State of the Market

State of the Market

Ken DeLeon, and Michael RepkaJanuary 3, 2014
DeLeon Insight January 2014

 

Following on the heels of 2012, 2013 was yet another stellar year for Silicon Valley real estate. While Silicon Valley has seen a robust market, the core areas, namely Mountain View to Atherton, have been even stronger. The towns within that core have experienced double-digit price appreciation, with some areas having an appreciation rate of approximately 20%. While there are multiple reasons for the continued local market strength, the two most significant are the continued influx of money from overseas, particularly from Chinese investors, and the federal government’s low interest rates in an effort to stimulate the economy.

Foreign Investors & Overseas Money

In 2013, we have seen continued investment in the Silicon Valley real estate market by foreign nationals who live abroad and those who relocate here. The stability of the U.S. market and the desire to invest in real estate, despite restrictions placed by many of the foreign nationals’ home countries, notably China, are two key factors driving foreign investors. Foreign investors often write very strong offers, often including an all-cash payment at a price significantly above the asking price. While this may seem strange to some Americans, two recent business trips we took to mainland China, Taiwan, and Hong Kong have indicated that, despite high prices, Silicon Valley homes are a relative bargain compared to prices of nicely appointed condominiums in some of the first-tier Asian cities.

Interest Rates

Another factor that contributes to the strength of the local economy is the federal government’s desire to keep interest rates low. While most of the country is still recovering from the Great Recession, Silicon Valley’s vibrant economy has continued to flourish. Nevertheless, the low interest rates, available nationally, have added fuel to an already kindling fire. 

The Federal Reserve, however, has made clear its intent to raise interest rates in the future. Some similar statements in June 2013 caused a temporary spike in interest rates because Federal Reserve Chief Ben Bernanke indicated that he was going to end quantitative easing and stop holding the interest rates low. His comments caused a very dramatic spike in interest rates, and this was the only time in 2013 where we saw a slowdown in demand, albeit, short lived. Shortly thereafter, the market calmed and interest rates settled back down towards where they were before. As a result, this fueled the strong burning fire that much more. People who thought they may have been priced out of market because of increasing interest rates decided to use the interest rate retreat as an opportunity, thus creating an even stronger fall market than usual.

Looking Forward

While we generally expect the real estate market in the core  areas of Silicon Valley to remain strong into 2014, we believe the trend will shift slightly towards neighboring cities that have not increased quite as quickly as Palo Alto due to the upward pressure of people being priced out of Palo Alto’s most prime neighborhoods. In the recent months we have started to notice more variations in home prices between Palo Alto and its neighboring cities.

Overall, 2013 was a strong year for the real estate market in Silicon Valley, and we look forward to another robust year in 2014.