The New Normal Will Become An Older Normal

This past Monday I opened the MLS website for agents and hit what I call is my "Hot List".  The "Hot List" is a summary of all the new listing, pendings, solds, price cuts or raises, withdrawn and expired properties for that day. or week.  24 price cuts for my universe of real estate.  11 price cuts in Redwood City, for an average 5.62% price cut for an average list price of $1,830,000.  A 6.78% price cut in Palo Alto in 5 listings at an average list price of  $3,756,000.  Menlo Park has 3 cuts to average 5.63% on an average list of $2,498,000.  Atherton has 3 cuts to average 7% on an average list of $7,848,000 and 2 transaction fell through.

Summer clean up of inventory?  With inventories low it would seem that prices would remain stable.  Too many cuts to warrant a low inventory market. 

The week has been loaded with news articles on renters, both residential and commercial.  The jury is out on this one.  Stories abound on landlords that will not relent on renter non-payment to landlords who forgive a month or so, and even cut rents.  The recent bill from Congress deals with halting evictions, California has done so until September 30 and San Mateo County until the end of August.  In the meanwhile; county by county have gone back into lock downs. 

This recovery is looking more protracted than many had anticipated.  The good news is the real estate residential market remains vibrant.  Low interest rates are the main benefit to buyers.  With 30-year rates below 3% buyers can look at affordability as attractive.

Two articles came across my desk. 

One from the Saturday/Sunday edition of the Wall Street Journal.  The article spoke of work from home after 5 months and the results on family life.  The article stated that employers were surprised that employees were more productive.  So much so, employers looked to keep the work from home option.  Now we had the picture of Dad in his shorts with a shirt and tie on a video call.  What was missed in the cartoon was the back ground static.  The kids were noisy, the dog barking and Mom was yelling.  The children and home schooling, Dad and Mom working from home soon became a chore and hard to accept.  Slowly the move back to the office started.  this time the desks were 6 feet apart.  Meeting and decisions became easier as the parties were in the office.  The long process of video calls and recalls of participants to one another to talk over the ideas lengthen the decision chain.  Back in the office decisions could be make and acted upon as they were talked out. 

I thought back to my first job as a Financial Analyst at General Electric Medical Systems Department.  Our desks were far apart to allow the mail room to deliver items to us, or they were in cubicles with glass partitions.  As one moved up the food chain offices replaced cubicles. 

That's the way things were in the 70's and onward until we get to the Dot Com and social media revolutions and open floors with full out flow of ideas among employees.

The virus changed all that and we all went home to work.  The single employees soon became like a  criminal is solitary confinement.   Not only stuck in their $3400 one bedroom, they could not go out!  Soon the idea of renting in a hot neighborhood became a burden and off they went to open country.  Larger homes with room for an office.  Rental markets soon collapsed as the well paid renters departed.

City dwellers are now looking to the suburbs to own.  Old suburb owners finally can get out of their homes to smaller homes in locations near children, that place in the desert or Hawaii.

The other article was a presentation from John Dione, Senior Lecture at Harvard Business School and Senior Advisor to Blackstone Group, The Pandemic World Before, Now and After.

The new economy will become the old economy of the 70's.  The high budget deficits and debt load will only be paid by higher taxes.  Income tax rates will go up, capital gains taxes will go up, estate taxes will go up.  Property taxes have to go up!  Municipalities are over loaded in debt.  Hawaii just passed a tax on the Big Island to increase property taxes on all homes over $2 million.  Friends have told me of rate increases of $20,000 to $1 million per year.  WOW! 

Taxes will put a halt on economic growth.  We will see years of slow growth to no growth economy.  Investing ideas as buying an index will become a loser.  Picking stocks will become the better ploy and only for pro's.  Real Estate will be a chosen investment of the masses.  At least for those who have a job and money to invest after taxes.

Historically it takes 31 months for employment to return to past lows, except the Great Financial Crisis which took 76 months.

The presentation is attached below.

https://isvr.acceleragent.com/usr/1024408819/CustomPages/The_Global_Coronavirus_Recovery_-__John_Dionne_-_Final__1_20219.pdf

The key to Mr. Dione's presentation is the Democrats take the presidency, house and senate and key red states.

I don't like the forecast under that assumption.  But we will see what the people think.

