Monday, July 2, 2018

Q2 2018 Real Estate Update - At Long Last the Market Shifts to the Buyers’ Favor


We are excited to share our Q2 2018 Silicon Valley Real Estate update. We will start off by saying that the market has at long last SHIFTED to the Buyers’ favor! It has been a roller coaster this year and we have many areas to update you on!

January to April – Red Hot Sellers’ Market

The beginning of the year continued the previously hot Sellers’ market of 2017. The same story continued this year; low inventory levels, large quantity of Buyers, intense bidding wars, prices rising on a weekly basis and each home selling aggressively more than the previous week’s sale price. If a Buyer had less than 30% percent downpayment and did not make it into the top 3 offers, they would have had little to no chance to win. Agents and Buyers had to be aggressive, constantly following up, overbid pricing by emotion, waive all conditions on their offers, close quickly and give in to the terms of the Sellers. The Sellers during this period truly maximized their gains both on pricing and terms.

April and May – The Turning Point

In April we started to see some softening in the market as we started to notice fewer offers per listing. We monitored this trend to see if this was signaling a possible stabilization in prices. Literally the first week of May we saw Buyers stop in their tracks. The typical indicators remained strong; Open House traffic, Agent Showing traffic and Disclosure requests all showed normal activity. We were setting offer dates as we have for the last year and a half expecting the same multiple offers, and for the home to sell significantly over list price. That activity came to a screeching halt. Listings got one to two lower priced offers and many had none at all. 11 weeks in now we can confirm that the market has shifted to the Buyers advantage for the first time since 2017. Not all markets have been affected but slowly this is trickling into all price points.

What is Causing this Market Stabilization?

Understanding this market stabilization requires analyzing the historical and current trends both at a Macroeconomic and Microeconomic level.

Footnote on Sustainability and Seasonality

It is important to note that this type of aggressive Sellers’ market was never sustainable. Even as Realtors in the business, we would watch our listings blow through the last comparable home sales and we have always known that at some point there must be a stabilization. It is also important to note that it is abnormal for a market not tohave cycles for such a long period of time. We typically have seasonality in our local real estate market. The same stabilization happened in June of 2016 as well and in years past, so none of this is out of the ordinary whatsoever.

Macroeconomics

The key question is what changed at the macroeconomic level that would cause a direct correlation to this market stabilization? The first key indicator for the Silicon Valley is the health of the Stock Market, especially the Technology-heavy NASDAQ index. These stocks are the source of the down payments fueling real estate in the valley. International cash offers have been slowed down significantly and heavily scrutinized, hence recent real estate activity is directly correlated to local Technology stock funds. It is interesting to note that on April 2, 2018 there was a low point in the market after the peak set on March 5, 2018. This brief drop even though it lasted a few weeks could have been enough to pause multiple Buyer’s home searches. The second economic indicator is that April is tax month; with a drop in stock prices and likely capital gains to pay, it is possible that Buyers found themselves cash strapped with unexpected tax bills.

Exhibit 1 – NASDAQ Snapshot April 2, 2018



Source – Yahoo! Finance

The third economic indicator would be that the Federal Reserve interest rate rose in April as well. In essence this was a third level of change for Buyers to adjust to, which was more psychological than material, as mortgage rates do not immediately adjust to the Federal Reserve rate changes. However, it is human nature to dislike change and it is likely that the combination of these factors caused the current market stabilization.

Exhibit 2 – Federal Reserve Interest Rate


Source – St. Louis Federal Reserve - https://fred.stlouisfed.org/series/FEDFUNDS

There are also grumblings of trade wars with other countries that weigh on the minds of many Americans and that impact is yet to be seen. If these changes affect stock values and our economy then that will be the direct impact yet to be seen.

It is our opinion that the combination of Macroeconomic factors such as a dip in stock prices, income tax season, and increasing interest rates all played a part in this halt in the real estate marketplace.

Microeconomic Factors

There are other factors more local to our area specifically that we should bear in mind.

