Does This Market Have Legs?

Home values have risen this year at a breathtaking rate, faster than at any time I can remember.  Three times since January I have revised my recommended list price upward and all three times the home sold substantially over the list price.  According to the California Association of Realtors, the median sale price for homes in San Mateo County jumped from $1,015,000 to $1,200,000 since the first of the year.  And there appears to be no letup in sight.

What is behind this amazing run?  And equally as important, does it have legs?

I think I know what is driving the growth.  But how long it lasts requires a crystal ball that I don’t have.

In purely economic terms, we are witnessing the law of supply and demand being enforced with remorseless effect.  There is nearly immeasurable demand chasing pitifully low supply.  That’s a classic formula for price growth.

Last August, the San Mateo Daily Journal published an article that pegged the average wage in San Mateo County at $2724 per week, the highest in the nation and $700 per week more than the second ranking county.

Last week, the Journal published numbers that peg the unemployment rate in San Mateo County at 3.5%, lowest in the state.

Put those two statistics together and you have immense buying power.

Combined with unprecedented demand, there is a chronic shortage of listings.  Many homeowners fear selling then discovering that they can’t get another house without competing with countless other buyers and get forced into a bidding war.  If the process takes months, they’ve sold the roof over their heads without having someone to go.  Many retiring boomers want to downsize, or go from a two level home to a one level home.  But to do it without a mortgage, it will take all of the money from the sale of their home to buy another one.  So there goes their nest egg.  Or if, in retirement, they are living on a fixed income, it is a stretch to qualify for a mortgage.

Then there is a potential capital gains problem for sellers who have owned a home for a long time.  Prices have risen so much that their capital gains have exceeded their $500,000 exemption and they end up with a tax liability.

We also have the problem of living in an area that is completely built out, creating a problem for which the solutions are extremely restricted.  The only new construction possible today is multi-unit housing such as condos, townhouses and apartments, many of which in Redwood City are mapped for condominium conversion at some future date.

Single family home developments have been proposed but the bayside locations of the developments immediately puts the developers into conflict with environmental opponents and various governmental agencies with jurisdiction over the waterfront.

Taken together, the factors that constrict the availability of homes to sell are severe and they come with extremely challenging solutions, if solutions are available at all.

The question of whether the run up in home prices has legs is one that can only be answered by our local economic outlook.  Demand is being driven by a booming silicon valley.  How long this tech boom lasts is how long this real estate market will have legs.

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