Transition in Buyer Attitudes

Daniel Chinni of NBC News wrote on July 19, 2020 on the way the Pandemic has changed the way Americans live, ..."but the long-term repercussions may be in our world even after the virus eventually is controlled".  The way we shop and spend money began to change before the virus hit.  The virus only accelerated that movement.  More people found acceptance to online shopping, home delivery, working from home, with serious movements out of the congested urban environments. 

In June, Visa reported American volume of spending on credit cards declined 21% from May 2020.  Debit card spending increased by 12%!  Good news, as credit card debt will decline, and spending only on money in the pocket.   Bad news for the banks.

Spending habits are declining and people are more careful with their money.according to McKinsey and Company.  40% of Americans were becoming more mindful of where they spend their money.  31% were changing to less expensive products to save money.

IN OTHER WORDS, THE COVID CRISIS IS CHALLENGING AND CHANGING LONG-HELD CONSUMER PATTERNS!

Realtor.com reported this June 2020 to June 2019, that homes in the rural and suburban zip codes saw the biggest jump in average views per property.  Property views are not sales.  It is still hard to imagine the trend not stopping for views and turning into sales.  It is impossible to ignore the larger impact of Covid 19.  Communities that are spread out have the lesser impact of the virus and social distancing is a natural occurrence.  Away from the crowded streets and mass transit are part of everyday life in urban areas.  Working from home is becoming a greater  attraction of an occasional long term commute to 5-days commute stuck in traffic.

My Comments:  I have seen more buyers look outside the area as they became disenchanted with home prices and the quality of life; most importantly, forced upon them from Shelter in Place and Covid 19 guidelines.  As I pointed out in previous commentaries there is a trend.  Irrespective of the movement, there will be movement into the Bay Area as it is highly beneficial to new careers and those advancing up in their career ladders.

The San Francisco Chronicle reports more home buyers are becoming selective amid pandemic concerns.  The rumors of SF residents fleeing the city have been exaggerated.  A robust market is in San Francisco quotes the Chronicle, but home buyers are becoming ever-pickier!  The demand is a must have private outdoor space.  Outdoor living is becoming a big trend in San Francisco. 

The Chronicle further states that Single Family Market for Single-Families are being stimulated by declines in the demand in the rental and condo markets.  Those buyers eye the outdoors of rural and suburban areas that offer outdoor space.  Rents may continue to decline and condos without private outdoor space are likely to see a drop in value.  The Chronicle goes on to state that the Ultra-Luxury market is seeing a slow down in San Francisco.  Days on the market are increasing, offers are few, and buyers are becoming more discerning when they consider the additional construction and inspection costs.  Summer is becoming the new Spring as the shutdowns have forced buyers out in time.  This is very different than a typical spring as buyers will not compromise on what they want.  Over pricing and selling homes with flaws are passed over by buyers.  Buyers want the perfect mix of outdoor and indoor space with work at home capabilities.

My Comments:  San Francisco is a reverse market to the Peninsula.  Weather patterns make looking for homes pleasant in summer in the peninsula compared to the cold, foggy summers in San Francisco.  The other issue of condos and renters moving can be seen from previous remarks on the movement to rural and less expensive areas where there is outdoor space and costs of living are much less.

MSN reports that Bay Area home sales rebounded 70% from May 2020 to June 2020.  The surge in June represents a sharp turn around from May 2020, April 2929 and March 2929 when home sales fell 51%, 37% and 12% respectively.  The market for condos was generally weaker than for single-family homes.  The median condo was down 6.5%.  OLD NEWS!

Yahoo Finance Sarah Paynter reports that Americans delayed buying homes during the coronavirus.  22 million or 9% of the population delayed buying a home.  "If there is one thing we have in abundance right now, it's uncertainty".  For those who put off purchasing 62% said they would wait more than 6 months, including 20% who have stated they have delayed indefinitely. their searches.   Mortgage forbearance is prevalent but is declining.  4.2 million Americans were in forbearance as of July 10th.

My Comments: The trend in America is changing.  Homes with outdoor space whether it is condo, townhouse or single family are chosen, but with more pickier conditions.  The days of multiple offers maybe behind us. 

Zillow reports as of June 2020 a .3% decline in one year in Atherton, .7% decline in Portola Valley, 1.3% decline in Aptos.  Opposing the slight declines from the Mercury News reports that Marin has shaken off the coronavirus slump with a 5.3% jump in June.

