Q4 2013 Real Estate Outlook
Welcome to my Q4 2013 outlook. There is
some major news that affects the real estate sector and my overall
outlook going forward.
United States Macroeconomy
The most critical news was what came out of the Federal Reserve meeting
last week. Bernake announced that the Fed would in fact not reduce
it's stimulus and continue pumping money into the economy at this time.
This came as a surprise to the market, as he issued a warning in May,
which inadvertently caused a 1% rise in mortgage rates. My take on this
is that the Fed is backtracking from that statement as it was
pre-mature and they didn't realize that would cause an alarm in sectors
such as real estate which was in the process of recovering. A steady
rise is preferred, but a 1% jump was a shock to home buyers because it
is material in mortgage calculations especially to those who were
pushing their limits. The fact of the matter is that our economy is
recovering very slowly and the unemployment rate continues to hover at
7.6%. However, the Fed's easy money policy is designed to pump money
into the economy in an attempt to jump start spending and overall
activity in the marketplace. Since rates are so low, there is no
incentive for consumers to leave money in the bank to earn 1/10th of a
percentage in savings accounts. This has everyone flocking to the stock
market which is closing at all time highs, as well as real estate
investing which has pushed home prices close/over levels seen at the
peak before the sub-prime mortgage crisis. Personally I am very
concerned that this approach is creating asset bubbles across the board,
from the stock market to the real estate sector. Are we trading short
term gains for more long term pain and in fact slowing down a natural
more sustainable recovery? As far as rates, they may drop slightly, but
with this level of uncertainty, people are guessing when the fed will
layoff stimulus and that will likely prevent a sharp drop.
Bay Area Local Microeconomy
As I've been saying over multiple quarters, our local real estate boom
has been aggressively accelerating since February of 2012 and is not
sustainable, which we are seeing effects of that now. What I didn't
know was that we would slow so quickly. This was due to Bernake's
comments in May, there has since emerged the tale of three markets;
prestige areas with great schools, locations further from center
(without strong schools) and investment properties.
Prestige Areas (Namely Strong Schools & Convenience of Location)
The markets with great schools or prestige locations close to the
center of technology, continue to see low inventory and high demand with
multiple offers aggressively pursuing these homes. Some of the loan
buyers may have been priced out due to the 1% rate jump, however these
areas tend not to slow down much at all. There maybe less bidders than
before, but given that these homes are very limited and demand high,
there maybe less bidding, but these homes will continue to move quickly
and be competitive. One of my clients were looking at a home on the
Peninsula that had 12 offers and sold $250,000 over list price, this is
the price tag for this type of home. When I look at the inventory
levels in cities such as Mountain View, Los Altos, Cupertino, Saratoga
and Menlo Park, homes go into pending very quickly and there are very
few active homes.
Locations Further From Center
Markets that maybe further from the center of technology or not
supported by strong schools took a hit especially in June and July. In
these 2 months, the pending home sales were actually below the active
homes which means homes took longer to sell. These were tough months as
Seller's and Agent's alike were listing homes expecting the rapid
increase in pricing and may in some cases saw minimal activity and more
competition. These factors created the perfect storm. Seller's were
following the former market, while Buyer's were hit right at their
pocket books with the rate increases pricing many people out of their
range and at the same time that summer inventory gave Buyer's more
choices. The Seller's that needed to sell had to reduce their prices to
a level that Buyer's actually felt was worthwhile to go through the
process. Many took their listings down or had to negotiate below the
latest comparable sales. I also noticed many loans falling through and
pending homes coming back on the market which is never a good
situation. However, in August and September the statistics show homes
are more even as far as active to pending homes. Likely the price drops
have lured some Buyer's in and the drops in summer inventory, balancing
a bit better with the available Buyer's on the market. Personally I
much prefer markets in equilibrium rather than the lopsided market as we
have seen over the last year and a half.
