Q1 2023 Silicon Valley Real Estate Update

As we conclude the first quarter of 2023, the Silicon Valley real estate market continues to experience a roller coaster of activity on macro and micro economic levels. Overall, the real estate market is recovering in 2023. After putting their real estate needs on hold from May to December of 2022, Buyers realized that life events continue, and real estate purchases could not be put on hold any longer. They accepted the new interest rate environment and entered back into the marketplace.

 

Silicon Valley Bank Collapse

 

One recurring question has been around the collapse of Silicon Valley Bank. We have not seen any significant impact to residential real estate, with companies' payrolls and funds being guaranteed by the government. This was a prudent move by our government to instill confidence in our banking system. In short, there is nothing to see here carry on.

 

Tale of Two Market Continues

 

The market continues to be divided into two distinct categories. The first prime market of homes with highly desirable criteria, are selling quickly with multiple offers once again. The criteria include good schools, excellent locations, or affordable price points. In contrast, the second market is a bit slower in some markets or property types, with factors such as above market Seller expectations, not a strong school district, or a less central location have all contributed to sluggish sales in this sector.

 

General Trends

 

Looking at general trends, prime markets are once again seeing multiple offers. For example, a tear-down property in Saratoga off the market received nine offers, a Sunnyvale single-family home with good schools attracted five offers and a townhome in Los Gatos has 11 offers. The second market sector saw fewer offers, such as a San Mateo townhome after long days on market received 2 offers after a price drop and a Sunnyvale single-family home that was pulled off the market without receiving any offers. Overall, the Silicon Valley real estate market is still competitive, and homes that meet the right criteria are receiving multiple offers. However, sellers need to be mindful of pricing their homes to the market value to ensure that they achieve the best possible outcome in this market. Buyers are pickier than during the COVID years. We will continue to monitor the market trends and provide updates as they emerge throughout the year.

 

NASDAQ

 

The technology heavy NASDAQ was down 33.8% in 2022. This wiped out the 23% of stock market gains in 2021, but there is good news. As of 4/3/2023, the NASDAQ has recovered 17.7% making this a net 7% recovery since the COVID year. This is better news and could explain why Buyers are back in the market with a little bit more down payment.

 

Exhibit 1 – Nasdaq Composite 2023 Snapshot

Source - Yahoo! Finance

 

Mortgage Interest Rates

 

In 2023, Buyers got accustomed to the interest rates and loan programs have gotten a little more advantageous for Buyers. Rates have dropped slightly but continue to hold above the record lows prior.

 

Exhibit 2 – 30 Year Fixed Mortgage Rate

 

Source – St Louis Federal Reserve

 

Here is a sample of local rates which are lower than the national average especially on jumbo loans.

 

Exhibit 3 – Local Wells Fargo Mortgage Rate

Source - Wells Fargo Private Mortgage

 

Inflation

 

The rate increases are having an effect. Inflation rates have gone from 9.1% to 6%. We are trending in the right direction, but we still have ways to go to get to the 2% to 3% range.

 

Exhibit 4 – 12 Month Inflation Percentage

Source – US Bureau of Labor Statistics

 

Layoffs in the Technology Sector

 

Layoffs continue in the tech sector almost weekly. Tech employees are getting a good amount of runway as far as severance pay, so the impact may not reveal itself until Q3 or Q4 of 2023. Most companies are on hiring freezes and there are a lot of candidates looking for work. Although not ideal, there are consulting jobs available at a worst case, that could prevent this from becoming a broader issue for our local economy. We will have to monitor the impact if any to residential real estate.

 

Exhibit 5 – Technology Layoffs

Source – True Up Tech

 

Unemployment

 

The unemployment rate has increased slightly from 4.1% to 4.3%. Again, something to monitor with the tech layoffs.

 

Exhibit 6 – California Unemployment Rate

Source – Bureau of Labor

 

Real Estate Outlook

 

2023 kicked off with a strong start for most Sellers. Inventory has remained low, and this market has always been on the cusp of shifting to a Sellers’ market. As a Seller if you one universal fact remains, every home has a sweet spot, and if priced correctly, the property will sell. The question then becomes whether sellers are willing to price their home in line with market's expectations and take an offer in that price range. If you have been thinking about selling, look at the price recovery and see if that is an acceptable net amount for you to proceed with a sale. If not continue to hold until the market turns further to that acceptable price point.