My closing comments:  Judging by the news reports it is easy to see the move to outdoor space.  The value of living in a small space with neighborhood spots to hang out with friends are gone.  Marin with its outdoor space, trails and easy access to SF by Ferry make great sense.  I listed in June, 4 properties in the Middleton Tract next to Portola State Park.  The interest, views and requests for disclosures were unbelievable.  Selling one property in a little more than 30 days with multiple offers was high and exceptional.  Something I have not experienced in 14 years of dealing with Middleton Tract.  1-3 years DOM were more likely.  Trends are changing, buyer attitudes are changing.  I seriously doubt that the buyers want to live in fear once the epidemic ends.   Near terms fears take very long to remove and new attitudes accepted take even longer to change.


 

The Real Estate Remains Healthy while price declines recorded in rents and the price of homes sold

From the SF Chronicle Sunday Morning Edition: "Housing Market Gets Real".  Pandemic-related restrictions on showings, the number of Bay Area homes sold fell by more than half in May.  The median price in the Bay Area fell below $1 million.  The decline is Homes sold was -51.1% and the Median Price was $965,000.  In San Mateo County the decline is homes sold was -44.5%, the median price year over year was down 6.6%.  The figures do not include condominiums and newly constructed homes, Source: California Association of Realtors.  Thank you Kathleen Pender San Francisco Chronicle columnist.

From the Bay Area News, Louis Hansen, "Rents take a breather as techies go mobile".  Prices for one-bedrooms in "techie hives" near Silicon Valley plummeted from last July.  San Francisco fell 11.8%, Mountain View dropped 15.1%, Menlo Park fell 13.5%, San Jose slid 8% and Cupertino fell 15.75% according to website Zumper.  Twitter told employees they could work from home permanently.  Google is still working on plans. While the article states the results are not Apocalyptic, the pressure on prices will come to a point that demand will come in.

Following up on the comments, Louis Hansen of the Mercury News states, "Coronavirus: Bay Area rents drop, but not just the pandemic".  "It's more complicated than techies leaving for Tahoe".  Startup founder moves in with his parents with his girlfriend and finds working remote a benefit as he visits an aunt and uncle in Seattle.  "A lot of people are going remote" says the founder.  Techies are dumping roommates breaking leases to hang out in Tahoe, hiking and rock climbing between Zoom calls; while economists doubt the lifestyle change are not the only reason for plummeting rents.  The Supply-Demand equation in housing is affected as short term rentals from vacation shops and corporate housing shift units into the long term market pushing down prices.  Remote work from home has caused; a national survey states that 17% of renters more likely to move because of the pandemic. 1 in 3 were more likely to move to save money; while only 1 in 5 said they were planning to work remotely.  CEO of Zumper says it is the "Brooklyn Effect", renters in pricy New York city move to flats in Brooklyn driving up rents in new neighborhoods.  Facebook expects as many as a half of their employees will switch to remote work during the next decade.

My comments: While "techies" find a different home, there will be renters from the non-techie group to come in when prices fall to a level that fit into their budgets. Empty nesters may once again find their children back.  The result is demand in Oakland and throughout the East Bay are proven by the move out of Silicon Valley.  The growth we experienced in employment growth from Facebook, Google and like of social media companies and technology firms were bound to have an effect on home prices and rents.  The Affordability Question has been solved or will be solved by the markets, not the politicians!

Zillow has reported that the typical home value in Palo Alto fell to $3,732,600 from $3,809,981 a 1.6% decline with 44 homes for sale and 14 sold recently.  In the once hot area of Redwood City in the 94061 area code typical home prices fell 1.3% from $1,606,165 to $1,600,165, with 51 homes for sale and 24 recently sold.

CNBC has reported that 32% of US Households have missed their July Housing Payment.  The economic fallout continues from the Coronavirus pandemic.  19% of Americans made no payment while 13% paid only a portion of their Rent or Mortgage. That is the 4th month in a row that a historically high number of households were unable to pay their rent.  Worry of eviction mount while Governor Newsom has extended the moratorium until September 30, 2020. Renters have been the most vulnerable as 36% or more likely to work in industries devastated by the Virus Pandemic.  More articles will surface on Renters' rights, housing apocalypse, activist pushing for rent forgiveness, how to break your lease, and what to do if you worry about paying next month's rent.

Bloomberg predicts that prices of homes will fall 6.6% by May 2021.  This is the first annual decline since 2012. Economic damage deepens according to forecasts from Corelogic, Inc.  This is a stark shift from the path of the market recently, where record low interest rates and tight supplies pushed up prices.  The momentum was unlikely to hold as high unemployment and increasing cases of the virus force more state and local governments to delay or scale back on their reopening plans.  "By the end of summer, buying will slacken and we expect home prices will show declines in metro areas that have been especially hard hit by the recession" states CoreLogic Chief Economist Frank Nothaft stated in a report on Tuesday past.

