In Silicon Valley, the housing market is always experiencing high demand. Even as prices rise quickly in Silicon Valley, especially in San Mateo and Santa Clara, coupled with mortgage rates near 20-year highs, demand is still strong. High demand and low inventory are driving the rapid home price appreciation that Silicon Valley has experienced this year. Housing prices typically work in a counterintuitive way. In a classic supply/demand problem, as supply falls and demand remains steady or increases, prices rise. Housing works a bit differently. In the first half of the year, new listings usually rise rapidly, far outpacing sales and causing overall inventory to rise from the winter lows. Demand also tends to rise in the first half of the year, and the increasing supply actually benefits the overall market because buyers can more easily find a home that suits their wants and needs. Finding the right home is far more valuable than feeling forced into a home that’s not right, so prices tend to rise in the first half of the year.
Year to date, single-family home prices have increased 20% in San Mateo, 24% in Santa Clara, and 3% in Santa Cruz. Condo prices in San Mateo and Santa Clara were up 12% and 19%, respectively, in the first half of 2023, while Santa Cruz condo prices were down 7%.
Inventory declined as sales increased and new listings slowed
Single-family home and condo inventory, sales, and new listings rose in the first half of the year, although all remain at depressed levels. The number of home sales is, in part, a function of the number of active listings and new listings coming to market. Currently, inventory is so low relative to demand that any amount of new listings is good for the market. Potential sellers who have fully paid off their property are in a particularly good position if they don’t have to finance their next property after the sale of their home. Since January 2023, sales jumped 155% while new listings rose 78%, whereas last year, for example, sales rose 69% and new listings increased 57% in the first half of the year.
As buyer competition has ramped up and sellers are gaining negotiating power, sellers are receiving more of their listed price. In January 2023, the average seller received 94% of list price compared to 101% of list in June. Inventory will almost certainly remain historically low for the year, and the market will remain competitive in the third quarter.
Months of Supply Inventory remained under two months in June, indicating a strong sellers’ market
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). The Silicon Valley market tends to favor sellers, especially for single-family homes, which is reflected in its low MSI. MSI has trended even lower since January for both single-family homes and condos, meaning the market more strongly favors sellers. The sharp drop in MSI occurred due to the higher proportion of sales relative to active listings and less time on the market.