Santa Clara County is well on its way to a full housing recovery. Residential construction is booming and buyer incomes continue to rise at a much quicker pace than the rest of the state. However, annual home sales volume has remained level since 2010, marking the end of the housing tax credit stimulus.

Santa Clara’s success is due to its successful jobs market, particularly in the Silicon Valley area. However, the region’s high cost of living, reflected in steeply rising home prices, is a heavy drag on demand, reducing home sales volume and turnover rates.

Update March 22, 2017. Original copy posted August, 2014.

Home sales volume still low

Chart update 03/22/17

2017 projection* 2016 2015
Santa Clara County home sales volume 19,000 19,200 20,000

*first tuesday’s projection is based on monthly sales volume trends, as experienced so far this year, and other local economic indicators.

Santa Clara County home sales volume is more of the same each year, now headed into its eighth year of stagnation. During 2010-2015, home sales volume remained mostly level while accounting for seasonal bumps and dips. Total 2016 sales volume declined 4% below 2015.

And the reason for Santa Clara’s flat-to-down home sales volume? Home prices in the Santa Clara/San Jose area are inflated, sending end users further afield where they are able to buy more home for the same amount of money. This is not what local real estate agents want.

Sales volume will continue to be pulled down in 2017 since — while incomes are rising — prices are rising faster. Worse, the mortgage rate rise which began in November 2016 further reduces the buyer purchasing power of Santa Clara residents.

Personal incomes have risen at a much slower pace than home prices. Personal incomes rose nearly 7% in 2015 in the county. While this is higher than the statewide average, it’s still below the year-over-year increase in Santa Clara County home prices.

Turnover is flat

Chart update 12/19/16

2015 2014 2013
Santa Clara County homeowner turnover rate 7.3% 7.1% 7.0%

Santa Clara County renter turnover rate

21.6% 21.9%
23.7%

It’s no surprise Santa Clara County’s housing turnover rate is stagnant, given the county’s resulting flat home sales volume. With home prices still excessively high as of Q3 2016, it’s simply not the prudent time to buy. However, the area’s solid jobs recovery ensures new residents continue to pour in at a rapid rate.

Santa Clara’s population grew at a rate of 1.1% in 2015, higher the statewide growth of 0.9% the same year. This pace of growth will help churn Santa Clara County’s turnover rate, first as increased renter turnover followed by a rise in homeowner turnover. The caution in these forward observations is the tech and information bubble developing in the area and whether it will come to the point of bursting and putting end to further job growth for a few years.

On the other hand, renters continue to move less each year. As rents rise rapidly in San Jose and Santa Clara, tenants are discouraged from moving out of their current situation.

Homeownership feels the pressure of high prices

Chart update 03/22/17

Q4 2016 Q3 2016 Q4 2015
Santa Clara County homeownership 49.9% 48.1% 45.4%

While varying greatly from quarter to quarter, Santa Clara County’s long-term homeownership rate has trended downward since 2005, oscillating around 57% most years, indicated by the dotted line on the chart. However, in Q4 2015 homeownership dropped to its lowest in recent memory, to a very low 45%, to rebound in 2016 to its current level of 49.9%.

The rest of the state has experienced a swift decline in homeownership since the 2008 recession, peaking at over 60% in 2006 and settling at 53% in 2016. Santa Clara’s long-term rate of homeownership is mostly stable, due both to its successful jobs market and high home prices. Elevated prices keep homeowner turnover from rising to unsustainable levels (as occurred across the state during the Millennium Boom). Likewise, Santa Clara County’s strong jobs market bolsters its homeownership rate.

However, the recent downtrend in homeownership does not bode well for the local housing market. End users of real estate are being pushed out of the market as prices rise beyond the reach of incomes.

Construction boom trails off

santa-clara-construction-q4-2016

Chart update 03/22/17

2016 2015 2014
Santa Clara County single family residential (SFR) starts 1,700 1,900 1,800

Santa Clara County multi-family starts

4,300 5,100
7,700

Construction was recovering quite well in Santa Clara County – until 2016. Single family residential (SFR) and multi-family starts are well above the numbers experienced this past decade, but have fallen abruptly beginning in mid-2015, continuing down throughout 2016.

Multi-family starts leaped in 2014, ending the year 33% above 2013. The multi-family market grew due to two factors:

  • Santa Clara County doesn’t face the same outdated constrictive zoning as nearby San Francisco County; and
  • Santa Clara County’s high cost of living makes it more cost-effective to reside in a multi-family dwelling with communal amenities, as opposed to a distant large suburban SFR.

The good news is annual rent increasing have fallen from a high 11% a year ago to just over 2% in Q3 2016, according to Zillow. SFR and multi-family starts will likely hit their peak following Generation Y’s entrance into the housing market in 2019-2021.

Employment growing strong

santa-clara-employment-jan-2017

Chart update 03/22/17

Jan 2017 Jan 2016 Annual change
Santa Clara County jobs 1,070,100 1,048,600 +2.1%

Santa Clara County passed the milestone of its pre-recession employment peak in early 2013. Accounting for a population gain of just over 100,000 individuals in Santa Clara County since the 2008 recession, it finally reached a full jobs recovery for its population in Q1 2015. In contrast, the state of California only just reached pre-recession employment numbers at the end of 2014 and has yet to reach a post population-gain recovery.

The full statewide jobs recovery (including jobs needed to account for population gain) won’t occur until 2019.

Why has Santa Clara’s job market recovered more quickly than the rest of the state? Of the 158,600 jobs added since the level set by the 2008 recession, roughly one-quarter of those jobs have been in the Professional-Business Services industry. This includes all of those tech industry jobs. The bulk of other new jobs can be found in industries that support the tech industry.

Employment by industry

santa-clara-industry-employment-jan-2017

Chart update 03/22/17

Jan 2017 Jan 2016 annual change

Goods Producing

210,100 207,500
+1.3%

Professional, Scientific & Technical

149,700 145,000
+3.2%

Education & Health Services

162,300 159,200
+1.9%

santa-clara-re-employment-jan-2017

Chart update 03/22/17

Jan 2017 Jan 2016 Annual change

Construction

47,300 45,100
+4.9%

Real Estate Rentals & Leasing

13,900 13,700
+1.5%

The largest employing industry in Santa Clara County is the Goods Producing industry. This has recovered somewhat since the 2008 recession, but has a long way to go.

It’s unlikely to ever return to the peaks experienced in the early 2000s, as the local jobs market has switched focus away from producing goods to producing information, via the region’s thriving tech industry. On the other hand, expect the construction industry to continue to grow steadily in 2017 and in the coming years as construction starts rebound.

Income rising quickly

Chart update 12/19/16

2015 2014 Annual change
Santa Clara County per capita income $82,756 $77,663 +6.6%
California per capita income $53,741 $50,988 +5.4%

Santa Clara County personal incomes are well above the statewide average. Further, from 2013-2014 incomes increased nearly 7% in the region, while incomes increased statewide by a more modest 5%.

Still, incomes need to increase much faster if home prices and rents are to be maintained. Since this isn’t the way home pricing functions, home prices need to either fall in line with homebuyer incomes, or else homebuyers need to resort to risky adjustable rate mortgages (ARMs) to make up the difference.