Confirmed: The Market Has Changed—Now What?
September was a significant month to determine whether our real estate market would be considered a seasonal trend or transitioning market [June 2018 Newsletter]. The typical traction I see following the summer slowdown did not happen this year, so the lack of market-momentum and confidence has shifted the overall conversation to pontificating the causes of the slowdown and how deep it will go.
Until recently the market was stimulated by FOMO (fear of missing out). The speed at which it was moving (how quickly decisions were made) was influenced by necessity – if you didn’t make a quick decision today, someone else would and the house was gone. This was a very good position for sellers, so the change has been a tough pill to swallow for them: re-calibrating expectations off a huge high that ended in early May. Now that the market is calming, buyers have more time to consider their decision and make sure it is the prudent thing to do, although I would not consider it a true “buyers’ market” just yet. Buyers can take their time to consider if it is the right time to purchase a property and if it is the right fit (price, location, amenities, etc.).
The additional time to make decisions perpetuates the condition and the overall market realizes the cooling trend. We have gone from a full sprint to a jogging pace with so much ahead of us and the real estate market can surprise in many ways: will it continue to slow, pivot and go up, or stay stagnate? I will breakdown the main catalysts to the slowing trend and address Buyer and Seller strategies for 2019.
What’s Slowing the Market?
Many of the contributing factors that are slowing the market are not new and have actually either been in the market or on the horizon for over a year. They are just now being considered material causes though they aren’t a surprise.
Geopolitical tensions – we have been having this conversation for about two years, albeit it seems to be intensifying. The uncertainty in politics doesn’t help the situation since global markets don’t fend well with unknowns and create a lack of clarity for decision making.
Brexit/EU instability – this has been a freight train coming since March 2017 but it is getting serious now. We still don’t know how it will play out, but EU instability spills into the US markets.
Rising interest rates – The practically zero interest rate environment we experienced for almost a decade has created a tremendous amount of wealth and even though the rising rate since 2015 to 2.5% (expected in December) is still low, investors are complaining about it because they have been accustomed to a free-money borrowing environment.
Affordability – When you evaluate the affordability of a home, it isn’t necessarily the purchase price, but the monthly payment, that is usually a deciding factor. As rates rise, the monthly expense increases and therefore there is pressure put on the purchase price.
Low interest rates tend to benefit Sellers because the additional buying power nets the Seller more money by way of a higher sales price. In a higher interest rate environment, purchasing power is impacted and the loan amount typically goes down, hence lower purchase price caps. This results in an overall lower affordability that trickles through the market.
Federal Reserve – Wall Street tends to hang on every word from the Fed and attempts to extrapolate their economic plans for the coming quarters. This can be dangerous as even the Fed is waffling a bit in their rhetoric. Ideally, the Fed doesn’t want to stifle the economy with raising interest rates though you won’t know until it’s too late whether the rates are too low or high. In the end, I think the Fed is simply doing their job and they shouldn’t be influenced by Wall Street complaining that it is going to impact the bull market. Interest rates have been extremely low for about a decade which has dramatically impacted wealth creation. Normalcy, if you will, is inevitable and keeping inflation in check is the main goal of the Fed.
Currency transfers – Government regulations have become stricter on transferring money outside of countries, like China. This has negatively impacted our real estate market since even local buyers (not international) are unable to get funds out of China for down payments (whether from family members or their own funds sitting in an overseas account). This regulatory shift has restricted potential buyers by either lowering purchase prices, slowing the rate at which they can purchase (taking longer to transfer funds) or taken them completely out of the market until regulations ease or they find alternative ways to move money out.
Tariff War – the current US trade dispute with China will impact 2019. I’m just now starting to see prices rise (about 25%) for goods and given the supply chain timeline, I expect to see a clear impact next year especially with no signs of a trade deal on the table. The clear instability of direction will force companies to hesitate when considering business strategy. I’m bracing for a conservative corporate approach to business decisions and spending in 2019 unless we see a significant trade deal materialize.
High PE (price/earnings) ratios – You’re hearing this conversation almost daily now, which seemed forgotten during the daily market rallies. Now that investors see the chink in the armor, they are moving from growth stocks to value stocks and being more aware of factors such as the price to earnings ratio, which I believe is tied to investor confidence. I think this impacts our real estate market because it is part of the overall conversation and mindset for prospective buyers: move from aggressive to more conservative decision making.
