AI boom revives Silicon Valley housing market

The AI boom is reviving the housing market of California’s Silicon Valley.

San Jose’s open houses are always packed. Million-dollar starter homes are often sold for hundreds of thousands more than the asking price. Listings are disappearing at the fastest pace in the United States.

The recent drop in mortgage rates has prompted buyers to rush out and buy houses. They are also flush with cash after a yearlong rally of Big Tech stocks, fuelled by AI exuberance. Many of those who are buying a home now have never done so before.

First-time buyers are in high demand and are feeling wealthy.

As the exodus of Northern Californians to other, cheaper areas around the country slows down, the competition for housing is increasing. Workers are being forced to move closer to headquarters, including those of Apple, Alphabet, and AI chipmaker Nvidia. The share price of Nvidia has tripled over the last year.

This has helped to offset the impact of thousands of layoffs that have roiled the tech industry. Even a slight increase in demand, especially in an area with a limited supply, can spark bidding wars.

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Silicon Valley, and the San Francisco Bay Area in general, are the only US housing markets that are so closely tied to the fortunes of the tech industry. Agents in other cities, such as Boston, Seattle, and Denver, could also experience a surge in demand in the spring, which traditionally begins right after Super Bowl weekend.

San Jose has the fastest pace of home sales among the 50 largest US metro areas. According to Redfin’s data, 61% of the new listings were under contract within 14 days. Redfin data from the four weeks to February 4 shows that 61 per cent of new listings were under contract in less than 14 days.

Redfin reported that properties in the San Jose region sold on average at 2% over the original list price. This could mean a substantial premium for a location where sellers were asking a median price of US$1.3million.

Software engineers and other tech workers often receive a large portion of their compensation in the form of company stock, which is how they are able to afford such expensive houses.

“You can’t buy a US$3,000,000 home in Los Altos with a US$200,000 income, but you can do it using your stock wealth.”

Bidding Wars

Karan Syal, a tech worker and his wife were searching for months to find something they liked before the prices went up. They were repeatedly discouraged when 100 people toured an open house or received a barrage offers forcing them to bid higher than they wanted to.

They changed their strategy and made offers as soon as agents teased that the property would be on the market shortly.

They were competing against another early bird buyer for a 2,000-square-foot (sq ft), San Jose-area house. Rabeet Nair, of Intero Real Estate sent Rabeet’s final counteroffer. He set it to expire within an hour, a measure that heightened the urgency. The seller accepted US$1.725m bid, which was US$100k over the asking price. They closed the sale last month.

It was still easier to fight 10 wolves than a small bidding war.

The stock of the chipmaker, where his wife is employed, has soared. This reassured their mortgage lender, and allowed the couple to sell shares to pay the 20% down payment.

Syal explained that the monthly mortgage payment of US$8,500 was a calculated risk. If borrowing costs drop, they can refinance to a lower rate than their current 6.375 percent.

Pandemic frenzy

The high mortgage rates of the last couple of years has kept the inventory tight in the area and throughout the US because homeowners are reluctant to sell their homes if they have to give up cheap loans. Syal and other move-up buyers aren’t selling. He stated that he intends to rent out his old house and keep the 2.25 percent mortgage.

San Jose’s housing market, one of the most expensive on the planet, has experienced a rollercoaster ride in recent years. The market peaked at 2022, after Covid drove buyers to the suburbs, but then cooled down with the rise in interest rates in the last year. The fall in borrowing costs since October’s peak triggered the latest buying frenzy.

The Bay Area is seeing fewer home owners leave. Redfin data shows that the net outflow in the fourth quarter was 26,000, down 13% from the year before and only half the level at the peak of September 2021.

Silicon Valley continues to produce millionaires, who value the convenience of living near their workplace. The buyer desperation has returned, particularly in highly prized areas such as Cupertino and Los Gatos where there are few homes available for purchase.

She is trying to convince a husband-and-wife team, who both earn high salaries in the tech industry, to bid higher. After searching for a home in San Carlos, they finally decided to bid high on the house they wanted. The property was 1,600 square feet with views of the canyon. Its asking price was US$2,35 million. Wyss’ agent told him not to bother with US$2.7m. It was sold to someone else.

San Francisco

San Francisco, which was particularly hard hit by the pandemic and has a low demand for downtown condos, is recovering slower than Silicon Valley. The demand for well-located homes is high even before the houses are officially on the market.

Alexander Lurie of Compass San Francisco hosted a casual open house in the Marina District for a three-bedroom, US$3.5 million property. This was the weekend that the San Francisco 49ers played in the NFL Conference Championships.

The property was remodeled and had an open floorplan with a large backyard. Fifty five parties came to see it. The seller increased the price after seeing the interest.

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