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.
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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