FAANG stocks – the darlings of Wall Street are falling out of love [for now] – we have seen some of our local tech stocks drop as much as 40%, which significantly impacts one’s ability to buy a home or make portfolio decisions. Many people have a high percentage of their net worth in their company stock, so when that individual stock has a large correction, they are pinched and have a difficult decision to make: ride through the cycle or liquidate at the discounted valuation and diversify the portfolio. Typically purchasing power goes down and/or urgency slows, which equals slower sale activity.
Transitioning market – going from “buy anything and it goes up” to being more thorough on purchases (real estate, equities, etc.). I am hearing more of a “wait and see” approach, but I think you can be prudent if you plan out a strategy. If 2019 continues to be similar to the end of 2018, there will be opportunities for my clients since we tend to be more patient and look for the right buying opportunities, making more methodical decisions.
Tax stimulus wearing off – the economic high from the 2017/18 tax stimulus is wearing off and is unlikely to be a positive factor in 2019. Our economy popped with the tax cuts and spending, but the markets are looking into 2019 including new tax regulations that take effect.
Sale Prices are Down
Prices are down from the peak across the board. I do not know of a single local market (from San Jose to San Mateo) that is not experiencing lower prices from earlier this year. Irrespective of price point, neighborhood, etc., I am seeing similar properties selling 10-15% lower than peak sales. Granted, peak sales are just that – peak; but in an escalating market they usually become a new comparable standard [unfortunately]. However, I stress that when the market softens, which can happen quickly, as we experienced this year, you don’t want to be the one who purchased the most recent sale for a ridiculously high price thinking the market will catch up with your purchase.
I could provide a spreadsheet worth of properties showing this trend, but instead will highlight a few examples:
A downtown Los Altos property sold in March 2018 for $3,400,000, only to resell in October 2018 for $3,120,000. That’s over an 8% drop in value, not to mention the selling expenses.
A tear-down home that sold in March 2018 for $3,800,000 compared to a superior property (move-in ready) in the neighbor-hood with similar lot selling for $3,400,000 in August 2018.
Fear Not! Sound Selling and Buying Strategies in This Market
The good news is economic cycles are just that, cyclical. It is inevitable a bull market turns to a bear market, so some people buy at the top and end up riding through it. Fortunately, we are staying in front of the information and preparing for opportunities, whether in real estate, equities or both. There are ways to leverage this market for your gain, whether buying or selling, so I will address a strategy for both scenarios that will facilitate your success in the new year.
If you are considering selling in 2019, it is paramount to have your home show well and priced right. The combination of these two factors will lead to success since most sellers, along with their real estate professionals, fail to properly prepare their homes. I’m constantly seeing tired homes where sellers do not think preparing their multi-million-dollar asset for sale is necessary, and that turns off prospective purchasers. When your home shows well, it will be more attractive to motivated buyers, plain and simple. Not only will it be more attractive to purchas-ers, but you will have a more diverse pool of prospects since many buyers will not consider homes that show poorly – it gives off negative ener-gy and/or they cannot see the finished product.
If your list price is based on a neighborhood sale from the glory months you will likely be sitting on it with price drops in your future. As a seller you want competition. If you are fighting yourself down to a sale price, buyers will know and will [should] negotiate more aggressively than when forced to compete with other prospective purchasers. I would do the same! This does not promote success for a seller since they do not have as much negotiating power in price and terms of a purchase contract.
What is driving your purchase decision? I think this is an important first step because it sets the stage for motivation and timing. Once you have a better understanding of what’s driving the purchase decision you will be more likely to make the right buy.
Price charts – if you are running data sets to see the market change, I argue you won’t be seeing an accurate representation of the micro-market since the data includes aggregate sales data, not just like-kind sales. I find it more valuable to compare like-for-like sales in order to have an accurate pulse, since buyers and sellers are working in a more finite market (price point, neighborhood, etc). Property types can be very specific, therefore, you want to be looking at that granular level of data, which isn’t recognized in larger data models.
Know your down payment – is it already in cash or sitting in your stock portfolio? It’s the same old story that when the real estate market is down, so is the stock market, so if your down payment is in stocks you are in a predicament: sell your stocks sometimes at a 30-40%+ discount to buy the discounted real estate or ride through the stock swing, which means you may miss the real estate buying opportunity.
Stay put: keep renting or don’t upgrade your home – you may currently be renting and your expenses are nice and low. The thought of quadrupling your expenses isn’t exciting, or you have a small home and the idea of an increased mortgage payment doesn’t excite you. Either way, you’ll need to decide whether to make a move or just stay put for the time being and watch the market. This is a realistic scenario that many people will be discussing.
Buying the right property takes times. We will work through every step of the process in order to understand your needs and make the best decisions. We will be patient, discuss your wants and needs and move forward accordingly.