Buyer Fatigue, Rising Prices and Rising Inventory

It is likely that buyers have become tired of this bidding war environment for the last year and a half and are taking a break. It hasn’t been easy as a Buyer fighting with 10 to 20 Buyers per home, giving up your rights and moving at lightning speeds. Prices were also at all-time highs, and this coupled with rising interest rates may have given Buyers psychological pause. It is also important to note that in the Silicon Valley we have seasonality as well. The summer season is when most homes come on the market equating to more inventory, and Buyers have more choices. It is natural in those cases that homes will sit longer on the market.

Exhibit 3 – Santa Clara County Real Estate Snapshot


Source - MLS Listings Database REIL 2018

Silicon Valley Employment

Employment rates in the Silicon Valley are at all-time highs and the health of the Silicon Valley employment market continues to be strong. From last year, employment has risen by 3.1% and the unemployment rate down to 2.3%. These are all healthy statistics for our local market.

Exhibit 4 – Santa Clara and San Benito Counties Employment Data


Source - Employment Development Department - http://www.labormarketinfo.edd.ca.gov/file/lfmonth/sjos$pds.pdf

Silicon Valley Commercial Buildouts

Local Technology Giants continue to expand all across the Bay Area. From Facebook picking up real estate in Sunnyvale and Fremont, to Google’s build out in Downtown San Jose, this supports the fact that hiring is strong as companies continue to fight for commercial real estate across the valley.

Mortgage Interest Rates

There is no need to panic because rates are slightly on the rise. Interest rates are still at historic lows! Ask Buyers who bought in the 80’s how high their rates were. Certain banks have been offering deposit incentives for a lower interest rate; these types of programs exist as well.

Exhibit 5 – 47 Year History of the 30-Year Fixed Mortgage Rate


Source – St Louis Federal Reserve - https://fred.stlouisfed.org/series/MORTGAGE30US

Buyer Advice

If you are a Buyer you can at last celebrate that the market has finally turned in your favor and it will likely continue to be the case for the rest of the year. The key question is will you follow the herd and wait, or will you take advantage and go for a home when less Buyers are doing so? It is very possible that the herd will be back once again in the spring. Do you want to follow the herd as they were bidding this year? Buyers tend to have the most choices in the summer, though they will find better deals in the fall, but not as much selection on houses during the latter seasons. If you have been thinking of buying, we highly recommend that you re-engage while the market is on your side.

Seller Advice

If you are a Seller this will be the toughest market for you, as likely you have been used to seeing homes selling in a week and over the last sold price consistently, and that activity has now halted and turned the other direction. Currently prices are going the opposite direction from the last peak prices 11 weeks ago. We are seeing 10% to 15% drops from last peak prices in some locations. This change is especially hard to accept. The first off market or first week offer could be your best offer. Waiting longer gives the Buyers even more advantage as the freshness of your listing goes stale and they begin to low ball you the longer your home sits on the market. Expect longer days on market, as much as 30 to 45 days. Houses are still selling just taking more time. Again, selling a home in a week was never sustainable. Buyers are taking their time, looking for deals and they have other options on the market. If you have owned your home for some time, celebrate your gains. You may have missed the peak of this year but coming off peak isn’t the worst scenario in the grand scheme of things. If you are looking to maximize, you may need to wait for a different season that is more to your advantage, assuming the market isn’t turning into a longer-term bear market. If you believe the market is turning for the long run, then it would make sense to take your games and exit the market.

In Conclusion

It is important to note that we do not have a crystal ball. Given the typical seasonality of our local market, it is likely that this market will remain slower now and for the rest of this year with an advantage to the Buyer. Looking forward, it is true that we are in year 10 of this bull market. There is always a possibility that a major shift is occurring and the market turns into a bear market now and for the foreseeable future. However, given the fact that the economic indicators appear to be more short-term blips than anything longer term, there is a big possibility that 2019 will be the return of the fierce Sellers’ market once again.

We wish you the best for the rest of 2018! Reach out to us at alan@alanwangrealty.com so that we can analyze your specific real estate situations!

Exhibit 6 – NASDAQ Snapshot July 2, 2018 – Market has already recovered from the last lull in April


Tuesday, January 2, 2018

Silicon Valley 2017 Real Estate Year in Review, 2018 Outlook and Tax Reform!