 

As a Buyer, if you did not buy last year, you missed the bottom. However, do not fear, the market is coming off the bottom and recovering. Without a crystal ball it is difficult to perfectly time the market, but rest knowing that the market is recovering from the bottom, and it is still a great time to buy. Be ready to compete though not as aggressively as during COVID. Remember real estate is a long-term investment and best to own Silicon Valley real estate instead of renting and missing out on the upside when the market turns once again.

Schedule Your Custom Real Estate Strategy Consultation Meeting

Everyone family has a unique real estate scenario specific to their needs and circumstances. We are always available to have a strategic consultation meeting with you to address your needs and come up with an execution plan. Book your consultation with us today at homes@alanwangrealty.com or call and text us at (408)313-4352.

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2022 Silicon Valley Real Estate Year in Review and 2023 Outlook

 

Turbulence would be an understatement for how the real estate market fared since the beginning of the COVID-19 pandemic. When the pandemic locked us in our homes, there was widespread fear of how our lives, our health and our jobs would be affected. The stock market dropped in value and the housing market froze.

 

Then in a blink of an eye, the stock market turned upward, especially companies in the technology sector. Technology was heavily relied upon to navigate through the pandemic which is why these companies saw enormous growth. Technology stocks soared by over 23% and thereby increased the wealth of Silicon Valley workers. The Federal Reserve acted quickly and dropped interest rates. Mortgage interest rates were once again at all-time lows. Two factors also became critical; families needed more space specifically bedrooms and more yard space. Paired with increased wealth for down payments and loans at bargain rates, Buyers came out in droves to purchase the home that their families desperately needed. In an area with traditionally low inventory, this spike in demand caused an aggressive level of bidding that we have not seen in our 19+ years in the business.

 

As we emerged from the pandemic, another phenomenon occurred that our economists did not factor into their stimulus. Families working at home cut their spending significantly. Consumer spending dropped as we were trapped in our homes; the byproduct is that our savings increased dramatically. As we emerged from the pandemic and were allowed to dine, enjoy entertainment, and even simply drive again, our pent-up demand exploded across all products lines. There was only one problem, companies did not predict this surge of demand and they not only scaled back production during the pandemic, but COVID affected the ability of their workforces to be at maximum efficiency hence a lower supply of products were produced. Low supply and high demand equated to higher prices. Unfortunately, we over stimulated the economy to which prices soared to over 9% due to this dynamic.

 

At the start of 2022 we were in for a rude awakening. What goes up must come down. Inflation was the theme of the year as our country has been fighting the higher prices by aggressively raising interest rates. This has had a major impact on the prices of Silicon Valley real estate. Prices peaked in April and real estate prices have been on a downward trend since.

 

NASDAQ

 

The technology heavy NASDAQ is down 33.8% in 2022. This not only wiped out the 23% of stock market gains in 2021, but we are taking an additional 10.8% loss on top of that. This has directly affected the amount that Buyers are able to put down on their next homes. This is a major contributor to the current real estate market.

 

Exhibit 1 – Nasdaq Composite 2021

Source Yahoo! Finance

 

Mortgage Interest Rates

 

Our Federal Reserve recognized that they overstimulated the economy and had to aggressively raise interest rates to get inflation under control. This more than doubled the cost to borrow and increased monthly payments dramatically. Cheap money was gone, and Buyers had to quickly adapt to the new reality. Many Buyers moved to the sidelines and continue to wait.

 

Exhibit 2 – 30 Year Fixed Mortgage Rate

 

Source – St Louis Federal Reserve

Inflation

 

Despite all the bad news there is some good news. These aggressive increases in the prime rate seem to be having an effect. Inflation peaked at 9.1% and is trending downward to 7.1% in November. The Federal Reserve did not go as aggressive of late, opting for a half point hike rather than the three-quarter hikes they have been doing much of this year. We are seeing gas prices come down lower as an example. Hopefully this trend continues.

 

Exhibit 3 – 12 Month Inflation Percentage

 

Source – US Bureau of Labor Statistics

 

Layoffs in the Technology Sector

 

Ever concerning are the layoffs in the technology sector. Although not all jobs are in the Silicon Valley, a larger amount of the technology jobs are centralized here. This new factor has caused much fear in Silicon Valley home Buyers. If this trend continues, it will add to an already nervous sector of Buyers. Hopefully there are no more layoffs occurring in 2023.

