Tuesday, July 01, 2008

What Real Estate Crisis?

News outlets everywhere are filled with stories of gloom, doom and implosion in the real-estate market. If you believe the stories, California home prices are down about 18% from a year ago, but out here in the San-Francisco Bay Area, or to be more specific on the Peninsula, where most folks make their living from the high-tech industry, prices have barely dipped.

For example, home prices in Mountain View (home to Google) are actually up about 5% year over year, according to Zillow. The same source shows prices in Menlo Park, center of the venture capital industry, are up about 12%, and Palo Alto, home to Apple Computer and Stanford University has gained about 13%. What gives?

Well, I don't know this for a fact but here is my theory. Our local economy is more closely tied to the technology sector than to anything else. Silicon Valley has been churning out millionaires at amazing rates in recent years. Google and VMWare on their own have no doubt made several thousand of new millionaires out of their stock option holding employees. The average person around here cannot afford to buy a house using his regular income. Your two options are to undertake a long range commute from some of the more remote and affordable suburbs (I know several folks who commute 40 or even 60 miles each way), or to hit the jackpot when your company goes public.

Since the tech sector has been largely unaffected by the downturn until recently, home prices in this area continued their seemingly never ending climb. Well, I think things are about to finally change. Last week I read an article that stated that not a single venture backed company went public last quarter. In addition, venture capital firms have been much more conservative in their investments in recent months (which means fewer high-tech jobs, and fewer future IPOs). This suggests that the flow of money may taper down if not cease altogether.

In my opinion, it's only a matter of time before our local real estate market takes one on the chin. The market is already showing some signs of slowing - there are now multiple houses for sale on my street - something that previously was very rare, as available homes would be immediately snapped up. In the counties of San Mateo and Santa Clara, which together cover Silicon Valley, prices have already started to decline in recent months. In my opinion there is a decent chance that this measured decline will turn into a more dramatic drop in the near future.

I guess we'll just have to wait and see.

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