Wednesday, June 1, 2022

May 2022 Silicon Valley Real Estate Update – The Market Correction Has Arrived

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 Rates

 

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.


 

https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm

 

Interest Rates

 

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. 


30 Year Fixed Mortgage Average Rate


 

St Louis Federal Reserve

https://fred.stlouisfed.org/series/MORTGAGE30US

 

Snapshot of Wells Fargo Home Mortgage Rates



NASDAQ Index


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


Unemployment Rate

 

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.


 

https://data.bls.gov/pdq/SurveyOutputServlet

 

 

Impact of Rising Rates and Lower NASDAQ on Buyers

 

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.


Feeling Social?


Join the conversation on Linkedin! https://www.linkedin.com/pulse/may-2022-silicon-valley-real-estate-update-market-correction-wang/?trackingId=03vhpPI0LGaQRyg4d6Cg7g%3D%3D

No comments: