Where Are We Now: A Normal Cycle Or A Transitioning Market?
This summer was busy for global economy: the Greek bailout, China’s devaluation of currency, global market indexes on a roller coaster, tanking oil prices, and more Fed uncertainty about interest rates. What impact do these have on our local real estate market?
Locally, you may have noticed homes in your neighborhood taking a bit longer to sell or the selling prices seem lower than what you witnessed in spring. Are these local factors stemming from the global occurrences from the summer?
Year after year, my analysis shows that our local real estate market is cyclical and typically in this cycle, July –September are transitioning months. So far, this year has been no exception, but will the coming months continue in a normal pattern or will the latter part of 2015 change course given the events of summer and current global economics?
A Typical Bay Area Summer Cycle Explained:
In my 2014 September newsletter, I discussed this cyclical market in my article, “Summer Market or a Changing Market”. After addressing how summer is historically and nationally the best time to sell, I explained why I see our region different: extensive vacation travel, priority and motivation shift in summer, which may not be the same in other regions. This phenomenon compounded with seller expectations of getting 30% over asking price since that is what they witnessed in spring, makes for unhappy sellers if they have not been given realistic expectations. If your neighbor sold their house for 30% over their asking price in April and you use that sale as a comparable to price your home at their sale price, why would you expect your home to sell 30% more than that? Has the market gone up an additional 30% in a quarter? A situation just as common is the sale in April that had an offer significantly higher than any other offer from an emotional buyer (I call this an emotional premium), but when you list your home in August the emotional buyer is on vacation or they may not feel the motivation and urgency. There is a great example of this situation in a Mountain View development known as the Old Mill. It is ideally situated near Caltrain, close to Google and next to Los Altos in the Los Altos school district.
This is a great example because it is a large development with many of the same units, so it makes for a more accurate comparison. We have experienced a surprisingly aggressive increase this year. Since January, fairly equivalently updated units sold from $1.18m up to $1.4m and now back down to about $1.2m. If you were the $1.4m seller you were likely skipping all the way to the bank. Right now, there is a significantly updated unit getting ready to close at $1.25m, which is situated next to that $1.4m unit. Needless to say, the seller expected a $1.4m+ price for their home and when they didn’t get it after being listed at $1.138m, they raised their price! Turning down offers as high as $1.325m, the seller settled on another offer after two months of market time at $1.25m. These can be difficult realities for a seller to stomach, so many raise their list price after it has been on the market, or pull the property off the market and attempt to rent the property and try again next year.
This summer I have experienced multiple situations with buyers where we make solid offers, but even though we were the only offer after multiple weeks on the market the sellers felt their home was worth more. Since their expectations were not met, they declined our offer after sending outrageous counter offers and either raised their initial list price to their wishful price, or pulled the home from the market in hopes that the market would catch up. These are actual situations I see weekly in this transitioning market. Will this continue into fall? Now that’s a good question!
Are We Looking Towards a Market Correction Period?
To those who think that the market always goes up, that’s just not true. Those of us that have lived in the valley long enough have experienced market correction periods. We have seen periods of severe job layoffs, rent rate decreases, and significant interest rate increases. None of those are happening today…yet, but my point is that our market can and does change, albeit not as significant as other regions.
If we are headed to a market correction period, here’s the good news: you can take advantage of lower sale prices and buy investment property or upgrade your existing home while having more than a day to may your decision. But, there is a catch – a market correction will likely result in higher interest rates and we do not know what the net difference will be to your monthly expenses (affordability of purchase price to interest rate ratio). For example, I have a family currently looking for a specific property and school district. Irrespective of market condition, they are spending approximately $5,000 post-tax money on elementary school tuition because they are not in a public school area that meets their needs. We are looking for a property within a public school area that would enable this family to purchase now as a temporary home and take advantage of public schools, which would save them $5,000 per month. That will basically be the carrying costs of the home, even with a completely vacant house. So, for this family, whether the market goes up or down, they want to take advantage of significantly low interest rates, keep their expenses the same, and improve their quality of life with great public schools for over ten years. The low interest rates have been and continue to be a main driving force of our market. I have been saying that the rates will be a key indicator to watch, since it will directly impact one’s affordability. When we do see a market correction we will be excited with lower sale prices, but everything comes at a cost.
Investing in local real estate long term is a solid strategy. Coming into the next quarter I will be carefully monitoring the reactions in the global equities market, the Federal Reserve rhetoric, and the day to day of how buyers and sellers interact in our local environment. The ability I have to be in the market daily gives me a unique perspective to immediately witness up or down market changes. I can make swift and decisive actions to help my buyers and sellers to meet and exceed their goals and objectives.
Should you buy or sell today? That depends on more than a few questions. There are always opportunities depending on the end goal and I enjoy the process and strategy of helping my clients identify the best course of action and execute accordingly. I am always happy to meet with my clients to discuss their needs – even if the resulting strategy is a long-term strategy. You may not buy or sell a property today, but the best results come from a well-planned process over months and sometimes even years.