Investment Properties
Lastly, investors continue to be out and about with cash from overseas,
locally as well as institutions. Hence lower priced homes less than
$600,000 become heavily sought after as they can generate income and a
possibility for appreciation. The math is simple. If I have $500,000
in cash and let's say I buy a single family home. Let's assume rent is
$2,000 a month which generates $24,000 a year. If I take out property
tax as an expense ($6,249), my return on investment is $17,750 a year
(assuming no other expenses). This is a 3.55% return on investment in
which the alternative would be to sit in the bank earning next to
nothing in this macroeconomic climate. However, this scheme is
understood by many and cash was in fact 32% of August sales. What I've
found with my investors is that the competition is so fierce that the
home price jumps to a point where the excel spreadsheet stops making
sense. Even worse, on homes such as these, regular home buyers looking
for primary homes will be generally out of the running against these
strong cash offers that have no loan dependencies and very fast close
times. Cash simply is king! For my investors, I personally feel that
home prices have increased to a point where investing in our local may
not make a ton of sense.
Summary of Activities in the Last Quarter
I
like to review some of the activity I've been running into, in order to
give you a sample of what is going on in the marketplace. Overall, I
have more Buyer's opting to wait it out to see what happens in the
marketplace. Here are a few more samples in the last 3 months.
Listings
- 455 Alegra Terrace in Milpitas, this listing hit the market literally two
weeks into the slowdown. Showings and overall interest was very low.
This home eventually sold after a price drop, with a slight loan
extension provided as the lending process has gotten more challenging.
Congratulations to my Sellers for weathering the storm!
- 1891
Anne Marie Court in San Jose, hit the market right at the beginning of
the slowdown. We planned for the aggressive price increases from the
previous market which never came. After a couple of price drops, we got
an offer that eventually fell through due to loan issues. This
property is now available for rent. Let me know if you or someone you
know is interested!
Purchases
Q4 2013 Outlook and Beyond
I expect Prestige Areas to continue what they do, so if schools are
what you want, gear up and be ready to compete. I do see a more
balanced market in that sweet spot in Locations Further From Center.
The closer you are to the center of technology in the Palo Alto/Mountain
View area, the more competitive it will be. Since the stock market is
doing so well, buyers have plenty of equity from Google, Apple,
Linkedin, Facebook and the list goes on. Next year there are rumors of
IPO's from companies such as Twitter and Box, which will create more
wealth in the valley. At the same time prices have been very aggressive
and builders have been adding inventory to meet this demand. With
newer Townhomes selling in the high $800,000's and above in Mountain
View and Sunnyvale, the affordability factor and rising interest rates
are stopping many Buyers from jumping in. I expect prices to stabilize
from their aggressive acceleration as demand calms. What is unclear is
will there be a second coming of the madness we have seen? Given that
rates will likely hold steady and prices won't drop overnight, I see a
steady calm as the market shifts to equilibrium. In my opinion it is
long overdue as it was never sustainable to see 20%+ increases in home
prices. The old adage rings true, "what goes up must come down",
remember that real estate is a long term investment, but you should ride
the waves appropriately.
Seller's If
you are in the first or third bucket of homes, I'd say you are still in
a good position if you need to sell your home but the comparables will
have to be taken with a grain of salt. Of course strategies will vary
depending on where you are located, so contact me for a customized
evaluation. Those of you in the second bucket, will have to adjust your
expectations to a calmer market.
Buyer's
In many areas we are coming off peak prices to more stable prices.
This is overall good news if you have been on the fence waiting to buy.
However, this is a steady stabilization, not a situation where we can
come with aggressive low offers and expect them to be accepted. Homes
will sell closer to list price, unless there is competition. Again if
you are in bucket 1 or 3, be ready to battle for homes as the
competition is still alive and well. The key decision to make here is
do you buy now right off the possible peak, or hold for the next
downturn. I with I had a crystal ball of when that is, but if you have
housing needs now and can't wait, at least you aren't buying at the peak
of the market, assuming the market doesn't come roaring back. I do
want to say let's not forget the big picture. 4.75% is still a great
interest rate, you may just have to scale back a bit on what you are
looking. Ask your parents what they paid in the 80's and they will
remind you that their mortgages were over double digits for sure.
Happy Upcoming Holiday!
I wish you all the best as we head into the holiday season and thank
all of you that constantly refer customers to me. If you or your
friends and family have real estate needs, please remember me when the
need arises!
