To some people it may be a world where money is irrelevant but those living in the famous Silicon Valley have seen a substantial fall in the value of their properties with the last quarter of 2008 particularly tough. The fact that some people are suffering will surprise many around the world who were of the opinion that the area is dominated by the rich and famous who have bank balances the vast majority of us can only dream of.
The southern part of the San Francisco Bay Area in California is commonly referred to as “Silicon Valley” although it does encompass the northern part of Santa Clara Valley and the adjoining communities. As many people may know, the name Silicon Valley refers to the massive number of silicon chip companies in the region but more recently there has been an influx of technology companies which have also added to the mix.
Since way back in the 1950s the area has been a hotbed for new technology, product development and education for thousands of technology graduates who have gone on to dominate the US technology market. When you consider that the area houses the headquarters of companies such as Apple, Cisco Systems, eBay, Google, Intel, Oracle and Yahoo! you soon start to build up a picture of how technologically advanced the area is. However, contrary to popular belief there is no such thing as a safe haven in the ongoing property recession and house prices in the region have suffered as much as, if not more than, the average American state.
The Silicon Valley property market
A report by Zillow.com has lifted the lid on property prices in and around the San Jose metropolitan area which is commonly referred to as “Silicon Valley”. This is a region where property prices average around $587,000 and the cost of property has mushroomed over the years. However, the final quarter of 2008 saw the sharpest decline in property prices in the Silicon Valley for over a decade and the lowest median property value since the first quarter of 2004.
The Zillow report also shows that across San Jose metropolitan area the reduction in property values totalled some $58 billion in 2008 alone, with nearly $29 billion lost in the final quarter. It would appear from this ever weakening trend that the area had performed better than most during the early part of the recession but now appears to be “falling off a cliff”. What started as slight concern during 2008 has slowly but surely picked up pace with some areas of the Silicon Valley reaching crisis point and property owners desperate to bail out at any price.
Property transactions in the area
While there has been a distinct reduction in the price of property across the Silicon Valley the number of transactions has remained fairly consistent although it is off the highs of the peak period just a couple of years ago. While this has given some people hope that the ongoing decline in property values will not be as severe and as long-term as many fear, the number of people falling into the negative equity trap has increased substantially over the last 12 months.
It has been reported that 44% of all homes sold across the Silicon Valley area in 2008 were sold at a loss to cost price. Official figures also suggest that 19.4% of homeowners in the region are now in a negative equity state due to the massive reduction in prices in the final quarter of 2008. The substantial rise in instances of negative equity has also exacerbated the reduction in property prices with many homes being placed on the market at distressed prices, which are dragging the average price down as a consequence.
The future of Silicon Valley
In many ways the property trends across the Silicon Valley can be mapped against the trend of technology shares on the US stock market. The link between the two issues is very close and as a consequence house prices have tended to be fairly volatile during boom and bust times. The Internet bubble experienced toward the end of the 1990s and early 2000s saw a substantial increase in the value of properties in the area and then a sudden downturn as the stock market turned sour.
However, the ongoing reduction in property values at the moment is more severe and more concerning than at any time in the recent past. An average reduction of 17.2% in the final quarter of 2008 is a perfect example of how the area is being affected although individual property markets within the region do vary substantially from a slight increase in property prices to falls well in excess of 17.2%.
Rather bizarrely, the ongoing reduction in property prices across the Silicon Valley has attracted the attention of more and more first-time buyers in the area. It would appear that while prices continue to fall and more homeowners fall into the negative equity trap there has been a distinct increase in property transactions in certain pockets across the region. First time buyers have to a certain extent been locked out of the market for many years but now that prices have fallen back, many are now taking this opportunity to jump onto the property ladder.
When you consider the mass of wealth in the area and the long-term potential for lucrative employment, even if the short-term market has softened, there is potential for the property market to bounce back fairly quickly as and when the US economy starts to stabilise and money markets return to normal.
The sharp reduction in property values across the Silicon Valley in the final quarter of 2008 shows that there is no region in the world insulated from the ongoing worldwide recession and worrying reduction in property prices. Despite the massive wealth in the region, a substantial number of home owners have slipped into negative equity which has placed further pressure on property prices and individual financial circumstances.
The area is awash with some of the wealthiest companies in the world and a workforce which is unmatched across the globe. It would appear that the property market had been fairly resilient, all things considered, in the first three quarters of 2008 but towards the end of 2008 the true extent of the economic downturn seems to have dawned even in Silicon Valley.