Is the Market Going Down?

It’s been quite a summer for real estate. The seasonal slowing we consistently see play out makes both buyers and sellers step back and question the market condition. We know summer is an uncertain market, so it should be no surprise that we experienced a noticeable decrease to buyer urgency, aggressive offers and the “must-get it at all cost” attitude.

In addition to the seasonality, there was a huge amount of political tension from immigration issues, tariffs, global and domestic disputes, and more. It is always easy to look back to explain a market change, but I want to foresee it as best as possible to help give my clients the edge.

Given the fairly normal summer real estate market, I will be looking at the coming months to help my buyers decide whether we should complete our purchase soon to take advantage of the slower market, or wait a few quarters anticipating a continued decline. For my sellers, we must decide whether to sell now or gamble on the market picking back up in the near future.

There is no crystal ball to make that decision, however, I think there is substantial data to support our market cycle trend and it shows that we must prepare for a market change separate from seasonality. Yes, for the coming quarters I think a market climate change is in the making depending on how contributing variables play out similar to how the domestic and global markets seem to be changing quickly. This is where you will decide how risk tolerant or adverse you are.

An Early Summer Market

This year’s summer market started off early. I saw a clear drop in open house activity and total number of offers all year, but late May was a surprise. Typically the summer market starts in late June, so we were a solid month earlier than usual. That means many people were caught off guard, including me. Once the summer market kicked in, I quickly adjusted the conversation with both buyers and sellers to prepare them for the months ahead.

The phone calls started coming in – other agents asking about offer activity on listings and whether I had buyers for their home, not understanding why they didn’t have a line of motivated buyers for their listing. Days on market began ticking up on homes and people wondered why they couldn’t get that spring price. Alternatively, more mainstream articles about the market softening surfaced and I had more conversations about whether to buy/sell now or wait for more clarity. Our market is so dynamic—though there are common factors that I see play out year after year:

Seller Expectations – when your neighbor sells in spring for a given price, you expect the same in summer, but most often you don’t see as aggressive of offers in summertime. If sellers do not receive offers at prices they expect, they will either raise their listing prices to their expectation, remove from the summer market, or begrudgingly sell their homes. You are more likely to come across an unhappy seller if you haven’t been informed on summer market conditions, so be prepared for a more emotional encounter. I have seen so many price reduction emails come through this summer (even more than normal) and homes that raise their listing price. Alternatively, spring sellers are typically more surprised because the offer prices exceed comparable sales and exceed seller expectations.

Buyers make less aggressive offers – there is a feeling that other homes will come on the market, so the urgency dwindles and you see more of a normal market whereas the buyer who ends up being 10-15% over the next highest offer typically doesn’t come to the table. I encourage buyers to make offers not necessarily based on the last comparable sale, but hedging the market because we are often surprised at how few offers end up coming in. This means that the seller doesn’t get their bonus price that a neighbor may have recognized.

For example, there is a great, newer development on the peninsula that had a sale at the end of March. It was listed for $1.45m and sold for $1.65m. The same floor plan in the development was listed in June for $1.495m and didn’t sell. The seller had an expectation of $1.65m because of the neighboring sale, but apparently the seller didn’t get the memo that they weren’t in spring anymore. After raising the list price and still not selling it, they pulled it off the market assuming they will put back on at a later time.

Seasonal or Climate Change?

Summer was fairly typical, so I advised clients to be cautious about reading too much into the past few months, though whether we go back into a traditional seasonal market or continue into a transitioning market is yet to be seen. This is what I’m watching most carefully.

I think September will be an important indicator - this is when we usually see a pickup in confidence and market momentum. If we see the market rebound, both in energy and prices, then we can categorize this past summer as normal seasonality. However, if we see continued buyer hesitation and unrealistic seller expectations, I will be willing to consider a transitioning market. Interest rates are continuing to rise, albeit slowly, but even small rate increased can make a notable impact to monthly payments, especially on higher loan amounts.

Market Factors

Interest Rates – they are continuing to rise with the Fed rate currently at 2% and expected increases in 2018. Inflation is also on the rise, however, it doesn’t seem to be impacting buyer decisions yet.
Inventory – we have a chronic inventory shortage in our area, so I don’t think this is good data point because it is always low, though you often see it used to explain market conditions
Motivation – buyer/seller motivation is key because it will dictate the sale terms
Stock Market – continues to show strength
Employment – not many signs of slowing, which increases Bay Area/Silicon Valley confidence
Affordability – I think this is one of the top market factors! Affordability is already nearing its lowest point, so any rate increase will have an impact, assuming income continues to be fairly flat

What will change the market? I think the catalyst that will pivot our market is already here. Take your pick: affordability, rising interest rates, political instability, tech regulation, tariffs, global tensions. There are plenty of factors amongst us that have the power to change the conversation, but won’t be considered the cause until after the fact. Even with the uncertainty there are opportunities, you just have to dig for them.

What are you seeing in your industry that may show signs of market changes? What is the conversation among your inner circles? I love to have deep dive discussions about this, let’s talk!

Other News:

California vs. IRS — SALT Deduction Battle

The Treasury Department and the IRS announced in Notice 2018-54 that they intend to propose regulations aimed at countering the efforts of California and other states in their attempts to help taxpayers get around the new $10,000 cap on state and local tax deductions (SALT).

Beginning with the January 2019 tax year, “The Tax Cuts and Jobs Act” (TCJA) limits the deduction of state and local taxes from an individual’s federal taxes to $10,000. For California and other high property value states that is likely to expose many taxpayers to an increase in their federal taxes. In response, some state legislatures are considering proposals that in effect allow a taxpayer to pay their state and local property taxes into funds that could be characterized as “charitable contributions” and thus be fully deductible on their federal tax returns. The “chartable” funds would then transfer the “contributions” to the state and local authorities to satisfy the taxpayers’ liabilities.

While this seemed like a way for saving many taxpayers from increased tax bills, the Treasury and IRS are saying not so fast. They remind all that federal law supersedes state law for federal tax law purposes, and that new regulations will be drafted to make this very clear to taxpayers.

New California Solar Mandate on New Construction

California became the first state in the nation to require that virtually every new home be equipped with solar panels. The California Energy Commission endorsed the requirement on almost all new single-family houses built after Jan. 1, 2020, as part of the state’s fight against global warming and passed unanimously (5-0). This will be a burden on the builder/seller but should offer a long-term benefit to the buyer/homeowner.

Certain cities already offer building incentives for adding solar, so it will be interesting to see if they maintain those incentives or remove them since it will be a state requirement.

suzanne sarto