What’s causing this current shift in the real estate market in Los Altos, Los Altos Hills, Mountain View, Sunnyvale, Cupertino, Palo Alto, and other Silicon Valley communities? The common belief is that the Supply of homes is increasing. While that may be true in some sub-markets, the Supply still remains constrained for the MOST desirable neighborhoods and homes.
I believe that there is a lack of confidence and short term optimism. I talk to Buyers and their Realtors every day. Buyers need to feel that their current situation is secure and their future is bright before they pull the trigger on one of the largest purchases in their life. When uncertainty prevails, confidence among the pool of Buyers erodes. Without this confidence, Buyers are second guessing themselves and their decisions about buying a new home. Here are the some common concerns that I’ve been hearing among Buyers.
1) Company Stock.
Many of the Buyers rely on their company stock to provide most if not all of the down payment or purchase funds. If a Buyer’s company stock declines dramatically, the Buyer’s confidence goes with it. Many people would rather wait to see if their stock rebounds before cashing out to buy a house. And/or, they become very conservative with their finances.
2) Job Security.
Meanwhile, many local technology companies are tightening their budgets. A year ago, many companies were touting that they were hiring thousands of people and couldn’t hire fast enough. This year, some companies are under hiring freezes and/or quietly laying people off. Job uncertainty erodes the confidence required to make a home purchase.
3) Down Rounds.
Some VC backed companies are struggling – including the Billion Dollar Unicorns. For a few start-ups who are running low on cash, there is a new term called “down round.” Instead of increasing the valuation of a startup to raise new capital, some startups are LOWERING the value of their company to attract new investors. I’ve talked to a few people who tell me that their company only has enough money to last through 2016. Beyond that, their future is uncertain.
4) Dry IPO Market.
Very few companies have had a successful IPO in 2016. Without a liquidity event (e.g. IPO or acquisition by a publicly traded company), employees and investors have no way to cash in on their company stock to buy a home.
5) Plateau Effect.
The local real estate market has been climbing at a very rapid rate for a number of years. At some point, every market has to level off and we may be due for a breather at some point.
6) Geopolitical Uncertainty.
Given the drama in the media surrounding BREXIT, the upcoming US Presidential Elections, and the social/racial unrest, Buyers seem to be distracted and concerned about the future. This turmoil contributes to the ‘wait and see’ mentality because people want to buy in times of certainty. I personally don’t think these events will have a direct impact on our local real estate market, but many Buyers do and they decide to make offers – or not.
I don’t intend to be an alarmist. I DO NOT think the real estate markets in Los Altos, Los Altos Hills, Sunnyvale, Mountain View, Palo Alto, and Cupertino are going to crash. I think we’ll see more of a plateau effect where prices level off until the optimism returns to Silicon Valley.
In the past, homes in Los Altos, Los Altos Hills, Sunnyvale, Mountain View, Palo Alto, and Cupertino have weathered most economic storms very well because they are so desirable – and supply constrained. Even in 2008 – 09, these markets did not decline nearly as much as other markets. The local public schools, the desirability of the neighborhoods, and the limited number of homes in these communities contribute to the intrinsic value of the homes in these neighborhoods.
However, if the house is what I describe as “Perfect, Perfect, Perfect” then it will still draw a lot of attention and competitive bidding will probably break out. It’s still very likely that we’ll still see multiple offers on a house that:
- Is in a highly desirable location [PERFECT]
- Is in excellent condition with an open floorplan [PERFECT]
- Is priced attractively [PERFECT]
It’s very likely that we’ll still see multiple offers on that house.
There are still plenty of well qualified Buyers with large down payments and/or CASH who have been waiting patiently for the Perfect, Perfect, Perfect property. They’ve passed on other homes that didn’t meet all their criteria. When the right house comes on the market, these highly qualified Buyers will pounce on it.