Is the Bay Area in the middle of a real estate revolution? Let’s look at some numbers.

Question: Are we reaching a real estate market peak, or are we in the early to mid stages of a revolutionary recovery and growth period?In January 2014, it was apparent that our local real estate reporters had misjudged their early forecasts for the Bay Area real estate market for this year.  For example, from the Jan. 12, 2014 San Jose Mercury News:

"[E]xperts are predicting a much calmer (Bay Area) market in 2014.  That's good news for potential homebuyers, since there will be more homes to choose from, fewer bidding wars and less worries about spiraling prices."

So far, it’s just the opposite in the Bay Area real estate market

Two months later we are in the midst of experiencing perhaps the most sustained low inventory/high demand period in our area's real estate market history.  Many would draw parallels between this period and that of 1999/2000.  Similarities include a tremendous surge in technology, climbing equity markets, major commercial real estate plans/development all coinciding with (and related to) low housing inventory and immense demand.

Reflecting back, however, the 1999-2000 market was a quick acceleration of conditions that did not sustain much longer than 12 months (from mid 1999 through spring/summer of 2000) when conditions down-shifted following the NASDAQ's deflation from its peak of 5,048 on March 10, 2000.

Our present low-inventory/increasing demand conditions actually began a few years ago and seemingly hit a seasonal and historical bottom in the first half of 2013.  Of course, last year was a pivotal year for values as demand surged only to find a limited supply of available properties throughout the Bay Area.

In studying and reviewing the inventory figures over the second half of 2013, it was predictable that early 2014 would prove to be an even tighter (lower inventory) and potentially more competitive market.

Silicon Valley home sales market “in the midst of a bold, intriguing and historically significant dynamic”

During times of change and when multiple factors are affecting the Silicon Valley real estate market, it’s important to devote some time to reading, listening to smart people, following trends and studying statistics.  During a recent presentation, top real estate consultant Carole Rodoni explained that the present market is different from 2000, suggesting that we are in the midst of a bold, intriguing and historically significant dynamic that may be nothing short of a revolution.

We must remain realistic about the fact that markets cycle in real estate.  There are periods of prosperity and climbing values and seasons of value adjustments/corrections.  Still, it's dizzying to keep track of all the activity and momentum building in Silicon Valley and making its way up and down the Peninsula and over to the coast in 2014.

The NASDAQ has now reached levels above 4000 that haven’t been seen in nearly 14 years.  At the same time, there are countless new, state-of-the-art tech campuses planned or under construction.  We have seen a very active IPO market and tech titans emerging and evolving into the next new thing we will understand only later.

Big Data is part that new thing and how the focus now is on human behavior patterns and the socialization of those patterns.  Foreign investors/buyers entering our market area continues to make an impact.  In addition, real estate investors have been at least as active as first-time or move-up/other buyers in our residential market for several years running now.

While we may or may not be in the midst of a Revolution, no one can argue that the real estate landscape isn’t at least different.  In 1999/2000 the majority of people were not really ready or interested in changing their habits and behaviors to accommodate the investors and speculators who poured funds into the dot-com dream, and there was actual fear surrounding this possibility (including Y2K).

Now, behaviors have most certainly evolved.  How many of us shopped mostly online for gifts this past holiday season?  Can any business in any part of the world operate today without technology?  The Millennials (which includes our children) have been brought up in a wired world and their habits are markedly different.

What does all of this have to do with this monthly market report?  Everything. 

If we are truly in the midst of a technology/behavioral revolution of which we are geographically at the center, then we are more likely in the early to mid stages of a real estate recovery (revolution).

In this case, while we may continue to experience some market volatility due to global economic or political instability, there would be more room for this market to run for several years.  If we are at or near market peaks, inventory should already be starting to dramatically increase, thereby exceeding demand and leveling out property values.

One challenge in arguing for this being a "market peak" is that inventory levels are starting from such a historical low-point, it’s difficult to imagine why or how a significant increase would occur anytime in the near term.

Inventory this low can only reasonably climb to more balanced levels over a period of years.  Perhaps the continued increase in values will be enough to attract additional sellers to the market.  When final sales prices from Q1's multiple offer activity begin to surface, we may observe a modest inventory push late spring into summer.

It is logical, then, to anticipate a high volume (increased number of sales at higher average sale prices) period from April through June/July of 2014.  In terms of a more balanced market, however, we are most likely at least one to two years out, from an inventory perspective.

Current real estate market statistics for Santa Clara and San Mateo counties

Santa Clara County

In Santa Clara County (class 1 & 2), the two-year “sold” median trend is up 39% while the “for sale” median has risen 31% during the same period.  Here are other data points to focus on:

1. Median Price

a) Feb 2014 sold median of $696,000 as compared to $615,000 same month only one year prior.  Feb 2012?  $450,000!

b) More than 50 fewer closings this February as compared to last and 45 fewer new listings on the market this February as compared to same month prior year.

c) In February 2013, 2,876 properties for sale.  This Feb, 2,430.

2. Supply & Demand Units

a)For sale/supply in units two-year trend remains down 39%, no surprise here.

b) Under contract number of units now trending down 26%; however, this figure is constrained because of lack of inventory to meet high demand.

c) Total sold units also reversing a modest upward trend now down 22% during the same period.

3. Months Supply & Days on Market

a)This is one of the most fascinating statistics over past several years.  This stat alone offers a barometer of intensity in the market.  Remember that five to six months’ supply is more of a normal, balanced market.  Meanwhile, we have seen one month and under in SCC and SMC and even more compressed in several communities throughout the past one to two years.

b) Months supply for February in each of the past 3 years:  2012 – 2.2; 2013 – 1.6; 2014? – one month supply!  We have hit "the" low-point of the past two years (which is likely the lowest SCC MSI in seven to 14 years or more).

c) Check out the number of SFR properties for sale on the last day of February 2014: 1126 and the number for sale at the end of last February: 1644.

d) Days on market shrinking back down to 25.

4. Sales Absorption

a) A good indicator of increasing year-over-year market momentum/demand: 44% of the active SFR inventory in escrow at February 2014 month end vs. 37% February the prior year.

San Mateo County

For San Mateo County (class 1 & 2): Two-year sold median price trend also up 40% (same as SCZ and SCC) with for sale median price up 32%.

1. Median Price

a) Only 1,089 total actives this February as compared to 1,240 same month last year.

b) The February sold median price of $783,000 is over $250,000 higher than the $525,000 in the same month in 2012.

c) San Mateo is the only county of the three where the number of new listings was greater this February than February of last year (596 vs. 580).

2. Supply & Demand Units

a) For sale inventory, in terms of number of listings, has trended down further (-42%) over the past two years; the number sold now down 19%; the number of homes under contract also is in decline (-26%) during same time period.

3. Months Supply & Days on Market

a) Two-plus-year low (arguably as much as a 14-year low) in March of 2013 (1.2MSI).  February 2014 stood at 1.3MSI as compared to 1.7MSI in February of last year.

b) For sale last day of month remains notable:  February 2014 – 578; February 2013– 736; February 2012– 1,275.

c) Average days on market: under 30.

4. Sales Absorption

a)  40% PUC last month as compared to 36% for February 2013.