2017 Year in Review

We hope that you and your families had a wonderful winter break! Going back in time, 2016 ended with uncertainty about the presidential election. Yet those concerns were short lived as 2017 started and ended with record low inventory levels, record high property prices and we remain in a strong Sellers’ market in the Silicon Valley. The majority of the homes on the market garner multiple offers. Especially in prime locations, homes receive anywhere from 5 to 30 offers each, creating intense Buyer bidding wars. Prices increase on a weekly basis, with Buyers even more desperate than weeks prior. 2017 ended with some concerns about the changing tax laws, which we will break down.

Tax Reform Major Changes

Tax reform will directly affect states such as California, as we have the highest home prices in the nation. However, we believe the impact will be short lived and the market should remain strong in 2018.

Here is the breakdown of the Tax changes coming into effect that directly affect real estate. Remember that they will be applied to 2018 taxes the following year. Disclaimer: We are not Accountants or CPA’s, and we advise that you discuss your families’ specific use cases with the appropriate expert. This is a high-level view of real estate specific changes.
  • Home Seller Profit - It is important to note that there is NO change to this provision. If you live in your home for 2 out of the last 5 years, joint filers can deduct up to $500,000 tax free or single filers can deduct up to $250,000 tax free.
  • Mortgage Deduction – Previously, if you had a mortgage of $1,000,000 you could deduct that amount from your taxes. This amount has been reduced to $750,000.
  • Property Tax Deductions – Also known as SALT (State and Local Tax Deductions): There was previously no cap on this; now there will be a $10,000 cap on this deduction.
  • Equity Line Deduction – Previously a homeowner could deduct $100,000 from their equity lines. This is no longer the case, as this deduction has been eliminated.

Tax Reform Impact

Change is difficult, especially to a system and rules that are complex and have been the same since 1986. We are pleased to see that Sellers’ profit gains have been left alone. The Mortgage Deduction was initially discussed to be $500,000 and they pushed this up to $750,000. This is not great and could have some Buyers tapering their home purchase prices by $250,000 possibly. The Property Tax Deduction cap is certainly not beneficial to homes over the $800,000 to $900,000 mark, as property taxes are usually at 1.25%. If a Homeowner is in Alternative Minimum Tax (AMT), they would not have had this benefit anyway. This would, however, affect Home Owners who are were not in AMT. The Equity Line deduction was always nice to have if you had a project you were funding; however, this has also been eliminated now. Homeowners who have room in their primary mortgage could refinance that into the first loan as long as it is under $750,000 to maintain the same benefit.

In the short run, there could be a pause for Home Buyers as they digest the impact. However, given the demand from 2017, even if half of this group suddenly stopped looking for real estate, multiple offers will still be the case. Shelter is one the key foundations of our basic human needs. When we meet with clients looking to purchase homes, usually there is an additional family member on the way, more space needed for parents moving to the country, a need for yard space, a commute that is taking a toll, or a desire for better schools or a better neighborhood. Very rarely are taxes the reason Buyers purchase homes, although it is an added bonus to have a tax deduction.

2018 Silicon Valley Real Estate Outlook

We may see a short-term halt from Buyers due to getting the facts around tax reform, but likely the momentum from 2017 will carry into 2018. Home Sellers continue to struggle with their next move and as high prices and competition make it extremely difficult to move up, Sellers are opting to stay put with a few moving out of the area. These new tax laws should have grandfather clauses for previous mortgages, which could further dis incentivize Sellers from moving. Low inventory levels will likely continue through this year and Buyer bidding wars will also continue, though hopefully at lower levels than last year to give Buyers a chance.

If you are a Home Seller this will be an excellent year for you to sell your home once again. If you are looking to move up, we will have to have further detailed planning sessions on how to achieve this goal.

If you are a Home Buyer, this market is not for the weary or conservative. The competition is fierce, cut-throat, and irrational. In order to compete you must first have the foundations of down-payment, additional reserves, the right lenders and above all be mentally ready to overbid. Comparable market data is barely just a data point; This is a bidding war and you must do what it takes if you want to win a house, or you will continue to chase the market and prices will keep rising.

We are bullish on 2018 being yet another busy year for Silicon Valley Real Estate. As long as Technology stock prices continue to hold or increase, and job creation continues, the real estate market will continue to remain strong.