 

Exhibit 4 – Technology Layoffs

Source – Trup Up Tech

 

Unemployment

 

Despite the layoffs, for now the unemployment rate remains at 4.1%. It might take a few more months for this data to settle to determine if the Technology layoffs had any affect.

Source – Bureau of Labor

 

2023 Real Estate Outlook

 

If we are optimistic perhaps the market turns in the next 2 quarters, however realistically we could be in this down market for most of next year. The critical factor to note is that inventory levels are still low. Our clients who are looking for homes, often complain that they are not pleased with the inventory available. It would not take much of a surge in demand to turn the market back into an aggressive Sellers’ market once again. For now, all of the leading economic factors seem to be pitted against a turnaround in the current market.

 

For our Buyers, the question is always when we will the market bottom as far as prices and when is the best time to buy. We never know when the bottom is and once we do it has passed us already. The real questions are do you have a family need and is this a long-term purchase? If the answer is yes to both of these questions, then it is a good time to buy. For those of you that are speculating, remember that when the market turns it turns quickly and with the market down 15% to 20% it is not a bad time to get in.

 

For our Sellers, the question is always is it a good time to sell? The key questions are do you have a family need to sell and do have you made a good amount of equity? If the answer is yes to both of these questions, then yes, it is a good time to sell. If not perhaps you can wait out 2023 for a better market in 2024. The questions is how much further could this market go in 2023? Should we take our gains off the table now or can we wait longer for the market to recover?

Schedule Your Custom Real Estate Strategy Consultation Meeting

Everyone family has a unique real estate scenario specific to their needs and circumstances. We are always available to have a strategic consultation meeting with you to address your needs and come up with an execution plan. Book your consultation with us today at homes@alanwangrealty.com or call and text us at (408)313-4352.

Wishing you and your families an amazing 2023!

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October 2022 Silicon Valley Real Estate Update

The real estate market continues to be volatile. In an effort to battle inflation, rising interest rates are having a direct impact on both real estate and stock markets. Silicon Valley Buyers are battered by higher monthly payments (due to rising interest rates), lower down payments (due to reduced stock portfolios) which result in lower pre-approval purchase prices.

We are finding that Buyers are simply unable to afford the prices being offered by Sellers forcing them to negotiate. With these factors at play, Sellers that are selling are struggling to find the right equilibrium price that Buyers are able to transact, as the market that continues to trend downward.

We are pleased to have the opportunity to help our Buyers secure excellent homes at great prices. Buyers should also realize that this interest rate environment is short term. Once inflation is under control, the Federal Reserve should lower rates and that would be a great time to refinance.

Sellers who have to sell now, will have to contend with the fact that the offer prices the market is offering will be lower than the peak Spring prices and will continue to trend downward in the short term. If there is no urgency to sell, many have opted to not sell or rent out their homes as we get through this inflationary period. Some Sellers are opting to take the gains that they can, in order to get a good price on the buy side as well.

Inventory is still at all time lows, however our inflationary circumstance is forcing monetary policy to suppress the key factors that typically fuel real estate, causing downward pressure on home prices in the short term. The hope is that we get inflation under control soon so that monetary policy can be relaxed so that the real estate market can stabilize.

August 2022 Silicon Valley Real Estate Update – A Frozen Market That Could be Thawing

It has certainly been an eventful or shall I say uneventful summer. The market peaked in May and Buyers have been waiting on the sidelines as interest rates rose multiple times this year and the stock market continued to fizzle in June. Buyers were and continue to be concerned about a recession. In addition, more families were on holiday than prior years; this has been the first travel window for families in over 2 years since COVID grounded us all.

Panicked Sellers who missed the bull market, rushed to put their homes on the market, tried to stay ahead of rate hikes, all of which were futile as Buyers were already sidelined. Buyers that were in the market, were often embarrassed by their offers and didn’t even want to write them as they were wishful lowball offers. The beginning of July was much the same.

 

However, in the last week of July, activity started to pick up in the marketplace albeit still slowly. Contrary to the news, interest rates have in fact dipped under 5% and hovering in the low 4% range. Due to low demand, banks have pivoted to provide more attractive rates and more relevant loan programs for Buyers. Homes have started get into contract, but with an over 10% adjustment and more in some areas. For most homes on the market, after one or two price adjustments, Buyers who sent offers that were serviceable to a Seller, were able to get into contract with generous terms and pricing. In the last 3 weeks we have seen more Buyers engaging and looking around. Most Buyers are still in deal hunting mode, but more are coming off the sidelines. It is too soon to say there is any trend or recovery, just an observation at this juncture.

