The Silicon Valley real estate market has been nothing short of a roller coaster ride in 2023. From the impact of the pandemic on home prices to changing buyer preferences and economic shifts, the real estate industry has seen its fair share of challenges and opportunities. With an eye toward the future, let’s take a look at what the 2024 real estate market might have in store for buyers, sellers, and investors.
In this blog, we will delve into some key trends to help you prepare for the year ahead in real estate. Whether you're a first-time homebuyer, a potential seller, a seasoned investor, or simply interested in the state of the housing market, continue reading to gain insights into what might shape the Silicon Valley real estate landscape in 2024.
INTEREST RATES
Interest rates will continue to be a large part of the conversation regarding the real estate market and the overall economy in 2024. Interest rates are at their highest in 20 years and the impact can be felt throughout all sectors and all markets. At the Federal Reserve’s meeting in September 2023, the Fed decided not to raise the federal funds rate. This was significant as the Fed has pretty consistently raised rates since early 2022. The Fed did however indicate that additional rate hikes could be on the horizon and that interest rates could be staying higher for longer than originally expected. By 2024, rates will have been above 4% for over a year, and more and more buyers and sellers will have accepted the new realities of the market. For some historical context, interest rates haven’t been above 4% since the Great Recession, so it has been a while since the market has had to accommodate this additional factor.
When there are higher interest rates several things typically happen in the market. Buyers can end up staying on the sidelines due to the high rates, fearing high monthly mortgage payments. Especially in comparison to just a couple of years ago, buyers get spooked by just how much higher monthly payments can be for a home.
A similar but different issue can plague sellers during a high-interest rate season. Sellers can feel “trapped” in their low rates. They do not want to give up their low rate for a high rate, and this leads to lower inventory on the market.
“Approximately 62% of mortgages in the United States are below 4% and about 25% are below 3%. If those homeowners want to sell their current home and purchase another one they will, in all likelihood, be taking on a much larger monthly mortgage payment. That added expense is definitely preventing owners wishing to purchase a larger, or even smaller home, from selling their current home, keeping inventory levels low,” said Quetzal Grimm, Vice President and Managing Director of The Agency in Silicon Valley during our interview with him in August 2023.
With such a low amount of inventory and steady buyer demand, prices stay high due to the age-old Capitalism concept of “Supply and Demand.” Even if interest rates do drop, that doesn’t necessarily guarantee that prices will go down as lower rates will mean that more potential buyers could enter the market, which would increase competition and raise prices due to increased demand.
“I don’t think any drop in interest rates will make housing more affordable for people looking to purchase a home,” says Sipho Simela, CEO and founder of Matrix Rental Solutions. “This is because supply will most likely get even tighter as more people start looking to buy due to lower interest rates.”
When it comes to the high-end Silicon Valley markets—like the Los Altos, Los Altos Hills, and Atherton luxury real estate market etc.— interest rates tend to not have as big of an impact as most buyers in this price range use mortgages as a tool, rather than a necessity when purchasing property. Buyers considering luxury homes in Atherton are typically not as concerned about interest rates as the rest of the market.
ECONOMIC CONDITIONS
Economic conditions have a significant impact on the real estate market. Real estate is closely tied to the overall health of the economy, and various economic factors can influence both the demand for and supply of real estate.
Inflation is still the elephant in the room right now and will continue to be in 2024. A significant goal of the Fed’s recent monetary policy has been to combat inflation. All signs point to the Fed continuing in its efforts to steer the inflation rate to its target of 2%. As of this blog publishing in October of 2023, the current inflation rate is about 3.5%. Whilst this has been an impressive turnaround from the inflation rate hovering around 10% in the middle of 2022, we don’t expect the Fed to pump the brakes on their restrictive monetary policy. If inflation does get down to where the Fed wants it in 2024, we could see a stabilization in terms of policy, but likely not a rapid shift in strategy. In simple terms, don’t expect the Fed to rapidly drop the interest rates immediately after the economy reaches its inflation target.
In terms of employment, we have all seen the press articles about Big Tech companies in Silicon Valley laying off large amounts of their employees. Industry leaders like Google, Microsoft, Meta and more have received a ton of attention for their large layoffs and restructuring efforts. They were not alone, however; as other prominent companies such as Roku, Grubhub, Spotify, Sonos, Shopify and others have also laid off considerable amounts of their workforce.
The stock market has rebounded in 2023 after a difficult 2022, but the market still carries a sense of uneasiness. Between the mass layoffs at Big Tech companies, global uncertainties, post-pandemic malaise, historically high inflation and concerns regarding mass economic restructuring due to the imminent rise of AI, the general consensus about the current state of the market is not great.
“I see more fear than any time in my business career,” said BlackRock’s Chairman and CEO Larry Fink at the Berlin Global Dialogue Conference in September 2023.
