Silicon Valley Isn't Ready For the Looming Crash

[Christopher L Jones]

I’m not here to add kindle to the crash fire. But, if there is any market that’s not ready for a real estate crash, it’s the Silicon Valley. Let’s face it: values are inflated, techies are moving and investors are starting to restructure. So, what would happen if the market crashes in late 2020?

As you can see from the MSP data above, the Silicon Valley has clearly outpaced its national competition. Growing 47% in average value since 2010, there isn't any other market in the U.S. that rivals the tech mecca. However, this quick value appreciation has negative side effects that can really turn the tide.

At least, that question should have come up in thought over the last couple of months. We all know, when it comes to real estate, supply and demand dominates valuations. Luckily, the FED interest rates have kept demand at a steady high throughout the pandemic, especially in the Bay. Even better, those interest rates are supposed to remain low until late 2023. So, as long as interest rates stay low to the ground, we should be good right? Wrong. Here are three variables that we should all be worried about here in Silicon Valley:

The Whip Effect

When markets grow and inflate in value, less people can afford to enter the market. However, the overall demand doesn't get effected if there is a remaining large population of buyers that can still afford the sky-high prices. The value-bubble keeps growing and leaves many families unable to purchase a home where they work. Sound familiar? That's the exact situation here in the Silicon Valley. Ultimately, what happens? Well, those families choose to purchase homes outside of the community that they work in and place their bets in the growth of a new location.
You see, when a whip cracks it sends outward vibrations in equal directions. There is a similar effect in real estate when you see markets become bearish and grow exponentially. Not only does the whip-crack location sky-rocket in value, but it also positively effects the neighboring markets. That my friends, is The Whip Effect of Real Estate.

The MSP comparisons above show how the San Jose and Livermore markets moved together, almost parallel, for the early portion of the 2010's. However, San Jose experienced a very large jump around 2017 and left Livermore in the dust. As of lately, the markets have both experienced a cool-down and the hot markets have switched to a different area: The San Joaquin Valley. You see, if you follow the whip effect, you can almost always find the next great market. Modesto is now poised to appreciate more than 10% in value by 2022, all thanks to the flourishing nearby markets. If you are an agent out in the San Joaquin Valley, this information can definitely be useful to pull more buyers out to your location.

Working From Home

As you just learned, the markets that surround the Silicon Valley can be quite enticing for the buy-and-hold investor. However, that's not the only issue looming around the Silicon Valley real estate market. Working from home is the plague to commercial agents, investors and managers. With the lack of techies to fill the grand office buildings that have been recently developed, many Bay Area investors might be looking bankruptcy right in the face.
Check out this post of 100 different companies that are offering full-time remote positions.

Let's be honest, we are all jealous of the people that get to sit at home in their pajamas and earn a decent wage. Should we really be worried that these work place changes are going to trickle down to the real estate market? Well, right now i'll let you answer that, but there is definitely another variable that is exponentially effecting the property environment here in the Bay. It's the evictions.

The Eviction Wave Coming

There is no doubt that landlords here in the Silicon Valley are stressing over their tenants. Due to the eviction moratorium, evictions due to non-payment have been postponed. However, other types of evictions are still getting filed and placed in a pile of paperwork that the local governments are going to eventually have to deal with. That's when things are going to get really sticky in the tech mecca.
According to the SF Chronicle, more than 15% of all Bay Area renters have broken their leases since the start of the pandemic. Unfortunately, as the pandemic continues, that number will only keep rising.

At this point, nobody knows what is going to happen next. Here at BAIC, we will make sure to keep you updated on the market twists and turns as they happen.