The novel coronavirus (COVID-19) pandemic has paralyzed the Bay Area, the United States and the World. Most aspects of life as we know it will be different going forward. I will save you my personal opinions on the virus and the long-term outlook except as it relates to the Bay Area (more specifically the Peninsula — Los Altos, Palo Alto, Mountain View, Menlo Park, Atherton, Redwood City, San Carlos, Belmont, San Mateo, Foster City, and Burlingame) real estate market. You’re welcome:).
Predicting coronavirus infection and survival rates is not my specialty and that should be saved for the epidemiologists. Regardless, I believe unemployment will continue to rise significantly, the stock market will continue to decline, and people will continue to panic and act irrationally (e.g. toilet paper rationing). Economically, I believe it’s going to look similar to 2008 to 2011. Many of us in the Bay Area have amnesia since it was a while ago, so let me remind you what happened — US unemployment peaked around 10%, Santa Clara County unemployment peaked at over 10% and the NASDAQ and S&P 500 both dropped by more than 50%. I don’t think we’re going to escape with any less economic damage than the 2008 to 2011 downturn at the peak of this pandemic.
Let’s see what happened to the Peninsula real estate market during this time period. We’ll use Central Menlo Park as an example. I pulled extensive data on Central Menlo Park back from 1998 to present to look at houses that sold during that period. Below you can see what happened to overall price per square foot (Figure 1).
From the peak in 2008 to the bottom in 2011 (2011 was the bottom even if not indicated in this graph), overall prices in Central Menlo Park dropped 10%. If we look at the upper end of the market with homes greater than 4,000 sq ft in Central Menlo Park (Figure 2), we can see that the median sale price dropped 1% from 2008 to 2011. Based on this data, the upper end of the market fared better than the average market, but the upper end of Central Menlo Park has generally been a stable market and in high demand in most economic environments. Compared to the 40–50% drops in property values that we saw in the rest of the country during the Great Recession, the Peninsula real estate values were more resilient.
The question is whether the Peninsula real estate market during and following COVID-19 will see a repeat of the Great Recession, a milder version or a worse version. While the cause of the market change is very different than the 2008 to 2011 time period, the economic result so far seems to be very similar — close to 0% interest rates, large stimulus package, plummeting oil prices, and high unemployment. Initially, we are seeing a slight decrease in home prices as uncertainty is high. However, assuming the US maintains low interest rates and continues to stimulate the economy through this pandemic, house prices are likely to increase dramatically. As Work From Home continues to become the norm, people will leave the Bay Area for greener pastures and increase property values elsewhere. In addition, people in the Bay Area are likely to move towards larger houses and properties with more distance between them. Ultimately, I see median home prices in the Bay Area increasing at approximately 10% per year for the next year or two.