Tuesday, October 6, 2020

2020 Curveballs and Impact to Silicon Valley Real Estate

First of all, apologies for not getting the second quarter blog out to you. We are honored by so many of you asking us about the blog and that so many of you read our quarterly updates. This update will encompass the second and third quarter update of 2020.

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2020 Challenges-to-Date

 

The year 2020 could not be over soon enough. The challenges we have faced as a society we have never been seen in our lifetimes. We are fighting challenges on multiple fronts; first with the threat of coronavirus still looming, learning how to shelter in place with our families and many with children of all ages, learning to cope with online schooling, social distancing in public areas, local businesses fighting for survival, social unrest in many parts of the country, a country divided on many issues and in the last month wild fires across our state creating unhealthy conditions outdoors further trapping us in our homes not to mention those that have lost their homes. Despite all of these challenges, residential real estate continues to boom in certain sectors while struggling in others. This article will explain in depth the various phenomenon’s that we are seeing.

 

A Momentary Freeze


When the Shelter-in-place ordinances were announced, all of us were extremely concerned about what would become of the real estate market. In fact, Realtors were not considered essential at the onset although Banks and Title Companies were. In March and April all activities mostly grinded to a halt, except for those Sellers or Buyers who were already in contract.

 

Temporary Halt of the “City Center”

 

Traditionally, societies around the world revolved around major metropolitan cities and in our area that is pre-dominantly the city of San Francisco. People flocked to San Francisco due to its’ historical ambience and character, multiple night life and entertainment options, an abundance of jobs and career opportunities. These characteristics drove down the supply of housing, confined people to smaller spaces, pushed rental rates as well as home prices upward. When the Shelter-in-Place ordinances were put in place and companies were forced to allow employees to work from home, the justification to live in confined spaces at high prices were no longer justified when people could no longer enjoy all that San Francisco had to offer. Without the nightlife, enjoyment of the outdoors and the need to go to work, people left San Francisco in droves quickly.

 

Out of State Migrations and San Francisco

 

The first group to leave the area were individuals or young couples that weren’t from the area to begin with. Their reasons were simple, move back home to their families as their jobs no longer required them to live in the high-priced Bay Area and therefore they were saving money on high rents in the area. There was simply no need to physically be in the Silicon Valley and remote work options were always a part of the foundation of the tech sector. The impact of this has hit the San Francisco housing market especially hard. Moving trucks were seen throughout San Francisco and landlords have been forced to compete with a sudden influx of rental properties thereby driving down the rental rates in an effort to fill their vacancies and stop the loss of cash flow on their investments. Homes sales especially for Condominiums and Townhomes had a major increase in inventory causing home prices in both of those sectors to drop. Buyers suddenly had an overwhelming amount of choices and it really boiled down to price as the key differentiator. The Mercury News reported “Monthly rent dropped 17.8 percent in San Francisco, the steepest decline in the nation, 9.5 percent in San Jose, 7.9 percent in Oakland and 6.3 percent in Fremont” – Source Mercury News Louis Hansen - 10/1/2020 - https://www.mercurynews.com/2020/10/01/rent-falling-fast-in-bay-area-cities-during-pandemic/. Leveraging Supply and Demand curves, let’s take a look at what happened.

 

Exhibit 1a – San Francisco Supply and Demand Pre-Covid

 


 

Exhibit 1b – Migration Out of San Francisco Caused a Reduction in Rental and Home Prices

 



Exhibit 1c – Increase of the Supply of Rentals and Homes for Sale Further Pushed Down Prices

 


 Government Stimulus and Interest Rates

 

The government acted swiftly to initiate The Cares Act with programs such as the Payroll Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) for small businesses. Although not all businesses were able to get these funds many did. A new concept called forbearance granted relief for a homeowner or landlord from having to pay their mortgage or at a lower rate. Many states, cities and counties initiated tenant payment relief programs as well. Last but not least, extra stimulus payments for qualified earners and additional unemployment benefits helped to keep families afloat.

 

The Federal Reserve having learned from the last downturn, acted very quickly in dropping interest rates to zero and adding more liquidity to the financial system. What resulted was yet again the lowest interest rates ever seen especially for mortgages.

 

Exhibit 2 – 30 Year Fixed Mortgage Rates


 

Source Freddie Mac - https://fred.stlouisfed.org/graph/?g=NUh

 

Technology, Finance and Medical Sectors

 

We are certainly mindful of small business owners/workers that are having the toughest time during this pandemic. Many small businesses and franchisees have shuttered their businesses unable to continue during the strict restrictions as we continue to shelter-in-place. Consumers have been hesitant to return to dining and multiple businesses still remain closed although local counties are attempting to re-open. Even outdoor dining still equates to limited capacity and reduced revenue for local business owners. California’s unemployment rate went from 3.9%, peaked at 16.4% and is currently settling at 11.4% for the month of August. The impact of the coronavirus pandemic is simply staggering.

