“It doesn’t mean the market is going to crash tomorrow.”
Money from Chinese investors “has dried up,” a residential real-estate broker in San Francisco told me a few days ago, as he was fretting about the local housing market. It’s a result of the crackdown by the Chinese government on capital flight, he said.
Chinese investors have been buying about 5% to 7% of residential properties in San Francisco, possibly more in parts of Silicon Valley. And other brokers are now publicly chiming in about money from China drying up.
“We’ve recently noticed a slowdown,” Jack Woodson at Alain Pinel Realtors in Menlo Park in Silicon Valley, told Bloomberg. “Buyers are taking more time to decide about making offers.” He fingered Chinese investors who’ve suddenly curtailed their purchases after they had “really been driving the market.”
Data coming out of China appear to support the thesis of a sudden money vacuum in some of the toniest West Cost Housing markets.
In February, foreign exchange reserves had dropped to $3.20 trillion as a result of rampant capital flight and the central bank’s efforts to prop up the yuan. It was the lowest level since December 2011, down $790 billion from the peak in June 2014, after a record plunge in 2015 of $513 billion. But in March, foreign exchange reserves rose to $3.21 trillion. And in April, instead of re-plunging, they rose again to the great surprise of the onlookers, hitting $3.22 trillion.
And China’s State Administration of Foreign Exchange (SAFE) reported that capital outflows have begun to ease. Net foreign exchange sales by commercial banks dropped to $23.7 billion in April, from $36.4 billion in March, and less than half of the $54.4 billion in January.
This money vacuum is being felt in Silicon Valley. It coincides with the tech slowdown, the iffy stock market performance, and the swoon in the IPO market. Bloomberg:
Silicon Valley, the most-expensive U.S. housing market, is seeing a pullback by the wealthiest homebuyers after a four-year real estate boom marked by bidding wars and multimillion-dollar prices.
In Palo Alto – where the median home price was $2.5 million in the first quarter, according to Zillow – the 11 listings of homes costing over $5 million as of May 14 have been on the market a median of 30 days. Gone are the bidding wars “when newly minted millionaires from tech initial public offerings raced against buyers from China to scoop up anemic inventory.”
And price cuts – the bane of the industry – are back in vogue. Bloomberg cites a home in a prime area of Palo Alto that, after sitting on the market since the end of March, had its price slashed by $500,000 to $7.5 million. It’s still on the market, having joined “a growing inventory of high-end homes in the area that are taking longer to sell.”
The slowdown in Silicon Valley also hit homes costing over $3 million, Realtor.com reported. In that range, the average selling price in April dropped about 9% from a year ago to $3.76 million. Homes in that price range sat on the market for 30 days, up from 26 days a year ago.
A similar trend is spreading across California. Homes costing over $3 million sat on the market on average 52 days in the first quarter, up from 40 days a year ago, Jordan Levine, an economist at the California Association of Realtors in Los Angeles, told Bloomberg. And more tidbits:
- In Santa Clara County, where Palo Alto is located, Q1 sales of homes costing over $5 million plunged 35% to just 13.
- In Atherton, a small town in San Mateo County, and one of the most lusciously expensive pockets in the US, the 25 homes costing over $5 million have been on the market a median of 100 days.
“The market is cooling down,” Avi Urban of Keller Williams in Palo Alto told Realtor.com. He’s seeing interest wane for homes costing over $4 million:
“It doesn’t mean the market is going to crash tomorrow,” he says. “This is a time where basically we have reached a point where it’s too expensive” for many would-be buyers, and it’s starting to pull down prices.
For example, Urban had a two-unit condo property in a prime Palo Alto location in the $2 million range that received only one offer in the first two weeks it was listed. A year ago, he would have expected it to receive more than a dozen bids for 10% to 15% over the asking price.
“We’re probably moving toward normalization,” Katharine Carroll, vice president at Pacific Union Real Estate in Palo Alto, told Bloomberg.
Alas, “normalization” is reminiscent of the famous explanations in 2007, as the housing bubble began to topple, that the market was “plateauing” and “taking a breather.”
So far, realtors claim that demand in Palo Alto’s middle segment, so in the $2 million to $3 million range, is still getting propped up as Facebook and Google are still hiring, unlike many of the other tech companies that have started laying people off. But there’s a snag.
“Palo Alto is at a crossroads, where some homes are doing very well, and some homes are lingering that last year would have sold with multiple offers,” Ken DeLeon, founder of DeLeon Realty in Palo Alto, told Bloomberg. “When they do sell, it’s when the seller cuts the price below what they would have gotten last year.”
And that would be a year-over-year price decline. Which is how it starts.
Apple and Alphabet, each worth around $500 billion, along with Facebook, Amazon, and LinkedIn, the Big Five in Silicon Valley, have a giant footprint on commercial real estate. So just how exposed is Silicon Valley’s office market to a slowdown among the Big Five? Because this could get very ugly! Read… Silicon Valley Commercial Property Boom Ends, Totally Exposed to Apple, Google, Facebook, Amazon, LinkedIn
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.