An important link to highlight as well is the connection between the stock market and interest rates. As discussed in detail in our blog titled “How Interest Rates Affect the Luxury Real Estate Market in Silicon Valley,” higher interest rates mean that borrowing capital becomes more costly. This can slow down economic expansion and the overall stock value of companies. With how involved Silicon Valley is in the stock market, variations in the market can shift behavior rapidly. A substantial decline in the stock price of a major company has the potential to swiftly deter a significant portion of buyers from participating in the market.
Finally, 2024 will be an election year which as always throws an extra set of variables into the mix. The economy, inflation, interest rates, employment, and the stock market will be major topics of discussion during the Republican primaries and then of course the General Election. There will be additional pressure on economic policy as it becomes more and more of a general topic ahead of the elections.
INVENTORY
“The presence of multiple offers implies that housing demand is not being satisfied due to a lack of supply,” said Chief Economist of the National Association of REALTORS® Lawrence Yun during the NAR’s housing forecast for the rest of 2023 and for 2024 this past July.
“The recovery has not taken place, but the housing recession is over,” also said Yun.
Basically, even with fluctuating interest rates and economic uncertainties, the massive misalignment between supply and demand in real estate is what is keeping prices high and growing.
Demand for housing is still high. Nationwide, Millennial and now Gen Z buyers are bursting at the seams to enter the market and purchase their first home. Investors who have been spooked by the fluctuations in the stock market are seeing real estate as a safer investment and want to park their money there.
For these eager buyers, however, there is a very limited inventory. This limited inventory is why homes that do enter the market can fetch a very high sales price. There are simply too few options to be picky for a motivated buyer!
Interest rates alone are not the only factor causing current sellers to hold off on selling their homes. An arguably bigger overall factor is the lack of new construction that has been tightening the market since the Great Recession. New home construction dropped rapidly then and has never picked up.
New construction for homes has been historically low for a very long time. According to Statista.com, between 1950 to 1999, an average of 11,314,000 new homes were built every decade. In the first decade of the new millennium, 14,560,000 new homes were built. In the past decade (2010-2019), only 6,900,000 new homes were built. With the pandemic following that and the supply chain shortages that ensued, home building has been very slow this decade as well. Only in 2023 have new home construction rates gone back up to historical averages. Overall, for about 15 years, we have had very low rates of new homes being built. All the while the population has grown and international and domestic investment into American real estate has skyrocketed.
Silicon Valley in particular also faces additional challenges to building. Strict state and local regulations regarding zoning, land use, the environment, traffic, and government policy add additional barriers to building homes which prevent buyers from being able to enter the market.
According to a 2021 report from the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, “A few of the most often cited reasons for housing shortages are the lack of available construction labor, land use regulations, zoning restrictions preventing supply from picking up in areas which have the most demand, NIMBYism (not in my back yard), lack of land developers and land to develop.”
When we also consider the supply chain and labor shortages linked to policies as a result of the pandemic, we can start to understand why there is such a shortage in new construction homes and overall housing inventory.
A final parallel thought to consider is that with more people priced out of the market to buy, we will have more renters. This will in turn raise rental prices and overall costs of living. With more people renting instead of buying, those with lower incomes will struggle with basic living expenses.
“It is critical to expand supply as much as possible to widen access to home buying for more Americans,” Yun said to address the issue of Americans not being able to enter the home-buying market. “Home prices will be influenced by how much inventory is brought to market. Increased homebuilding will tame price growth, while limited construction will lead to home price appreciation outpacing income growth.”
CONCLUSION
The 2024 real estate market promises both opportunities and challenges for those involved. As we look ahead, it's crucial to stay informed, adapt to evolving trends, and make well-informed decisions. Although interest rates, the overall economy, the election, and more will have an effect on the overall state of Silicon Valley real estate in 2024, the biggest factor will be inventory levels. As long as demand for real estate stays high, which we confidently believe it will, home prices will stay strong and grow due to the low inventory. While the days off 20-30 offers and sales prices of several hundreds of thousands over the asking price are likely gone for now, we will still see high final sales prices. At the end of the day, Silicon Valley real estate is some of the most coveted in the entire world. People want to be here and buy here due to the amazing lifestyle that Silicon Valley offers. As long as demand heavily outweighs supply, prices will continue to stay high and grow. Whether it’s luxury homes in Los Altos, mansions in Atherton neighborhoods or Los Altos Hills luxury properties overlooking the Bay, real estate prices will remain high in Silicon Valley in 2024.
Are you looking for a top Los Altos realtor at The Agency? Follow Kiersten Ligeti and Patricia Karoubi Team luxury realtors for an exclusive look at Los Altos, Los Altos Hills, Atherton properties and more.
Kiersten Ligeti | 650.766.8319 | LIC. #01298631
Patricia Karoubi | 650.868.4565 | LIC. #01396914
The Agency Los Altos