We wish you and your families a wonderful 2018! Let us know how we can help you with your real estate needs!

Regards,

Wednesday, October 4, 2017

Q4 2017 Silicon Valley Real Estate Update

Executive Summary

The Silicon Valley Real Estate market continues to show historically low inventory levels causing a bidding frenzy for Buyers. Taking Santa Clara County as a prime example, there are 58% less Condominiums and Townhomes for sale and 46% less Single Family Homes for Sale than the same time last year. The most fundamental principles of Supply and Demand in Economics are on full display in this market. With a low Supply of homes reducing the Quantity of homes (S1 -> S2) available, coupled simultaneously with an increase in Demand (D1 -> D2), is the root cause of Buyer bidding wars. In short, if you are a Seller you have a major opportunity to attain record setting prices on your home. If you are a Buyer, you will need to have a strong plan of attack plan and be extremely aggressive in your home bids to beat out other Buyers in this very cut-throat market.

Exhibit 1 - Supply and Demand Curves Driving the Silicon Valley Real Estate Boom


Exhibit 2 – Snapshot of Key Statistics in Santa Clara, San Mateo and Santa Cruz Counties (August 2017)




Macroeconomy

Despite the Federal Reserve raising interest rates, mortgage interest rates have remained steady. Jumbo Loans have been seeing near record lows this year. Buyers flooded the market this year in anticipation of a rate increase, but have been pleased to find steady and low interest rates which continue to fuel real estate price increases. With the stock market continually hitting record highs, this seeds a key component to funding local homebuyers’ purchases. Cash Buyers from abroad have screeched to a grinding halt, as Governments continue to control the inflow and outflows of funds.

Microeconomy

The key economic indicator in our market is the health of the Technology sector. Although there have not been any recent notable Initial Public Offerings (IPO’s), with the stock market hitting records highs, Technology stock values are continuing to increase in value. These makeup the foundations of the down payment for homes and enable Buyers to be competitive in the marketplace. The Technology sector does not show any signs of slowing down this year or next. Furthermore, although there has been an outflow of the California population to areas such as Seattle, Denver, Portland and various cities in Florida, there is a healthy in-flow of Technology workers and the Technology sector continues to hire.

Why is Inventory So Low?

The crux of the issue is that Sellers do not know where to go and how to avoid a homeless period during the exchange process. Few have enough funds to buy a home outright before selling, as much of their down payment lie in the equity of the home that they currently live in. Secondly, moving means an increased property tax amount, which is another burden that is difficult to accept. Also with increasing prices, Sellers are opting to stay put in the home they already have if there is no need to move and pay higher prices. Coming up with complex project plans have become paramount in order to help Sellers move to their next home. There are creative strategies, advanced planning and project management skills to create as stress free a transition as possible.

The Emergence of Downtown San Jose

With latest news of Googles Downtown San Jose campus, coupled with Adobe’s expansion, Downtown San Jose is positioned to be the next hottest location in the Silicon Valley. Though the campus buildout is still underway, excitement has already begun in what is likely to be a hot location in years to come.

The Sunnyvale Halo Effect

As more Technology workers are hired, traffic has become a major concern around the Silicon Valley. This makes the old cliché of Location, Location, Location even more true. With the opening of the Apple Spaceship and expansions of Google and Microsoft/Linkedin into the city of Sunnyvale, this has caused a spike in demand for housing in the city. The Sunnyvale market is the hottest market to date with homes selling 11% to 19% over list price in an average of 13 days.

Shift on the School Requirement

There has been a major shift in the last few years in the Valley. Traditionally families considered a school with the highest scores to be the desired school to purchase a home in. Since the Palo Alto Caltrain suicides, our thinking about sending our children to the top-rated schools have shifted. More and more families are opting not necessarily to have the best schools but seek balance for their children outside of simply academics.

Cost of a Great School

For those of you familiar with the market a great school will cost more initially but also retain its’ value in the long run. Also for those of you monitoring real estate closely will know that homes will sell over list price.

Below is a sample of the most popular areas in the Valley, their Average Sale Prices, the Percentage the Sold Over List Price and the Average Days on Market.