 

Exhibit 3 - State of California Unemployment Rates



 

Source – US Bureau of Statistics -https://data.bls.gov/timeseries/LASST060000000000003?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true

 

There is one bright spot in this news, key Silicon Valley skilled industries such as the Technology, Finance, Medical, Legal, Construction, sectors of the Real Estate industry continue to thrive despite the pandemic.

 

NASDAQ

 

The technology heavy NASDAQ took a major hit when the pandemic came to bear in March. There was widespread panic across the board. Defying all odds the NASDAQ has now recovered to record levels even pre-covid. This is important for our local home buyers as this is the source of the down payments for their homes.

 

Exhibit 4 – NASDAQ Index Last Two Years


 

Source – Verizon/Yahoo Finance! – 10/2/2020

 

New Requirements in New Times

 

For most families, none had planned to be in their homes with their spouses, children and work 24 hours a day. For most families our days were spent working, driving children to school or day care, enjoying the outdoors, partaking in night life, attending children’s sports and other activities and traveling. Suddenly every home buyer came to us with four key requirements; more living space, more bedrooms to accommodate at least one office, a good size backyard especially for those families with children and lastly a move-in ready home. The key product segment that fulfills this requirement is the traditional Single Family Home which has seen a major increase in demand. Condominiums and Townhomes on the other hand are sitting longer on the market if they sell at all. This is simply not the product segment that people need at this time in their lives.

 

The Flight South East

 

As the migration out of San Francisco occurred, Bay Area residents flocked to the suburbs desperately looking for that space and a yard. In the past, hot markets were defined as flights towards the city centers for the first time we have a flight away. One factor is abundantly clear, housing is an essential need and which is why real estate is in fact booming. Cities in the past that were considered far for most Buyers are seeing multiple offers. Some examples of heavy competition are taking place in Pleasanton, Dublin, San Ramon, Danville and Morgan Hill. Homes are selling before Buyers can get there on the weekend to see the home. Essentially all markets with Single Family Home inventory are seeing a hot market.

 

Exhibit 5a – Supply and Demand of Single Family Homes Pre-covid

 

 

Exhibit 5b – Reduction in Supply Caused and Increase in Prices


 

Exhibit 5c – Increase in Demand Due to Shelter-in-Place Further Increased Prices

 



State of the Market

 

Fueled by a strong job market at skilled positions, a rising stock market, low interest rates, combined with the desperate need for more indoor and exterior living space; these factors have driven the Single Family home market into low supply and high demand across most cities in the Silicon Valley and across the nation and created heavy competition across the board. Condominiums are the hardest hit sector following by Townhomes especially in San Francisco and Commercial real estate has been impacted as well.

Taking Santa Clara County as an example let us take a look at the Single Family Home sector. Inventory has stayed more or less the same however homes are taking longer to sell than last year. This is not surprising given that there is more friction with the home showing process with waiver, forms, booking times and and also the desire of Buyers to have a move-in ready home. What is very interesting are the pending and sold units are overtaking the active homes on the market. What that means is that the demand is extremely strong in this sector. The homes that are selling are selling 29% faster than they were last year. Homes that are priced right and are in move-in ready condition tend to fly off the market. The Condominium and Townhome market tells a slightly different story. Inventory is up 35% from a year ago and the days on the market have increased as well. As mentioned this not the product group that folks are flocking to during the pandemic however the pending and sold units seem to have been picking up momentum though not as aggressive at least in the southbay.

 

Exhibit 6 - Q3 2020 Santa Clara County Snapshot



Real Estate Outlook 2020 and Beyond

 

Companies are allowing workers to work from home until at least June of 2021. Even if employees were permitted to return to work, they will most likely be in a hybrid model first, before having to go back into the office full time. This is all dependent on the status of a vaccine and how the overall coronavirus numbers are trending. 2021 will likely be certainly more than half time at home and indoor and outdoor space will continue to be a premium. Single Family homes will continue to be in high demand while the Condominium and Townhome sector may or may not be on a road to recovery in 2021. There are certainly multiple dependencies before we get back to normalcy.

 

We are living in a unique location where jobs are secure overall fueled especially by the tech sector and those have always been the demographic of people buying homes. I anticipate interest rates to continue to stay low and if the NASDAQ holds at current values or continues its’ upward trend, home prices will continue on that trend as well. The two key variables are the upcoming election and the health of the rest of the nation. The big question is will monetary policy change due to the next president and although we live in a unique place, the health of the rest of the nation should be monitored. If the rest of the nation falls into a recession, then even the mighty Silicon Valley could be impacted and that may slow down this strong real estate market.

 

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