Good Times Ahead for the Lafayette CA Real Estate Market 2015

Chinese investment in Lafayette CA luxury home market

Chinese investment is driving the US luxury home market.

As a Lafayette CA real estate agent, the most frequent questions directed my way are often about the state of the market and what lies ahead.  In fact, some weeks, it seems like I have the conversation in one form or another on a daily basis with various clients concerned about whether they should sell now, buy now, wait another year, etc.

I never pretend to know more than I do, and I always place myself in the client’s position when responding to their important questions.  Unfortunately, that is not a universally adopted practice by some of the most successful people in our business, who seem to only care about what serves their personal financial interests and accumulating another sale.  At the end of the day, it’s important for me to know that I’ve provided clients with well-substantiated, honest answers to their questions about Lafayette CA real estate or Lamorinda real estate, even if it means that they don’t buy/sell immediately.

I was fortunate to attend a meeting last week with Alan Zafran, Senior Managing Director and Portfolio Manager for First Republic Bank.  He is a former wealth manager for Goldman Sachs and was Phi Beta Kappa at Stanford in Economics, as well as earning an MBA from Harvard.  He is a very articulate, thoughtful, well-researched speaker, who I found most impressive.

The current strength of the greater Bay Area and Lafayette CA real estate market is being driven by several factors:

1.  Job growth in San Francisco is exceeding housing supply.  This issue is affecting the escalation of housing prices in San Francisco, and is partially responsible for the spill-over effect within our Lafayette real estate market.  Additionally, rent prices are escalating even faster than the purchase prices of San Francisco real estate, thus pushing many renters into becoming buyers in the more affordable areas outside of the city, such as Lafayette.

2.  Interest rates will remain low for 2015.  Ideally, the Fed wants interest rates to be about 2.5% above the inflation rate — or around 4% based upon the 10 yr bond yield.  With major global economies in disarray around the globe, (e.g., China, Russia, Europe, etc…), foreign money is pouring into the US.  Our economy is still not fully recovered outside of the Bay Area, but it is the safest place to invest on a global basis.

3.  The credit climate is improving.  Simply stated… lenders are finding ways to make solid loans to well-qualified buyers across all price points.

4.  Foreign investment in US real estate.  85% of all applicants for US Visas are from China.  They are attempting to escape the downturn in the Chinese economy and to invest in the US.  Since the granting of their Visa is streamlined when they own property or a business and employ people in the US, they can often satisfy that requirement by purchasing a luxury home and hiring people to take care of it.

5.  The luxury home market is being driven by the tech economy and Chinese investment.  Clearly, the Lafayette CA real estate market has been a strong beneficiary of the San Francisco tech economy.  About 80 percent of all of our Lafayette real estate transactions the past 2 years have involved buyers moving from San Francisco.  Chinese investment is heavily influencing the luxury home markets in certain US markets, such as San Francisco, the Palo Alto/Menlo-Atherton Silicon Valley market, LA and NYC.  

6.  Wealth creation in a rising US stock market.  The past week has demonstrated that the bull market is not over.  According to Zafran, the market will continue to move up as long as cash pays zero.  People will chase yields.

Mr. Zafran believes that we are in the “7th inning” of the run-up in real estate prices — reminding us that real estate is a cyclical market.  Eventually, supply catches up with demand and prices either plateau or move downward.  In San Francisco, there are 50,000 housing units in various phases of the planning/construction pipeline — many in the south of Market area.  Supply may outstrip demand as they are completed.  Growth in San Francisco’s housing inventory is about 2 years ahead of the east bay’s inventory, which could serve to moderate the demand

As a person who always believes in full disclosure, I want to articulate the risks that cause me the most concern about the Lafayette CA real estate market, as well as some that were mentioned by Mr. Zafran.  Stay tuned for my follow-up post.