My 2018 Forecast
2017 in Review:
Who would have thought that a highly turbulent and divisive Trump Administration where no major legislation was passed (pending tax reform) with constant shakeup and uncertainty within the leadership and some of the worst global tensions in decades, still enabled Wall Street markets to shoot up 20-30% and digital currencies up eleven-fold.
2017 started off slow with plenty of uncertainty to go around. Homes were sitting on the market longer and accurate pricing was very important. It seemed that the trend would continue through the year, but then the stock market started increasing at a rocket’s pace and our local real estate market followed suit. By May, a new euphoria set in with new money being cashed in to buy homes and an unexpected confidence. Local prices are now well above any historical standard and anxious homebuyers are doing anything they can to purchase a prized Silicon Valley property.
I expected a slower 2017 with so much looming uncertainty and presumed the new administration would cast additional uncertainty on the markets. Surprisingly, it seemed nothing could slow the bull market: international government conflicts, North Korea, Brexit, country bankruptcies, interest rate increases, etc. The increased Fed Rate of .75 has yet to impact pricing and the incoming Federal Chairman, Jerome Powell, who is replacing Janet Yellen (another shakeup), is another change that has yet to impact the markets. The pending tax reform legislation includes sections on reducing mortgage interest and removing property tax deductions, two key benefits to homeownership, especially in our region, which has yet to sway prospective purchasers.
The slow start to 2017 became noticeably more aggressive by May and has not let up. What many thought would be a humdrum year ended up being a very active one– unexpected gains with practically every asset class experiencing record increases.
I think the wealth created in the stock market has been the key driving factor to the increased home prices through 2017 and I am yet to see a slowdown to that mindset. As discussed in my September newsletter, the growth in equities has significantly outperformed real estate and therefore allowed the option of cashing out some proceeds to use towards down payments. Many clients did larger down payments this year by using stock sale proceeds and there was less hesitation in the buying decision. I am seeing this euphoria across price segments, but I am most concerned with the entry level homes, where buyers are typically putting all their savings into their first home, which in some cases has doubled in 5 years.
As an example, a West San Jose development was selling in 2012 at approximately $350,000. In Fall 2016 it was selling at approximately $740,000. Today, that same development is selling around $900,000. That’s a 20% increase in just a year and 2.5 times more than 2012. It concerns me because most of the buyers in this category have never experienced a market downturn, so they don’t believe it will ever happen in the Silicon Valley. Granted, there is stiff competition and many of the competing buyers are doing and paying anything they can, irrespective to other market factors.
A large uncertainty today is the pending tax reform legislation that will likely impact homeowner tax deductions of property taxes and mortgage interest for many years to come. However, even with that uncertainty looming, buyer motivation does not seem impacted and each new sale seems to be setting the previous record high. It almost seems unstoppable, which is what alarms me. Even Goldman Sachs came out recently and acknowledged “all good things must come to an end”. This unstoppable energy is not typical for our market and continues to beg the question, how long will it last?
This conversation is much different from a year ago – the hesitation and lackluster attitude about real estate that dominated the latter part of 2016 has morphed to an urgent and euphoric mindset: “our market is impenetrable,” is more the appropriate attitude I’m hearing from homeowners, Realtors and even the local Baristas.
What Will Happen in 2018?
I think two key factors that will shift the inertia are a sizeable pullback in the equities market and weakening jobs. Our region is home to four of the juggernaut tech companies that have been instrumental in the market runup, so the growth in those company valuations and employee retention has created a very attractive environment, locally. I am constantly asking industry experts whether they are seeing any signs of pullback on hiring, but so far it appears companies are still aggressively seeking talent. Venture capital is still investing at a huge rate, though there is new data to suggest money is flowing to more mature, previously funded companies, than traditional start-ups. This is an indicator that venture capital is becoming more conservative and less likely to bet on the underdogs, which are inherently riskier. It is too early to see any solid signs of a market slowdown, but there are cautionary signs whether you are a buyer or seller.
This will be a wait and watch kind of year. Energy can change quickly, so I will continue to stay actively involved for you since it is unclear how long this euphoria will last. If you have a family necessity to buy or sell, you will have to consider it and make a prudent decision based on your timeline and needs; I wouldn’t suggest purchasing with a short time horizon, but if you are looking for a long-term home, you can still buy with a low interest rate and start living your new lifestyle. Or buy a smaller home now that fits your current lifestyle needs and preserve cash for your down payment on the next property. Strategizing when to sell? I don’t think waiting and betting on a future sales price is necessarily the best strategy, depending on your situation. I suggest planning out your 2-5-year plan and see where your home sale falls into the plan. There are always reasons to buy and sell real estate in any market, so it is important to understand how your decision will be impacted by the current economic climate. In other words, even the current climate can justify buying or selling depending on your needs.