bidding wars.

A recent report from The Mercury News stated that real estate agents in the area “report brisk sales, anxious house hunters searching through limited inventory, and bidding wars for desirable suburban properties with indoor and outdoor space.”

We are also hearing anecdotal reports from agents about home buyers waving contract contingencies in an effort to edge out competing buyers. So yes, it’s a competitive market.

Low Mortgage Rates Bring Buyers Into the Housing Market

Record-low mortgage rates are also contributing to increased home sales activity and prices in San Jose, and throughout the Bay Area. Buyers who were currently “on the fence” about making a purchase have been given an extra push from the current low-rate environment.

According to the weekly industry survey conducted by Freddie Mac, the average rate for a 30-year fixed mortgage dropped to 2.72% last week. That was the lowest average rate in 50 years of tracking (to date).

It bears repeating. In five decades, we have never seen mortgage rates as low as they are right now.

This is a powerful enticement for home buyers and homeowners alike. Buyers can lock in a low rate for the long term, by using the popular 30-year fixed mortgage option. At the same time, Bay Area homeowners are now in a good position to refinance their existing loans.

Related: 30-year fixed cheaper than ARM?

Disclaimer: This article includes forecasts and predictions for the San Jose real estate extending into 2021. Those projections were issued by third parties not associated with the Home Buying Institute. Economic and housing-related forecasts are the equivalent of an educated guess.