STAIRWAY TO NEW HEIGHTS

SAN FRANCISCO AND SILICON VALLEY

Twenty-two offers, all over asking, five all cash, and the winning offer is $300,000 over the listed price with no contingencies. This is an altogether common story in the Silicon Valley real estate market. Since January 2012, the median price of a Silicon Valley home has risen 69%.


It begs the question; is this a bubble near bursting?

In fact, we are likely still at the beginning of a long and steady climb in appreciation resulting from high demand and scarce supply in one of the most desirable locations in the United States.
Driven by a growing demographic of young, well compensated tech workers, international investors, and college educated professionals. This affluent demographic is increasing in size and becoming gradually wealthier and more educated, fueling further a huge demand for more quality housing. The housing supply is not keeping up with the demand, and will not keep up for a long time.

The Silicon Valley and San Francisco economy is booming. In June 2014 The Manhattan Institute for Policy Research ranked Silicon Valley as far and away the strongest metro economy in the United States. In December of 2013, a staggering 80% of all California jobs were created in Silicon Valley. In the first quarter of 2014, the San Francisco Bay Area gained 110,000 jobs and had a 3.4% increase in overall job growth. The unemployment rate has dipped below pre-recession levels and the jobs being created are good jobs.

It is not just the number of jobs, however, but the type of jobs, and who is getting these jobs that is pushing the housing market. The San Francisco Bay Area has 4 counties which are in the top ten median incomes in the United States, and Santa Clara County ranks #1 in all 50 states with a median income of more than $75,000 per year. The Silicon Valley average tech worker earns $120,000 per year. Many of the workers who are making these high salaries are also younger. Last year, PayScale reported that of 32 tech companies it surveyed, just six had a workforce with a median age greater than 35. Facebook and Zynga have a median age of 28, Google’s median age is 29, and AOL has a median age of 30. Normally young workers can be found employed by clothing stores and restaurants, but in Silicon Valley youth is rewarded.

Why is the age of the worker important? It is because the young, highly affluent tech workers are entering the prime age of household formation. In time, the single tech workers will be leaving expensive apartments and purchasing single family residences of their own to raise families. This is a demographic reality. Within the next 10-15 years, housing demand will continue to escalate. The problem is that there is just not enough housing.

In 2013, Silicon Valley had 33,000 new residents, but there were only 8,000 building permits granted for residential units. Of those residential permits, 70% were for apartment units. New single family housing is simply not keeping up with population growth. Another headwind to adequate inventory is the concentration of tech jobs inside Silicon Valley. Silicon Valley has a staggering 77% of California’s venture capital, 87% of California’s angel investment, 76% of California’s clean tech venture capital, and 56% of California IPO’s. It is the world center for intellectual and tech innovation, drawing talent and resources from around the world to the Bay Area. The pattern for tech professionals making a job change is a change of business address but not home address. So, while talented professionals are being drawn to live and work in Silicon Valley, very few are leaving. As long as this trend continues, so will the supply-demand dynamic continue to fuel appreciation of real estate.

The residents of Silicon Valley are also increasingly foreign born and highly educated. Forty-six percent of Silicon Valley adults have a bachelor’s degree or higher, which is 59% higher than the rest of the United States and 48% higher than the rest of California. The Silicon Valley Index also reports that conferred Science and Engineering degrees have increased 41% in the region. Many studies have proven that there is an extraordinary relationship between higher income and higher education.
The above factors have led to a large increase in foreign investing in Silicon Valley real estate. The foreign investors are attracted to the future appreciation of Bay Area real estate, and normally purchase real estate to buy and hold for long term rather than quick speculative flipping for short term gains. As foreign investment contributes to the absorption of an already thin inventory supply tightens further and prices continue to rise.

There exists a strong tailwind for price appreciation in Silicon Valley real estate. Low supply and high demand appear to be a reality for a long time to come. Though prices have risen dramatically these past two years, there is no sign that the stairway of appreciation is anywhere near its end.

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About Ensemble 21 Articles
Ensemble magazine is a bilingual publication associated with Today Sotheby's International Realty with a focus on Architecture, Design, Creative Art and Fine Estates in San Francisco Bay Area and Around the World.

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