Exhibit 3 - Top Elementary Schools Statistics



Exhibit 4 - Top High Schools Statistics

 


Q4 2017 Outlook and Beyond

We are approaching the fall and winter seasons where the market tends to hit a seasonal lull with reduced inventory levels along with lower price levels. Given the low amount of supply this year and the increased amount of demand from home buyers, we are not sure that there will be a price dip this fall or winter season. There appears to be enough demand to carry us well into 2018 and onward. Looking forward to 2018 we believe that there maybe more inventory hitting the market, but likely not enough to satisfy the current demand. As long as the Technology sector continues to be strong, price will likely continue to rise in the short run.

Join the Conversation on Linkedin! - https://www.linkedin.com/pulse/q4-2017-silicon-valley-real-estate-update-alan-wang/

We wish you the best in this fourth quarter to close out the year!

Regards,

The Alan Wang Realty Group


Alan is the Founder of the Alan Wang Realty Group at Keller Williams and has been in the Real Estate industry helping clients for over 14 years. Previously he was also in the Technology industry for over 13 years. He is passionate about helping families achieve their real estate dreams!

Contact us at (408)313-4352 for a complimentary consultation or e-mail us at team@alanwangrealty.com

Tuesday, April 11, 2017

Q1 2017 Silicon Valley Real Estate Update



The Spring season has started out with a roar. Inventory levels have been at extremely low levels and Buyer demand has been high. One component is certainly the usual Spring seasonality, but we also believe that the rising interest rates are an even more critical driver. The all powerful cash offer has now resurfaced with investors also heavily active in the market place as well. Thus far the new administration hasn’t dampened the Silicon Valley Buyers’ home buying spirit.  Demand is especially high in the Single Family Home category. Single Family Homes in the million-dollar mark have seen competition levels from 15 to 20 offers.  Buyers are realizing that they cannot be picky and settling for smaller homes less than 1,000 square feet and even settling for 1 bathroom. Competition is fierce; if you are a Buyer we suggest that you go with your most aggressive strategy and do not underestimate the competition. Home prices are pushing up with every sale on a weekly basis and many Buyers eventually find themselves priced out of the market.  The next category are homes in the $1M to $2M bracket. Homes in this range have also been very aggressive though with offers in the single digits typically occasionally breaking double digits.  Homes in the $2M and up price points will vary by location, but typically with multiple offers as well.  Week by week more inventory is coming onto the market, so if you are a Seller get out soon before everyone else catches on.

Rise in Move Up Sellers

We have seen a trend of Sellers who are selling to purchase their next property as well. As with many Sellers, their equity is in their homes, which requires a deeper dive into each Sellers’ unique financial situations to derive a property strategy.

Macroeconomy

The Federal Reserve raised interest rates by .25% and signaling another .5% increase this year.  This will ultimately affect the interest rates on mortgages in the long run. Interest rates are still at all time lows and we are still seeing great interest rates still from our preferred lenders. There will come an inflection point where higher interest rates will affect affordability and ultimately home prices. This inflection point will not likely be attained in 2017.

Technology Sector

Snapchat, Okta and Mulesoft led the way this year with their Initial Public Offering (IPO). This will pave the way for more IPO’s this year and next. The stock market has performed well in 2017, helping technology workers procure their downpayments to buy homes. Some Silicon Valley companies to watch for are Cloudera (Palo Alto) and Dropbox (San Francisco) are possible candidates as well.

Looking Ahead

We expect inventory to peak in the June/July timeframe. This year is unique in that it is possible that the market may continue to be good for Sellers as the number of Buyers that are in the market may still go unsatisfied through the summer months. It goes to be seen how the inventory levels are for properties on the market.

In Summary

As a Buyer if your mindset is anything other than aggressive, you may continue to lose multiple homes until the market forces your hand, or you simply decide to put a hold on your home search.  By then prices have increased on a weekly basis and often Buyers find themselves priced out. For Sellers, keep in mind that you are not the only Seller monitoring the market.  Many Sellers are gearing up to hit the market so take advantage while you can.

Join the Conversation

Join the conversation on Linkedin! https://www.linkedin.com/pulse/q1-2017-silicon-valley-real-estate-update-alan-wang