Silicon Valley Real Estate Market Crashes, Following Astronomical Rise

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Highlights from this report:

  • The Silicon Valley real estate market appears to be crashing in 2019.
  • Home prices are currently falling all across Santa Clara County.
  • This is partly the result of rapid, unsustainable gains in recent years.

What a difference a couple of years makes. In 2017, we were reporting on the huge home-price gains occurring across the Silicon Valley. For a while there, cities like San Jose, Cupertino, and Palo Alto were experiencing double-digit home price gains annually.

Now these housing markets are in the news again, but for the opposite reason. As of summer 2019, cities all across California’s Santa Clara County are seeing a significant drop in home prices. And there’s no telling when it might end.

Silicon Valley Real Estate Market Sees a ‘Crash’ in 2019

Last month, we reported on the situation in San Jose. House values in that California city are dropping steadily. But the “damage” is not limited to that one housing market alone. Similar trends are occurring throughout the region.

There’s no other way to say it, and no reason to sugarcoat it. The Silicon Valley real estate market is crashing — at least from a price perspective. Home values in the region have declined over the past year or so. And some experts are predicting a continuation of this trend well into 2020.

Fast Facts: Geographically speaking, the term “Silicon Valley” refers to Santa Clara County, which is home to nearly two million people. It includes the cities of Cupertino, Los Altos, Palo Alto, San Jose and Sunnyvale. Many of the major tech companies are headquartered in Silicon Valley (Google, Facebook, eBay and Apple, to name a few). It’s also one of the most expensive real estate markets in the U.S.

As mentioned above, Santa Clara County accounts for much of what’s considered to be “Silicon Valley.” So let’s start by looking at home-price trends countywide, and then drill down to the city housing markets.

According to data published recently by the Santa Clara County Association of REALTORS®, home sales in the area dropped by -14% in June 2019 compared to a year earlier. That’s for traditional single-family residences, in particular. Condo and townhome sales dropped by -19.5% during that same 12-month period.

Prices are dropping as well, and this is something that would-be home buyers should consider before making a purchase.

According to the latest data from Zillow, the median home value for Santa Clara County declined by -8.4% over the past year (as reported in early August 2019).

So, we are seeing a definite downturn in home prices countywide. Some cities within Silicon Valley are experiencing an even sharper drop in prices. These include the real estate markets of Palo Alto, Cupertino, and Los Altos.

Palo Alto: An Overheated Housing Market Cools

As of August 2019, Zillow was reporting a home-price decline of -11.4% over the past 12 months. Looking forward, their research team predicts that home values within the Palo Alto housing market “will fall -10.2% within the next year.” (This forecast was issued in early August 2019, so it extends into the summer of 2020.)

As of later summer 2019, the median price within the Palo Alto real estate market was a staggering $2.8 million, give or take. But it’s expected to drop significantly over the coming months.

The chart below shows Zillow’s proprietary “House Value Index” for Palo Alto, California going back about a decade. It’s basically a measure of the city’s median home price over the period. And it says a lot about the “boom-to-bust” situation that’s happening right now within the Palo Alto real estate market, and across the Silicon Valley in general.

Chart: Home values in Palo Alto, CA. Source: Zillow.com, August 2019.

In some ways, this chart is an emblem for what is happening all across the region. Many cities in Santa Clara County have experienced similar trends over the past ten years. If you overlaid their charts, the rise and fall would line up neatly (though the prices would vary).

You can see where home values started to rise steadily in late 2012, following the Great Recession. During those years, real estate investors were snatching up homes left and right. This led to a severe shortage of inventory, which increased competition among buyers. This in turn led to additional price growth. And so on.

But in late 2018, home prices within the Palo Alto real estate market began to drop. They’ve been on the decline since then and show no sign of hitting “bottom” anytime soon.

Cupertino: Home Prices Have Dropped Significantly

The Cupertino housing market is also experiencing a kind of crash right now, at least where home prices are concerned.

In August, Zillow reported a drop of -10% in the median home value for Cupertino, California. As for their long-range prediction, the company expects that prices “will fall -8.2% within the next year.”

Chart: Cupertino house value trends and forecast. Source: Zillow, August 2019.

Here again, the pattern is the same. Investors (and “regular” home buyers) depleted the housing stock in Cupertino over a relatively short period of time, fueling fierce competition. This pushed home prices north at a pace that was much faster than the national average during the same time. An unsustainable pace.

And then the market cooled, as affordability problems crept into the mix.

Now, home buyers in Cupertino are starting to sense that the real estate market is changing. Many are hesitant to buy at the “top of the market” and have adopted wait-and-see approach instead. This weakens demand and reduces the upward pressure on home prices.

Los Altos: A Negative Forecast Stretching into 2020

Los Altos, a city of about 30,000 people located in the northern part of Silicon Valley, is also undergoing a real estate market shift in 2019. House values in the city are falling, and this trend will likely carry into 2020 as well.

With a median home price north of $3 million (yes, you read that right), Los Altos is one of the most expensive cities in the state of California. And while it will probably remain one of the priciest cities, it’s experiencing a housing crash right now in terms of home prices. The bubble appears to be popping.

Of course, the housing market downturn is not limited to the three cities listed above. We singled them out as clear examples of what is happening — to varying degrees — all across Silicon Valley. Home prices are also falling in places like Milpitas, Morgan Hill, Mountain View (home of Google), Saratoga, and Sunnyvale.

The Common Thread: A Lack of Affordability

So what’s going on here? Why are these Silicon Valley real estate markets crashing in 2019?

Affordability has a lot to do with. Or a lack of affordability, to be more precise. In short, home prices in Santa Clara County (and across much of California) have risen to the point where a person who earns a “typical” income cannot afford to buy a median-priced home.

According to Leslie Appleton-Young, chief economist for the California Association of REALTORS®: “low housing affordability is California’s Achilles heel.” It’s one of the key factors that makes it hard to live in the state.

To quote a July 2019 article from The Mercury News:

“California housing affordability is at 32 percent, compared to the country at 57 percent. Research shows the only employment field which affords you to buy a home in the state is that of a software developer earning $127,950.”

And in Silicon Valley, even some of the software folks cannot afford to purchase a house. So it’s no surprise to see prices dropping like a stone.