The Summer Market: My Perspective
Summer is quickly approaching. As we bid farewell to the spring market, we must remember that it has provided a gauge of the market momentum that is likely to continue through summer. As 2016 progresses, it has been interesting to watch the small nuances and changes that affect the daily climate: anecdotal stories of buyer and seller motivation, sale price fluctuations and an overall paradigm shift in thinking. How do you adjust your strategy in a changing climate? Should you buy/sell now, or wait? How long until the market settles? These questions will likely change the water cooler conversation for the next several quarters. I’ll discuss my thoughts below, and I plan to highlight these questions on an ongoing basis through my newsletters and Facebook postings in order to provide you the most relevant data.
Where We’ve Come From
My initial sense of a changing market began in August of 2015: instead of the competition blowing out prices significantly above comparable sales, I noticed prices starting to sell in a more reasonable range compared to recent activity. The dialogue began with my clients as we watched inventory deplete into the fall and winter months.
Come January and February, typically two months that are completely out of control with typical comments like, “these prices are crazy,” and “where are the buyers coming up with these offer prices?” There wasn’t that same frenzy and fear of being priced out if you didn’t buy a house before spring. Yes, this January and February were different. Homes were still selling for strong prices, but that extra something was missing. Slightly more chatter began amongst agents about what was going on and I was able to leverage their uncertainty to negotiate great deals for my buyer clients. Some homes were still selling in excess of reasonable comparable sales, but I was throwing those out as anomalies. My strategy became: Don’t chase those properties and continue being patient. My sellers had an advantage as well – knowing that the frantic energy was waning, we had to strike and have a well-prepared home, smart pricing and a close feeler on buyer motivation. The emotional connection of a buyer is critical as the market changes – if there is no urgency to buy today, why would a buyer pay a premium for your home? We create urgency and desire by having a home that appeals to buyers. Thus far, this strategy has worked well for my clients, but it doesn’t stop there. The market is ever-changing and we have to constantly watch it as well as outlying variables to make the best decisions possible.
Today’s Market: Making Sense of the Mess
Today you are seeing homes with price reductions, price increases (yes, some sellers are actually raising their price from the original if they are not selling thinking that if it doesn’t sell for the asking, the price should be raised!) and increased days on market. In contrast, there are homes selling way over their asking prices, with a dozen offers, and all cash. How can one understand this dichotomy? Each home is independent, so tell the engineer in you to put the algorithms away. Look instead to what makes one home desirable and the next door home not. If you prepare your home properly and get the emotional appeal of a buyer, you can get top price. I am seeing a high number of sellers that have a sales price in mind, but that price comes from a 2015 sale. “If my neighbor sold for that price in June of 2015, I want that price or higher,” thinking the market never drops and every sale should be higher than the previous one.
Going Forward: My Assessment
As mentioned above, I have pinpointed August 2015 as the beginning of the market change, so the next step will be to wait for the year over year data come fall. I expect the market data to highlight flattening prices and possibly a lowering trend. If this happens I think you will see the market condition as a more mainstream headline. Granted, this may be a short adjustment. I don’t know with certainty what next quarter or next year will look like, but I do know what I’m seeing today and feel my forecast is reasonable. Volatility in the equities, oil and global markets as well as slowing venture capital funding are just a few of the variables playing into our market. We are a valley driven heavily on technology with substantial wealth in equity and passive income. With so much net worth tied to the stock market, any fluctuation in value does impact motivation to buy or sell.
My expertise spans from the Peninsula to the Silicon Valley and I am seeing a change across the spectrum, albeit, it appears to be a top-down slowdown, similar to the dot com market. The high-end homes in any given community seem to be seeing the largest change now (increased days on market, lower list to sale price ratio, etc.), but I’m expecting this to continue into the lower price ranges as I’ve already seen a reduction in the number of offers and motivated buyers. Prices have almost doubled since the bottom of the market and even with historically low interest rates, there doesn’t seem to be much more running room for growth – the debt ratio of salary to home prices has returned to a place of saturation. If prices are flat when rates increase, it will put even more pressure on the monthly expenses of a buyer.
What should I do?
Given this information, should you buy, sell or wait and do nothing? It depends. You may want to buy and take advantage of the low interest before they start increasing, or you have an expanding family and you want to plant roots. You may be selling because you are retiring, relocating or upgrading. There are a number of reasonable reasons to buy and sell in this climate. If you have the luxury to wait, that is a viable option as well. Financial institutions are beginning to be more conservative on lending guidelines just as venture capital money is becoming harder to obtain. The goal is always to create a specific strategy that best fits your needs in order to maximize your benefit.
Where do we go from here?
Summer is historically a sporadic period with many families vacationing outside of the valley once school is out for the summer or just enjoying the slower months. I think this is a main reason our summer market is less aggressive that spring. With that, I am anxious to see how it plays out with new inventory and motivated buyers. Will sellers frantically put homes on the market and will the inventory trend continue as usual? You often hear professionals discuss the supply and demand factor of our market as a reason why our area is indestructible and values will never drop, but I argue our area has a chronic supply issue, so it is more a norm that a contributing factor. Irrespective of supply and demand, our market experiences up and down periods like other communities, albeit typically short-lived, respectively. I argue our market is tied to other factors more closely than the traditional supply and demand model, since that seems to be a constant.
Let’s break it down a bit further
Take the historical data of Palo Alto (see the data set below): it shows 14 years of listings and prices and you will see that at the bottom in 2010 there was not a glut of inventory. Demand was there at the time with busy open houses and buyers out shopping for a home, but with the instability in the financial markets, there was a significant amount of caution before making a purchase decision. I specifically remember a unique factor in Palo Alto around 2009 was the opening of the Taube Koret Campus and many original owners were selling their homes to move into this new facility at the JCC. This is one variable the contributed to the local market at that time. It is variables like this that make each community independent and knowing these factors help understand what makes a neighborhood tick. Who is moving in and moving out? What are the driving factors to a neighborhood: walkability, schools, CalTrain access, etc.? Our market is very specific and I think understanding the range of motivating factors will make you a more informed buyer or seller.
Currently, it also seems that the commercial space is beginning to see an oversupply issue on the horizon with a vast amount of new inventory coming online in San Francisco and San Jose and companies are not ready to absorb the space. Rentals are still being met with multiple tenants, but I’m seeing a clear flattening to prices due to what I think is a saturation point. The good news is developers have been taking advantage of this initial adjustment to the market and spending their cash on projects. Fortunately, they will tie up their cash pretty quickly, which means that future deals will have less developer competition.
The adage, cash is king, should be your 2016 saying.
Thinking about buying? Get your cash together. Interest rates will inevitably change and you want to have the cash when deals come up. Thinking about selling? We will work closely together to prepare your home in the best way that appeals to today’s buyer. Real estate is unique, so we need a unique strategy for you.