This article has been published in our April 2008 Newsletter

Many things have been spoken of and written recently regarding the real estate market in Silicon Valley such as what is the real impact of the current recession? These are the opinions of some of our Members.

The dynamism of the market is a fact. “The so called ‘bubble’ in the Peninsula Real Estate market, specifically in Menlo Park, Los Altos and Palo Alto, is still not bursting. “says Catherine Hendricks, from Cashin Company. “Many properties sell with multiple offers above asking price, and there are a lot of buyers who have been waiting and are eager to buy.” Violaine M’Rahi, from Coldwell Banker in Redwood City, agrees: “Comparing January 07 to January 08 in San Mateo County shows the expected: increased inventory (+15%), longer time to sell (+7% or 5 days), higher average sales price (+9% or $102,148.).” And the situation is general to the whole Valley: another example is Redwood City, with a 36% increased inventory and a +16% average sales price. Marc Thompson, Senior VP at Real Estate Industries Division, concurs: “Specifically, we are seeing good opportunities for in-fill locations on residential for sale and rental communities in very-difficult-to-develop markets like Palo Alto, for example.”

In a recession context, how can this particular situation be explained? Of course, real estate has structurally been a good value, but there are some specific explanations.
The actual situation could be explained by the addition of many positive factors. For example, the attraction of the job market, or the quality of the public schools attracts people from East Coast, Asia and Europe, according Catherine Hendricks. Furthermore, “There is no room to build new homes, so the supply isn’t increasing to match the demand”, she says.

One of the main answers could also be found in the geographic location of real estate for sale. Nicolas Marin, from Thousand Oaks Financial, says: “We can say that land has regained value over building improvements. For example, a bigger house far from San Francisco will take months to sell while a smaller one in lovely Rockridge or Palo Alto will still get multiple offers.” Violaine M’Rahi confirms and adds: “Real estate’s first over-stated motto “location, location, location” says it all. This is the one thing you cannot change and could be the one thing you desire most.”
But this aspect can’t only explain this economic situation. Catherine Hendricks point out another explanation: for buyers, times are good, thanks to very low interest rates. Violaine M’Rahi confirms: “Interest rates are at historically low levels (30-year average fixed rate of 6.13%)”

However, Nicolas Marin, analyzes the situation from another point of view, and sees a potential change in this situation: “the pool of money available for loans has shrunk considerably in the last year or so, because of the subprime crisis. With this, the balance of power has shifted back to the banks allowing them to charge higher margins on their rates and to be more selective with their borrowers.” This shift has a potential consequence for the future: loans could be limited to higher income borrowers, which may narrow the demand.
But John Stafford believes in stability: “Rental rate changes are not significant now. The Bay Area markets are relatively strong.” So is the situation going to change? It is difficult to have a definitive opinion about it. Violaine M’Rahi is not completely optimistic: “The key factor for 2008 is the health of big local players. If our barometers, Apple, Google or Oracle, start letting go of workers, that’s a bad omen.”

The real estate market is still strong in the Silicon Valley, and despite the economic recession, the actors of the market are generally optimistic. However, a few indicators lead us to believe that change may occur.

Special Thanks to Nadine Greenwood (Frank Howard Allen Realtors), Catherine Hendricks (Cashin Company), Nicolas Marin (Thousand Oaks Financial) Violaine M’Rahi (Coldwell Banker), andJohn Stafford (Bank of the West)