Navigating The New Market
The market is different. I think very few people would try to argue our market is the same as a year ago. Prices are down, urgency has waned, days-on-market are up and political tension and tariffs have escalated. Ironically, with all these issues, interest rates are still ridiculously attractive.
Spring was an interesting quarter: new inventory hit the market (as to be expected) but there was a key ingredient missing – urgency. Spring is historically our most active quarter – Sellers coming to market and Buyers constantly swiping them up as fast as they are listed. Competition is strong and motivation is high with over-asking offers as the norm. But this year was different.
The IPO debuts were lackluster compared to many people’s hopes and buyers have found them- selves in a stronger position with the confidence to be more diligent about finding the right home rather than just making something work. We are now just over a year from what I’m calling our cycle peak (April 2018). I’m calling April 2018 the peak because I saw a noticeable nose-dive in May. It wasn’t mainstream news yet, but I had example after example of the market slowing, which seemed to be noticeable by most around September.
I’ve seen a number of sales that support the market slowdown.
Los Altos: A sale on the same street and similar square footage, lot size and condition. The 2018 sale was $4.216M (March 2018) and the 2019 sale was $3.55M (May 2019). Quiet the difference – almost 16% drop from the peak sales price.
Sunnyvale: A sale on the same street and similar square footage, lot size and condition. The first sale was $2.01M (February 2018) and the comparable sold for $1.86M in October 2018. Another comparable sold in January 2019 for $1.7M. That’s over a 15% drop from the peak sale price.
What’s exciting about this market is you can’t hide the warts. If a buyer overpays for a property it will be easier to spot because we are not in an up-swinging market. When a comparable property sells over the next few months at a lower price, for example, it will be clear and we will see more fallout of unhappy buyers, especially if forced to sell because of changing circumstances: job transfer, life changes, etc. I think this is the best market because it offers both sides a more reasonable negotiation process that I believe generates the best holistic outcome.
Why has the market changed?
Affordability – Ratio of income to debt has been low for several quarters, but it is finally being noticed.
Uncertainty – now that values have declined or are flat, depending on the specifics, there is uncertainty as to when we will re- turn to a hyper-appreciating market and how much additional decline may occur until such time.
Fear of Saturation – whether in the stock market or real estate, there is a fear that values are saturated and we will experience declining values in the near term.
Recession Fears – you have heard this pendulum swing all year – it’s not if, but when will we have the recession. The economic pundits keep kicking the can – at first it was “likely in 2019” now they are mostly saying “likely 2020”. I wonder if in 2020 they will say “likely in 2021.” Not since 2007 have we had the inversion curve of treasury notes, which has happened twice so far this year. No one knows for sure, and remember that it is actually confirmed in retrospect, but I am optimistically cautious about the overall economy, especially with the 2020 Presidential election year.
Why I am bullish in this market?
Low Interest Rates: interest rates are ridiculously low given the economic climate. Even though the Fed has indicated they plan to have a more patient approach this year, I think if inflation kicks up next quarter (which is likely) they may have to adjust that position and raise interest rates more than they’d like. I’ll take the low rates that are available now instead of gambling on rates later this year or in 2020.
You are not competing with emotional buyers: when the market is swinging up you are more likely to compete with buyers that have more money than you and less driven by value (betting if they over-pay for a property, the market will catch up to their inflated price relatively soon)
I know the current market: I’ve been selling homes for about 18 years and I’ve seen this several times now. I know the current market is experiencing a 10% drop from peak prices and depending on how the home is priced (significantly under current value or a wishfully-high price) the final sale price can be more or less the 10% number. In the quality neighborhoods (basically most of our areas) market swings typically de- cline around 20%, so I am comfortable negotiating in the current climate with fewer motivated buyers and take advantage of low interest rates. Next year may be a similar climate, but with so many unknowns, I’m happy taking chips off the table now if the right property comes up.
So, Would I Sell My House Today?
It depends. This is always a loaded question because I think there are good reasons to both hold or sell, depending on circumstances. Maybe you need to sell your house to buy your dream home. Or maybe you’re ready to retire and want to cash out and live in Hawaii (in that case, aloha)! Or possibly you want to sell your home to invest your money in another investment tool that offers a potentially larger return on investment without the hassles of being a landlord. There are so many reasons that you may decide to sell as there are reasons to keep your home. Personally, we are in a holding position as I believe not only in eating my own dog food (real estate), but we have a long-term horizon in real estate and don’t want to diversify out of it. That being said, everyone has different circumstances and goals.
Things to Consider
Timing – where will you go and when? This is the first part of your plan to consider. Timing needs to be right (or acceptable) in order for you to make a sound decision. It is easy to look back and pinpoint the best time (for highest price), but that may not work for your situation. Moving is a stressful process, so it is paramount to make sure it works for you, even if that means selling at an inopportune time. Others may make a conscious decision to move at a difficult time to get a higher price. I have learned everyone has different priorities.
Tax Liability – what kind of taxes will be due at sale, if any? This may impact your decision to sell or hold. Maybe you are at the limit for the $500,000 capital gains exclusion, so you want to take that off the table and invest the tax-free money or maybe your gains are so large that selling the home will generate a significant tax bill. There are sound deci- sions to sell or hold.
Return on Investment – What rate of return are you targeting? Maybe you are considering retirement and want the money to generate more income. Or maybe this is a passive investment that you’ll have for decades, so you’re comfortable betting on the long-game growth by holding the property.
Where Else Will You Invest – sometimes it is best to hold your property (if finances permit) if you don’t have a better investment option available.
If you plan to sell in this market, you’ll want to be mindful that it is different from 2018 and you’ll need to set your expectations appropriately, so not to be disappointed. It is still a very reasonable market, just not at ludicrous speed. Some points to remember:
Multiple Offers are Not a Given – not every home will get multiple offers. If you see a home generating five or more offers, I can assure you the listing price was significantly under-value with an attractive “auction price” set to generate a large volume of activity. This is a gamble because they will either push up the price (above the current reasonable value) or they will fall short of expectations. For example, there was a home in Los Altos that generated 7 offers and sold 2.5% over the asking price, which ended up being under their purchase price in 2018. That was an unhappy seller that didn’t have their expectations met. Alternatively, a home in Los Altos Hills listed for $3.988M and sold for $5.5M, well over expectation of perceived value. That seller was very happy and the low listing price worked. It’s a gamble.
Buyers are More Critical – buyers will be more critical of a home and demand better presentation. If your home shows poorly (think bad odors, poor condition, lack of preparation), these will all be factors that will turn off buyers and impact their purchasing decision.
Reasonable Price – Prices are still strong, albeit not ridiculous. If you receive 4 offers at asking price, the market is telling you the price is where motivated buyers think the value is today.
Summer is historically a slower market. School is out, vacations have started and priorities have shifted. It seems to be the same thing every year, so I am not anticipating an upswing in activity. Now that our spring season is coming to an end and it was fairly flat, I’m expecting summer to be the same, at best.
It’s time to self-reflect and consider what’s the best option for you: buy, sell, work harder, vacation – whatever the answer is, I’m glad we are in a market that offers you more time to make the best decision.