Welcome to Alan Wang's Real Estate Blogger. Alan specializes in residential Real Estate fully representing Buyers and Sellers with their Real Estate Needs. Check back here for market outlooks, mortgage rates and new listings! I am also available online at http://www.alanwangrealty.com.
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.
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 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 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
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 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.
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.
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 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.
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.
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
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.
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.
There are certainly many factors in-flux in our world today; inflation rates across the board, rising interest/mortgage rates, volatile stock markets and the war in Ukraine. One would assume that this would dampen the sentiment of Buyers, however the answer is that in some areas it has and in most areas Buyers are still running aggressively in favor of the Seller. We are still seeing half of the offers before the war in Ukraine, anywhere from 5 to 7 offers on our listings. Quality remains strong even though the quantity has been lower. Buyers continue to offer over list price, with non-contingent offers and closing as quickly as their lenders can close.
However, in the last month, we have seen a few odd datapoints of 1 to 2 offers on our listings and some properties that we have offered on. We are not sure if this is a localized phenomenon or a sign of a future market trend. This could be a momentarily blip or a more prolonged leveling. Nationwide some markets have been seeing this cooling as well. The fact of the matter is that inflation is out of control across multiple product sectors and the Federal Reserve plans to be aggressive in getting that under control. This will eventually inevitably slow down the real estate market as well. This level of price appreciation and overbidding was not sustainable and there could be a shift coming in the marketplace.
Inflation hit another record high in February at 7.9%. The global supply chain issues from COVID are now coupled with further disruptions due to the war in Ukraine. The highest impacted sector is fuel prices due to our boycott of Russian oil and gas further restricting supply.
Interest rates have increased from 3.875% to 4% locally for a 30-year fixed jumbo loan. These are still historical lows, but there are mixed reviews on the impact of rising rates. Some Buyers have felt that the increase has priced them out of their target budgets and desired monthly payments. Others are rushing to take advantage of the lower rates before they rise further.
Here are the nationwide 30-year fixed mortgage rates.
30 Year Fixed Mortgage Average Rate
St Louis Federal Reserve
The Technology heavy NASDAQ index fell 9.3% in 2022 since the peak at the beginning of this year, but still up from the lowest point at 20.5% on March 14th, 2022. The NASDAQ is critical as this is the source of down payments for our Silicon Valley home buyers. The volatility of the NASDAQ is likely a concern to home buyers who are not sure how much they can count on this source for their down payments.
Source – Yahoo! Finance
The good news is that the California unemployment rate has come down from the 16% rate back to 5.4%, just a little over 1% of the unemployment rate pre-covid. This means that the workforce is returning to their normal work lives as we all learn to live with COVID. Google mentioned that their workforce would return to the office on a part-time basis in April and Apple has already been back to the office as well. More companies are expected to follow suit.
The market will need to be closely monitored. Undoubtedly there is still momentum in most markets in the Bay Area and this Sellers’ market will continue.
However, these macroeconomic factors seem to indicate that there will be a slower market for Sellers in certain locations and for certain product types in the short run. There could be a greater slowdown across the board in the long run. Given the overall low supply and momentum of the market, we are not anticipating overnight changes, but likely a gradual change assuming these economic factors change gradually as well.
As a Buyer, we know it has been a tiring and frustrating journey with the level of multiple offers and levels of price overbids. If you and your family have been in the market for a home, in the short run offers will still be strong, however, opportunities may present themselves in various areas. It might be a good time to come back to the market or continue to put offers in order to get that home for you and your family. Consult our team for a deeper evaluation of your specific target location so that we can better advise you.
A leveling market is the toughest for Sellers. Sellers have had high expectations of multiple offers and extreme overbidding for over the last two years. With the possibility of us coming off peak, rest assured that you have had such a high level of appreciation and you will still have amazing gains. For some you just missed the peak, for others your area may still have momentum. Remember that multiple offers are a great story to tell, but in the end we can only accept one offer. Regardless, we recommend that you strike while the market is still hot. The future no one can predict.