 

Inflation Rates

 

Inflation peaked at 9.1% in July, but recently retreated to 8.5%, which is hopefully a sign of more stabilization to come. Unfortunately, the Federal Reserve will continue to increase interest rates until this is under control which will impact mortgage rates.

 

Source – US Bureau of Labor Statistics

 

Interest Rates

 

Interest rates previously increased from 2.875% in January to over 5% in May on a 30-year fixed jumbo loan. The good news is that jumbo mortgage rates are currently in the low 4% range at the moment. Since demand disappeared for mortgages, banks are pivoting to get Buyers interested again. As we don’t expect inflation to run rampant in the long run, these rate hikes will likely be temporary. Different loan programs are being explored such as Adjustable-Rate Mortgages (ARM), longer loan vesting periods and even interest only loans. If we believe that mortgage rate increases are temporary, then all that matters to a Buyer is being able to handle their payments in the short run, then refinance to a better program when inflation is under control.

 

Here are the nationwide 30-year fixed mortgage rates and also our local conventional and jumbo rates.

 

30 Year Fixed Mortgage Average Rate

Source - St Louis Federal Reserve

 

Snapshot of Wells Fargo Home Mortgage Rates

Source - Wells Fargo Home Mortgage

 

NASDAQ Index

The Technology heavy NASDAQ index has had solid gains towards the end of July and beginning of August, making a 4% recovery from the beginning of the year. We are currently down 20% from the peak of this year, verses 24% down back in May. That is good news for the down payment of our Silicon Valley home buyers but we still have a ways to go to have a substantial change in down payment for Silicon Valley homebuyers.

Source – Yahoo! Finance

Unemployment Rate

 

Unemployment continues to trend downward now to 4.2% from the COVID peak of 16%. In fact, we are having a hiring shortage in the valley. Finding a job is certainly not the issue.

Source – US Bureau of Labor Statistics

 

2022 Projections and Beyond

 

Three weeks is too soon to say that we are in anything resembling a recovery. The market is frozen in many markets as Buyers are in the wait and see mode and slowly poking their heads out. The biggest question is that if the Federal Reserve continues to raise rates, will banks be able to keep the rate at an attractive enough level to have Buyers engaged in buying homes. The other two variables are the state of the inflation rate as well as the health of the NASDAQ.

 

For Buyers, we advise that you get ahead of the market before things swing out of your favor. If this current trend holds, then the market could turn once again. Psychologically, humans seem to be programmed to move with the herd. When everyone is bidding hundreds of thousands over list price with no contingencies, Buyers feel that it is a great time to buy. When a Buyer could offer hundreds of thousand under list price with contingencies intact, they feel that it is a bad time to buy because no one else is buying and they are afraid to overpay in the moment. Savvy investors do not buy when everyone else is buying, they buy when no one else will. This is how wealth is created and opportunities capitalized upon, but only if we can overcome our fear of the unknown and the sense of security by following the herd.

 

For Sellers, it is important to understand that this market is unpredictable but trending downward. Even with a 10%+ adjustment off peak prices in April and May, because the market has been frozen, Sellers have been dropping their prices to entice Buyers to transact. If you must sell now, be aware that we might be selling lower than we expected. We are looking for a reasonable Buyer who can get close to our first, second or even third list prices. If the prices we are getting do not match what we are looking for, then we need to decide if we need to proceed with other plans until this market gets more in our favor.

 

We don’t have a crystal ball and certainly the market continues to be fluid. From the current indicators, the market could be thawing a bit, but still frozen at the moment.

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May 2022 Silicon Valley Real Estate Update – The Market Correction Has Arrived

As we were monitoring a few months back, the change in the market was not just a momentary blip, but a fundamental change in the market. Home prices peaked in March/April of 2022 and we are currently coming off peak as prices are leveling and seeing price adjustments in some areas. We are coming off peak prices. What does leveling mean?

