Be a Deal‐Maker in the Current Market
What motivates someone to buy a home? Life changes such as marriage, children, job transfer, an investment decision, or simply the desire for a quality-of-life improvement. Whatever the driving factor to purchase in our region one thing is for certain, it is expensive. As one could imagine, I’ve yet to have someone say to me they were buying a home because it is inexpensive.
Same thing is true with stocks. When companies go public I don’t tend to hear people say they are buying it because it is cheap. The price earnings (PE) ratio is typically high so you’re left making a purchasing decision on variables other than just the price.
Same thing is true with real estate – properties are purchased for reasons that don’t necessarily pencil out today. Of course, looking back you can say those that bought tech stocks or real estate were lucky or smart, but they made the decision based on more than just the single data point of price.
In our changing real estate market both buyers and sellers must decide what to do. I have lived in the valley my whole life and have a unique perspective to the ups and downs (yes, we have been down before).
In this article, I will lay out some of the talking points that you will likely have over dinner or a glass of wine in the coming weeks and months.
How do you feel today about the real estate market?
Do you feel bullish about price growth or are you more hesitant? I am expecting an emotional 2019 spring season where being able to navigate both buyer and seller wants and needs and finding a mutually beneficial agreement will be critical. No doubt a seller will be looking for the highest price possible and the buyer will be looking for the opposite. Setting proper expectations in order to help both parties recognize current realities and deciding factors such as holding power and opportunity costs are a few examples of how I plan to navigate this delicate market climate.
How motivated are you?
Spring is typically the season of inventory. March and April tend to be the highest two months for volume of available homes all year and with it comes new buyers. But just having prospective buyers isn’t enough. You need to have motivated buyers ready to make a purchase decision, otherwise you will have older listings on the market when new homes come on and inventory will build, contributing to a lack of urgency.
Ideally, a seller wants inventory sell weekly in order to make room for the next week of new properties and keep supply low. Doing this will limit buyer options and keep prices stronger. So far this year I’ve seen multiple properties with heavy amounts of prospective buyers receiving no offers on their home come offer time. There was a property in late February that had almost 30 prospective buyers reviewing disclosure documents (signaling interest to purchase the property) and only 3 offers came in. That is a much different story than a year ago when that much interest would generate about 10 offers or more especially in the winter months that tend to be better for sellers since there are motivated buyers with few available options to purchase.
One thing is for sure, this spring should have a typical volume of inventory based on the number of properties being prepared by myself, vendors and colleagues. I have no doubt we will see the seasonal increase to inventory in the coming weeks, however, it is not clear how buyers will respond.
What is driving your decision to buy today?
I am talking to both new buyers coming into the market and those that have been looking since 2018. One thing is consistent - I do not hear the urgency in their voice or actions as I previously experienced. The FOMO (fear of missing out) attitude is gone and has been replaced with more a sense of caution; a feeling of uncertainty whether now is the right time to get in the market or wait for more clarity or correction.
Stock Market Rebound – we are coming off one of the best 2-month gains in recent history, so people are talking about the worst being behind us and feeling prices will start heading back up from a six-plus month lull.
The Fed Pivot – the Fed has changed their tune about raising interest rates and have communicated a more patient approach in 2019. Many think they means they will slow down any rate increases.
IPO Rally – several unicorn companies are set to IPO: Uber, Lyft, Airbnb, Pinterest, Slack, etc. This will inject a large amount of wealth into the valley, which will arguably drive up prices, but this won’t translate to immediate purchasing power or whether new buyers will be ready to buy if the market direction is unclear.
Overzealous Pricing – pricing your home too high either because you think buyers will negotiate the price down or you think your home is better than the neighboring comparable. Either way, buyers are very savvy and when homes sit on the market for too long (for practically any reason) it will be a sign of a substandard property.
Waiting Game – I have no doubt our valley will be the leader in the next wave of entrepreneurs, but this takes time and not all sellers have the staying-power for 2-3 years, for example.
Increasing Inventory – most buyers are getting prepared for the season with their pre-approvals and starting to think about
their wish list. The urgency to buy in a week isn’t there, but I hear the chatter about looking at open houses, watching online and earnest interest to buy a home if the price is right and fits the profile.
Confidence – the pressure of buying a home that fits 1:10 of your checklist items is gone, for now. Buyers have more time to consider the kind of home they want to purchase and pursue the right property, verses feeling pressured to buy a home that doesn’t fit their needs, since the overall feeling is that the market is not currently appreciating at a fast clip.
Paralysis by analysis – the waiting game that goes forever. Even at the bottom of the market, most people will still say pricing is too high, so waiting for the price to be “right” is a very dangerous game. I argue it will never be right, just good enough. As of today we are 10-15% off of peak prices. This is not average price drop, just like-for-like neighborhood drop. I caution my clients when looking at large data sets because you won’t get an accurate snap shot of the micro-market you’re likely looking at.
Alternative investments – best use of cash and equities. You’ll want to dedicate a certain amount of your assets to the down payment of your future purchase and not consider that as your investment tool, otherwise you’ll always be thinking about how that down payment cash could be making you a larger return in a traditional investment. I have noticed it difficult for some people to take cash out of an attractive [potential] investment to purchase a home.
In addition to both seller and buyer sentiment, there are some obvious factors that should not be overlooked that I think will impact our market:
2019 Market Factors
IPO debuts - once the big IPOs hit, it will still be 6-12 months before stocks are available and buyers then start considering if they should sell stocks to buy a home or keep in stock. It doesn’t directly translate to a buying decision.
Immigration restrictions – we are seeing a clear tightening of work visas that are inhibiting talent from reaching the valley forcing more technology to be incubated elsewhere. Additionally, current valley employees are more hesitant to make a purchasing decision with an uncertain immigration status or pathway to green card and/or citizenship.
2020 election – how can this not impact our market? With the news cycle having a fresh scandal almost daily, I find it hard to imagine the uncertainty and craziness that is sure to surface between now and November 2020 will not be material to our market. Historically, election years are fairly quiet because neither party wants to rock the boat, but I think it will be far from quiet.
Fence-sitters – there are still a ton of buyers on the fence waiting for the right time to purchase. I have no doubt many of them will continue to watch and not buy, but whether enough of them will jump in to capitalize on the current slowdown is yet to be seen.
Prices can still come down more, especially if inventory doesn’t get absorbed this season, which would be a clear sign of the continued market sentiment. This is why I’m so anxious to see what happens over the next 60-90 days. I have both buyers and sellers making moves in the current market because they know what it is now, but waiting to see how the coming months play out is also a reasonable decision. The decision point depends on your goals and timeline, so there isn’t a catch-all answer for everyone. However, I have yet to hear a rustle from buyers becoming especially competitive with offers, so I think it is a great time be in the market and be a deal maker.