Turbulence would be an understatement for how the real estate market fared since the beginning of the COVID-19 pandemic. When the pandemic locked us in our homes, there was widespread fear of how our lives, our health and our jobs would be affected. The stock market dropped in value and the housing market froze.
Then in a blink of an eye, the stock market turned upward, especially companies in the technology sector. Technology was heavily relied upon to navigate through the pandemic which is why these companies saw enormous growth. Technology stocks soared by over 23% and thereby increased the wealth of Silicon Valley workers. The Federal Reserve acted quickly and dropped interest rates. Mortgage interest rates were once again at all-time lows. Two factors also became critical; families needed more space specifically bedrooms and more yard space. Paired with increased wealth for down payments and loans at bargain rates, Buyers came out in droves to purchase the home that their families desperately needed. In an area with traditionally low inventory, this spike in demand caused an aggressive level of bidding that we have not seen in our 19+ years in the business.
As we emerged from the pandemic, another phenomenon occurred that our economists did not factor into their stimulus. Families working at home cut their spending significantly. Consumer spending dropped as we were trapped in our homes; the byproduct is that our savings increased dramatically. As we emerged from the pandemic and were allowed to dine, enjoy entertainment, and even simply drive again, our pent-up demand exploded across all products lines. There was only one problem, companies did not predict this surge of demand and they not only scaled back production during the pandemic, but COVID affected the ability of their workforces to be at maximum efficiency hence a lower supply of products were produced. Low supply and high demand equated to higher prices. Unfortunately, we over stimulated the economy to which prices soared to over 9% due to this dynamic.
At the start of 2022 we were in for a rude awakening. What goes up must come down. Inflation was the theme of the year as our country has been fighting the higher prices by aggressively raising interest rates. This has had a major impact on the prices of Silicon Valley real estate. Prices peaked in April and real estate prices have been on a downward trend since.
The technology heavy NASDAQ is down 33.8% in 2022. This not only wiped out the 23% of stock market gains in 2021, but we are taking an additional 10.8% loss on top of that. This has directly affected the amount that Buyers are able to put down on their next homes. This is a major contributor to the current real estate market.
Exhibit 1 – Nasdaq Composite 2021
Source Yahoo! Finance
Mortgage Interest Rates
Our Federal Reserve recognized that they overstimulated the economy and had to aggressively raise interest rates to get inflation under control. This more than doubled the cost to borrow and increased monthly payments dramatically. Cheap money was gone, and Buyers had to quickly adapt to the new reality. Many Buyers moved to the sidelines and continue to wait.
Exhibit 2 – 30 Year Fixed Mortgage Rate
Source – St Louis Federal Reserve
Despite all the bad news there is some good news. These aggressive increases in the prime rate seem to be having an effect. Inflation peaked at 9.1% and is trending downward to 7.1% in November. The Federal Reserve did not go as aggressive of late, opting for a half point hike rather than the three-quarter hikes they have been doing much of this year. We are seeing gas prices come down lower as an example. Hopefully this trend continues.
Exhibit 3 – 12 Month Inflation Percentage
Source – US Bureau of Labor Statistics
Layoffs in the Technology Sector
Ever concerning are the layoffs in the technology sector. Although not all jobs are in the Silicon Valley, a larger amount of the technology jobs are centralized here. This new factor has caused much fear in Silicon Valley home Buyers. If this trend continues, it will add to an already nervous sector of Buyers. Hopefully there are no more layoffs occurring in 2023.
Exhibit 4 – Technology Layoffs
Source – Trup Up Tech
Despite the layoffs, for now the unemployment rate remains at 4.1%. It might take a few more months for this data to settle to determine if the Technology layoffs had any affect.
Source – Bureau of Labor
2023 Real Estate Outlook
If we are optimistic perhaps the market turns in the next 2 quarters, however realistically we could be in this down market for most of next year. The critical factor to note is that inventory levels are still low. Our clients who are looking for homes, often complain that they are not pleased with the inventory available. It would not take much of a surge in demand to turn the market back into an aggressive Sellers’ market once again. For now, all of the leading economic factors seem to be pitted against a turnaround in the current market.
For our Buyers, the question is always when we will the market bottom as far as prices and when is the best time to buy. We never know when the bottom is and once we do it has passed us already. The real questions are do you have a family need and is this a long-term purchase? If the answer is yes to both of these questions, then it is a good time to buy. For those of you that are speculating, remember that when the market turns it turns quickly and with the market down 15% to 20% it is not a bad time to get in.
For our Sellers, the question is always is it a good time to sell? The key questions are do you have a family need to sell and do have you made a good amount of equity? If the answer is yes to both of these questions, then yes, it is a good time to sell. If not perhaps you can wait out 2023 for a better market in 2024. The questions is how much further could this market go in 2023? Should we take our gains off the table now or can we wait longer for the market to recover?
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Wishing you and your families an amazing 2023!
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