We are not seeing the large quantity of offers pushing obscenely over list prices as we saw in the previous market. Homes with good locations, good schools and great condition are still selling. We are seeing less open house traffic along with the usual increase in summer inventory that is normal for this season. Homes will be on the market for weeks to maybe even a month as many Buyers seem to be in the wait and see mode. Inventory continues to be low but more competition is also sitting longer giving Buyers more options. If a home does get multiple offers, it is likely with just a few offers in the single digits but not guaranteed. With the changes in the market, many Buyers have been knocked out of their budgets meaning that there are less Buyers in the market. The situation remains fluid as the weeks progress.

 

It is important to note that the real estate market of the last 2 years was never sustainable. The aggression of Buyers were fueled by historically low interest rates and downpayments sourced from stock options that were up 23% in 2021, thereby allowing Buyers to downpay more funds into their homes and have lower monthly payments due to low mortgage rates. Mortgage rates are still at all time historical lows.

 

The fact of the matter is that our government needs to get inflation under control and they will keep raising interest rates until then and it is having an effect.

 

There are opportunities opening up especially for Buyers, but first let us see what has lead us to this moment and analysis in depth the economic leading indicators.

 

Inflation Rates

 

Inflation came down slightly to 8.3% from 8.5% prior. Everything is more expensive, fuel prices, groceries, the cost of food when dining out, vehicles, etc. COVID continues to cause issues on the supply chain across the world and the war in Ukraine has not helped matters.

 

https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm

 

Interest Rates

 

Interest rates have increased from 2.875% in January to over 5% on a 30-year fixed jumbo loan. That is a 73% increase in the mortgage interest rate. We are still at historical lows, but that is a major payment shock for Buyers. The approach to cooling home prices is working as the Federal Reserve intended, which is to slow down home prices and the real estate market.

 

Here are the nationwide 30-year fixed mortgage rates. 

30 Year Fixed Mortgage Average Rate

 

St Louis Federal Reserve

https://fred.stlouisfed.org/series/MORTGAGE30US

 

Snapshot of Wells Fargo Home Mortgage Rates

NASDAQ Index

The Technology heavy NASDAQ index in 2021 gained 23% and we are currently down 28%. All of the gains made last year by Silicon Valley workers have been wiped and an additional 5%. Stock options and restricted stocks have been the cornerstone of Silicon Valley employees source of downpayments. With this amount of loss to their portfolios, Buyers’ enthusiasm to buy homes have soured.

Source – Yahoo! Finance

Unemployment Rate

 

The good news is that the California unemployment rate has come down from the 16% rate back to the 4.6% range which were pre-covid levels. The local job market has recovered post covid.

 

https://data.bls.gov/pdq/SurveyOutputServlet

 

 

Impact of Rising Rates and Lower NASDAQ on Buyers

 

The model below shows a Buyers mortgage and downpayment at the beginning of 2022 and their scenarios now. For simplicity, we make an assumption that 100% of Buyers downpayment are from stocks, there is a subsequent 28% reduction in downpayment or a need to find those funds elsewhere that need to be bridged. Most Buyers will not want to sell their equity stocks now, which means they would need to have the cash in hand or liquidate another source of liquid assets. The second component is the jump in monthly payments due to interest rates is substantial. Unless a Buyer can bridge the downpayment and their lending ratios can still support these new rates, Buyers will be affording less on offer prices. We have had multiple Buyers re-calculate their buying power which has reduced in accordance with the reduction in their portfolios.

 

2022 Projections and Beyond

 

In the short run we are in a strange market where the Buyers that are in the market will make lower offers and Sellers will hold onto to previous prices. Expect the market to continue to level and adjust for the remainder of the year and likely into next year. Beyond leveling there are price adjustments that will occur sale by sale and week by week. All eyes are on the Federal Reserve and how aggressive they plan to be and how high the mortgage rate will go. The NASDAQ also needs to be monitored if it drops further into a bear market.

 

Buyers, if you and your family have a need to buy and you plan to be in the home for the long run, it is your window to get into a property! The last market was exhausting and it will be nice to be able to have some time to decide on homes and getting back to negotiating with Sellers.

 

Sellers, this adjustment will be the most difficult for you as this is a significant shift in the marketplace. We need to take the comparable market data from previous months with a major grain of salt since those were peak prices and the market is leveling and trending downward. Trust the offers that are coming in as the current market value of your property. You will need to be more patient with offers with the slight summer increase in competitors and the reduction of Buyers, the offers from Buyers will reflect the current market.

 

The market continues to adjust in search of a new normal, what that market develops into is yet to be seen.

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