The Market is Down — No Longer the Best Kept Secret
If you have been reading my newsletters, you were not surprised when the media finally picked up the story that our market has slowed – I’ve been writing and talking about evidence pointing toward a slowdown since mid-2018, but most people didn’t catch on until several quarters later or even into 2019.
Whether mainstream media, Redfin, Zillow or wherever you find your news, all sources are now on board that our market is different. Articles are now highlighting fewer multiple offers, longer days on market and even price reductions. Can you believe it … price reductions? No surprise, as our market is not immune to ups and downs, albeit we weather corrections much better than other regions.
A very clear observation of the change has been the conversations during my Open Houses. Last year, a buyer walks in the door and the first question out of their mouth is, “When are you looking at offers?” Today, that same buyer walks in the door and asks, “How long have you been on the market?” The stark shift in question is such a clear indicator to me that our market is slow, irrespective of what you may see in large data sets.
That being said, the overall data is clearly pointing to a slower market but not as dramatic as I’m experiencing. You’ll hear about longer days on market and price reductions, but I’m still seeing a clear shift from peak of about 10-15%, depending on the specific neighborhood. I have yet to find a neighborhood that is immune from a slowing trend: from Atherton, to Palo Alto, Los Altos and down through San Jose. It is across the board. Why has our market slowed? You have a bucket full of reasons, but I’ll highlight my favorites:
1. Instability & Uncertainty: There are many of these factors playing out in our market. I think this is the single, biggest reason for our market correction. Finally, the chink in the armor has exposed that our market doesn’t go up to infinity before having corrections.
2. FOMO (fear of missing out): Irrational exuberance is over, for now. Buyers do not currently have a fear of missing out. Alternatively, I’m seeing the pendulum swing the other way where some are struggling to make a decision even for the right property fit since there is uncertainty how long/far the market will swing.
3. Affordability: It has picked up slightly because interest rates came down, but still an overall concern for most whereas even high-earning families struggle to buy an average home within a reasonable distance to work.
4. Fed Interest Rate Policy: Currently lowered to 2.25%. However, there is uncertainty how much influence the President has over the Fed. Last I heard, the Fed was categorized as an enemy. There is also concern the Fed lowering the rate was an indicator of reces-sion concerns. I agree with Robert Shiller when he said “Fed’s move was less about the actual cut but more about the psychological impact of casting recession worries on the markets.” The manipulated interest rates are keeping our market moving. For the first time, I am seeing 30-year fixed interest rates on a purchase as low at 3% with no points. The low rates have given new stimulus to the banking industry as well, hence refinance timelines currently exceeding 60 days for most banks.
5. Tariffs: Seems like there are tit-for-tat tariffs almost weekly with no end in sight. I think tariffs will be the new normal for some time, but until Wall Street recognizes that, we will see hefty market swings with every whisper on the subject and this will play into the overall market picture.
6. Stock Market Rollercoaster: There is no certainty in Wall Street. Just the movements alone are enough to give me a stomach ache. The short-term does not look pretty – even professional investors struggle to make a decision on a position for more than a few weeks. The erratic market behavior is another sign that uncertainty is not close to being over.
7. Global Tensions: Iran, Russia, China, North Korea ... the list goes on. Who knows what is in store in the coming quarters and into the 2020 presidential election year, but it likely won’t be pretty.
8. Political: Need I say more?
9. Visa/Immigration: We are still seeing restrictions on the flow of talent to the valley because of visa constraints. Overall concern in immigration is impacting new talent and making those currently on work visas more hesitant to make purchasing decisions.
Housing Affordability Index
Do you want to start tracking the market? You won’t see an accurate gauge of the market by looking at macro data since it generalizes too many variables. However, if you look at like-for-like properties and neighborhoods over time, you’ll see a more accurate indicator of the current market climate. This takes local knowledge and boots on the ground to really know the data. Take a look at some examples on page 3 of transactions that offer insight into the current market.
So what do you do? Some may argue the market is already picking back up, but I do not see it. With the conversation so skewed and the conversation focusing on how low it will go, I don’t see sentiment turning around tomorrow. Even with the lower interest rates, it is not dramatically changing motivation as overall hesitation and uncertainty looms. That being said, I am a huge proponent of our area and am bullish on a long-term view; you won’t see me betting against this amazing valley anytime soon. This is the time to evaluate your financial goals and put a plan in place.
Personally, I’m starting to pick up properties as quick as possible with the understanding that: interest rates are low, competition is hesitant to make a buying decision, and prices are low (albeit not necessarily the bottom). I’ve been through market cycles, so I know even when property values are down there is still a market for rentals. The long-term play is very bright in the valley. You can wait until you think we are at the bottom, but you’ll likely miss some great properties along the way that could have been a great way to hedge the overall market.
By no means are we necessarily out of a correction since there are many variables that can impact our market, up and down. We may whimper how slow our market has become: price expectations not met, longer time on market, etc., but all you have to do is look at most of the country’s real estate market and you will be very glad you are invested locally. When other parts of the country become almost unsellable, we still have a moving market even if not at one’s expectations.
CURRENT MARKET EXAMPLES
Sold MARCH 2018: $4,205,000
Active Listing: $4,198,000
Estimated Loss: $(425,000)
Notes: This property listed in May 2019 for 3.998m and did not sell. It re-listed in June for 3.998m and still didn't sell. Now the Seller raised their price to $4.198m—still no activity. Loss estimated.
Sold APRIL 2019: $2,900,000
Re-listed JUNE 2019: $2,695,000
Estimated Loss: $(254,000)
Notes: Listed for $2.695m and sold at $2.9m. Re-listed in June for $2.695m. I'm told they had an offer as high as $2.8m, but Seller didn't want to take a loss (even though it was purchased with stock money which would be down as well if still in the market). It's ironic how you are okay taking a loss in stocks verses in a property investment. I guess.
Sold OCTOBER 2018: $6,000,000
Re-listed JULY 2019: $5,780,000
Estimated Loss: $(254,000)
Notes: Home upgraded after purchase (approx. $200k) and flipped in 2019. Not a good time to be a flipper.
Sale FEBRUARY 2018: $1,760,168
Sale JULY 2019: $1,350,000
Comparable Sale: $(410,168)
Notes: Comparable (1100 Macon) sold in Feb 2018, listed 1.35m and sold at 1.76m. Similar property listed May 2019, $1.55m and sold July.
Sold JULY 2018: $3,100,000
Re-listed MAY 2019: $2,488,000
Estimated Loss: $(454,000)
Notes: Listed in 2018 for $2.398m and buyer paid $3.1m. Re-listed May 2019 for $2.988m and no activity. Lowered to $2.488m & didn't get a price seller would accept. Assume value $2.8m for loss estimated.
Sale MARCH 2018: $1,640,000
Sold APRIL 2019: $1,488,000
Estimated Loss: $(233,840)
Notes: Listed for 1.388m in 2018 and buyer paid 1.64m at that time.