Q3 2018 Silicon Valley Real Estate Update - Stabilization in Effect as Home Prices Continue Decline

Q3 2018 has been yet another eventful quarter in our continuing shifting stabilizing Silicon Valley Real Estate Market. Please find our update to help guide your real estate decisions!

Home Prices Peaked

Home prices peaked in the month of May and this market shift came very quickly. As mentioned in our Q2 update, the reasons were exhausted home bidders, unaffordability of prices, the drop in the NASDAQ Index in April, tax filing deadlines, coupled with a rise in inventory for the summer months. Homes started to sit on the market and Buyers took a wait and see approach which has continued until now and likely the rest of the year. The conundrum is that there are still Buyers out there, however affordability continue to be a concerning factor.

Exhibit 1 – Santa Clara County Real Estate Snapshot July to September 2018

Taking Santa Clara County as a sample comparing to data from Q2 2018, the amount of Active homes increased in the Single Family Home category by 31% while Condominium/Townhomes increased by 93%. Subsequently the days on market also increased dramatically for Sold and Active homes in both categories. What is interesting is that Sold Units more than doubled the amount of units in Q2. This shows that Buyers demand is still there paired with more quantity of homes on the market during the summer months to purchase. In short, inventory and days on market are up, but Buyers are still purchasing homes but they are taking their time and looking for better pricing and more favorable terms. The crazy bidding market is gone and the Buyers in the market are at an advantage.

Exhibit 1a – Santa Clara County Real Estate Snapshot June 2018

Source - MLS Listings Database REIL June 2018

Macroeconomics

On a Macro level there are many factors currently in-flux which are contributing to the stabilization of Real Estate such as the NASDAQ index, Trade Wars, Protectionism and Rising Interest Rates.

Health of Equity Markets

The key concern is the health of the Stock Markets, especially the Technology-heavy NASDAQ index, which is the source of the majority of the down payments in the Silicon Valley. Notice the drop back in April and now another two recent drops in October. Oddly the economy and companies have generally been showing good overall health. There have been some companies that have revised lower guidance on earnings but most have shown decent earnings. Investor sentiment seem to be expressing concern across the board especially of a possibly overheated Technology sector and therefore companies being overvalued. We have just experienced the largest sell off in the second and third weeks of October and the markets have continued to show volatility since.

Exhibit 2 – NASDAQ Snapshot October 25, 2018 

Source – Yahoo! Finance

Trade Wars

The trade war with China is causing concerns about the impact to both economies. Companies who export from China are seeing their margins wiped out and goods from China could get more expensive here in the States. Companies that export to China will see a hit in revenue due to the counter tariffs from China. There is much concern from investors on the ultimate impact to profitability and this subsequently will affect equity values and our economy.

Protectionism

The current protectionist policies are making the visa and residency process even more difficult than they have previously been. Many key believers in purchasing real estate in the Silicon Valley are typically from abroad. With this uncertainty, Buyers are holding off on their home purchases, heading home or heading to countries with simpler more transparent visa processes.

Interest Rates

Federal Reserve interest rates have been increased 3 times this year. This will ultimately impact affordability. Some Lenders have been able to keep interest rates around the 4.5% to 4.75% range. Some other lenders have touched the 5% mark.

Exhibit 3 – Federal Reserve Interest Rate

Source – St. Louis Federal Reserve

Despite concerns about affordability and rising rates, interest rates are still at historical lows.

Exhibit 4 – 48-Year History of the 30-Year Fixed Mortgage Rate

Source – St Louis Federal Reserve

Seasonality, Buyer and Seller Advice

As we approach the holiday season, regardless of the overall market conditions, this tends to be the slower season for Real Estate overall. If you are a Buyer, this is your market to obtain deals due to the season and current market conditions. Lower down payments, under list price offers, contingencies and long closes are all possibilities. If you are a Seller, homes are still moving if we price them properly it should move in 17 to 30 days. The hardest part is to understand the market and not going after peak pricing that passed us in April. That market has passed us at this point.

In Conclusion

To be clear the market is still a healthy and more balanced. Silicon Valley Homeowners have been spoiled by homes selling in a week with multiple offers which was never scalable. With the latest concerns especially around the equity markets and rising interest rates coupled with the slower typical seasons, Real Estate in 2019 should continue to stabilize and could possibly also mirror the volatility of the equity markets. Though we cannot predict the future, it is likely that 2019 will be another more stable and balanced market for real estate.

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

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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

Source Yahoo! Finance

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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,

Alan Wang Realty Group