Think SF Real Estate Is Scary? This City Is Even Worse

If you listen closely, you’ll hear something booming in the Silicon Valley—and no, it’s not just the sound of blockchain capital exchanging hands or tech bros downing Soylent. What’s booming far louder than anywhere else in the U.S. is San Jose, California’s real estate market: According to a recent report by Zillow, home values are rising the fastest in San Jose, at a remarkable 26.2% change year over year to a median value of $1,263,900, the highest in the nation.

Yes, indeed, the people who were lucky enough not only to know the way to San Jose, but also to invest in real estate once they got there are now reaping the rewards. While home values are appreciating quickly at a rate of 8.7%, the fastest pace in 12 years, homes in San Jose are seeing higher growth than average—17.8 percentage points above the national average, and even 9.7 percentage points above Las Vegas, the second fastest growing housing market. Across the U.S. home values are rising fast because of a perfect storm, Aaron Terrazas, senior economist at Zillow, explains in the report: There is strong demand, a tight supply of existing homes on the market and new construction being built slower than demand. Additionally, tax cuts are putting people in the mood to spend and many millennials who saved up down payments from living in their parents’ basements are now looking to move out and buy their first homes.

San Jose’s housing supply crisis is tied to the Silicon Valley tech boom. Since tech workers are flush with cash, and there are more people looking for housing than houses available, many are more willing to spend more money to secure a space. But since San Francisco’s housing supply is so tight, expensive, and small, people are looking to neighboring cities for bigger housing. Terrazas notes that the median home value in San Jose is higher than that of San Fransisco, since it has bigger, more spread-out units. But since there are only so many large units available, the competition for available homes is fierce. In fact, housing supply is so low that even less-than-usable homes are fetching high prices. This April, a home with severe fire damage sold for a whopping $900,000—$100,000 over its asking price.

And while you might be thinking “bubble,” Terrazas says not so fast. From the perspective of an economist, a “bubble” happens when the prices in a market are being driven by future appreciation rather than the fundamentals of supply and demand. In San Jose, cost is being directly affected by an imbalance of supply and demand, and being facilitated by low interest rates. “Unlike a decade and a half ago, mortgage lending standards remain tight for anything but high income/high credit score borrowers, and the homeownership rate remains much lower than in 2005,” Terrazas said in an e-mail to Apartment Therapy. “There is no doubt that the San Jose — and broader Bay Area —housing market faces a host of challenges and risks, but it’s not a ‘bubble’ as economists would classically define them.”

So while you might be convinced to team up with your friends and invest in San Jose real estate, you might want to reconsider that, too. Terrazas says the future of San Jose largely depends on how the large employers in the area choose to react to climbing rents and cost of living. If they don’t want to pay the premiums to their employees, it’s likely that they will decide to create jobs elsewhere, leaving only the highest earning employees in the area. “That would imply softer demand for homes and a slower pace of appreciation, but not necessarily a decline in prices,” Terrazas says. Also, because interest rates are rising at a quickening pace in the U.S., it’s likely that home value appreciation will slow in the future. In this case, longtime homeowners would benefit, but those who bought more recently (and those who bought with a high loan-to-value ratio) would not see as much of a return on the investment.

So a lot of people are trying to get a piece of the Bay Area boom, some longtime and even newer residents are trying to get far, far away. According to a June 3 poll released by the Bay Area Council, a remarkable 46% of those who voted in the poll are looking to move out of the area, with housing cited as the top reason to leave. Surprisingly, though it seems like the youth are flocking to the city, 52% of those who said they wanted to leave were millennials.