It has certainly been an eventful couple of years in the real estate world. Let us know how we might be of assistance with the real estate needs of you and your family.
We hope that you and your families had an amazing holiday break and that you had good food and some good rest. We wish you and your families a healthy and prosperous 2022!
2021 Silicon Valley Real Estate Year in Review
2021 was yet another Sellers’ market, in fact the most aggressive that we have seen in over 18 years in the business. The explanation lies at the intersection of housing needs, the influx of wealth and more borrowing power all playing a critical role.
The first pillar of the Maslow Hierarchy of Needs identifies shelter as a basic human need. With COVID variants mutating with no end in sight, the local workforce will continue to work from home for the foreseeable future. With these circumstances, a home office is a key requirement creating the need to upsize to a home with more bedrooms and more space overall. Outdoor space remains critical, as it is still safer to congregate outdoors rather than in tight indoor spaces. The second factor attributing to this aggressive buyer pool is that Buyers have increasing wealth from their company stock options. The NASDAQ index increased by 23% in 2021, putting wealth in the pockets of our local technology workers. Homeowners that were looking to upsize, also had equity in their previous primary homes as well. Lastly, interest rates though up slightly, remained at historical lows in 2021, thereby increasing Buyers purchasing power on homes.
Average home prices in Santa Clara County increased 18% across Single Family, Townhomes and Condominiums in 2021. The Single-Family Home sector continued to be the coveted prize in 2021. Inventory has been so low that multiple offers were almost guaranteed on the majority of properties. For Buyers, it has been a survival of the fittest in this historic Sellers’ market. Buyers who can go the highest in terms of price, with the strongest financial position and the least amount of terms and conditions are deemed the winners. The winning bid continuously pushes the last sale price and often was rooted in the pure desire to win the home. The Townhome sector also saw a comeback from the second quarter onward, likely that due to being priced out of the Single Family Home sector. The Condominium sector has seen some recovery as well, though still more of a Buyers’ market to a more balanced market for this sector. Buyers prefer to have more space if possible.
The Technology heavy NASDAQ index gained 23.2% in 2021. This armed our Silicon Valley home buyers with down payments and equity to bid in this aggressive market.
Interest rates have stayed low in the 2.5% to 3.5% range. These are still historical lows, undoubtedly a key contributor to increasing home prices due to higher buying power for buyers.
St Louis Federal Reserve
Inflation hit a record high in November at 6.8%. Over the past 20 years, inflation has hovered generally around 2%. Like many businesses, when COVID hit, businesses lowered demand expectations and their workforces were forced to work from home. The lockdown pandemic created a high rate of consumer savings and when we emerged from the worst of the pandemic, the demand for food, goods, services, vehicles, etc all skyrocketed. This demand shocked the already disrupted supply chain, with labor shortages and created a shortage of products. Heavy demand and low supply equated to increased prices and subsequently inflation. When it comes to manufacturing and supply chain processes in a global economy, it is difficult to simply jumpstart that engine within an ongoing pandemic.
In the short run, low inventory and high demand will likely keep real estate prices high and competition fierce. The biggest concern is the inflation rate and will that stabilize over time? Will our supply chain ramp up to meet demand thereby lower prices naturally, or will this continue to be an issue. The Federal Reserve does not appear to be interested in taking the wait and see approach. They plan to raise interest rates three times in 2022. The impact is yet to be determined based on how aggressively the rates are increased. Regardless, rate hikes will eventually affect the interest rates on mortgages and if done aggressively could lower home buying power and slow down the rate of price increases. If this also dampens the mood of the stock markets, we could have 2 key pillars of home buyer aggression neutralized. This could create a more balanced market overall. My projection would be that in the short run little will change and perhaps the latter half of 2022 we may see some possible leveling in the market, but will it be enough to overcome Buyers’ housing needs? That is yet to be seen.
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