To add to the news is a Wall Street Journal editorial his weekend edition on California's request for a Federal Bailout.  Remember President Ford's response to the New York City bailout ,"Ford to City: Drop Dead".  Recommended solutions once given in days of  the "Governator" to drop the tax rate to 6.5%, reducing and eliminating many deductions, eliminating corporate and sales tax sales-and-use taxes and replacing them with a business net receipts tax.  the proposals under Arnold were later replaced by Brown with higher tax rate of 13.3%, thus making California more subject to the volatile high end high earners and the highest individual income tax in the nation.

My comments: With 53% of Californians stating they would move from the state only indicates to me that a change and a radical change in taxation is necessary.  I doubt there will be a mass exodus.  More probable are the voters will cast their dissatisfaction at the ballot box.

The good news is that the urban markets have shown the greatest increase in interest and sales as the virus and the proximity of homeowners and renters to one another force a movement out to safer areas.

The Data speaks for the market.

From my first class in college in investment banking that I thoroughly enjoyed, Statistic and Probability to my Wharton training in Investment Management Analysis, I have found that data shows the condition and direction of a market.

We went through a shut down from March to May.  The shut down did have a negative effect on sales and house prices.  That result is difficult to use in statistical analysis because that was a controlled market place.  Once we had the release the effects on the housing market have shown the direction in the market with built up buyers coming into the market in a BIG FASHION!

JUNE 2020

Atherton had a 37% decline in sales price and a 22% decline in sales volume.  Woodside had a 8% increase in sales price and a 63% decline in volume.  Portola Valley had a had A 13% INCREASE IN HOME PRICES AND A 436% INCREASE IN SALES VOLUME! Menlo Park followed with a 86% increase in sales price and a 131% increase in sales volume. Palo Alto had a 13% decline in sales price and a 11% increase in volume.  Redwood City had a 2% increase in prices and a 60% increase in volume.

The optimism for real estate is followed with new home purchases remaining high.  New home builders are saying buyers are considering new construction as a safe way to invest not only in their future, but in their well being.

Despite the Spring time slow down from shelter in place the real estate market is still safe and solid.

The transition of renters as seen in rental price declines in places like San Francisco of 20% with a 6-7% vacancy rate.   Similar declines in rental prices has occurred.  Housing units for rent  in Redwood City alone has Zillow posting over 200 "for rent postings" that mainly are dominated by the new construction apartment complexes.  From personal experience sales of previously rental properties are becoming common in Redwood City.  The clue to the declines and occupancy could be "work at home" is  pushing renters to new construction projects in the East Bay and South Bay giving rise to the New construction positive numbers.

This is complicated by the rental moratorium The moritorium  started in March to April and has been extended to September by the Governor.  Landlord lawsuits are beginning to dominate court records.  It improbable the suit will help to return the lost income from any source than the creator...The State of California.  Where in the constitution does the State get the right to take from property owners their source of income without proper compensation?  While it is understandable of the landlords case of having investment property governmental action taking income from it our situation is quite different when the population at whole is at risk.

All income investment sources do have risks.  Dividends are cut, interest payments are missed and bankruptcy creates a loss of value in all investment.  Real Estate in our area has led a charmed life.  The cost of living has gotten out of order in our area.  The middle class and below have tried to make ends meet for years.  We have all heard and read about it.  Now it appears the corrective action is occurring.  We are not living in England in the time of Dickens!

This next shut down may end up being a very decisive period as the service industry employees will all find themselves without job and insufficient unemployment income to cover rent and daily expenses.  Move to cheaper pastures is the eventual outcome and lower rents to create affordability

As a conservative friend of mine has stated, "you elected him now suffer with him".  It is easy to blame politicians for the current situation.  They are only dealing with the deck they have been dealt.  Unfortunately the deck has had many issues for many years and now the dealer is dealing a bad hand.

I believe we will see how the deck is played in the coming months as California must take care of a $54 billion budget short fall and landlords losing not only income but value of an income property that no longer creates income.

The question I have is there statistical information that can tell me where the renter are going, where the sellers are going and who are the buyers?  The big jump in Portola Valley would indicate to me that there is the movement to safe environments with larger properties, good schools and proximity to work.  Menlo Park has finally obtained the value over Palo Alto as Menlo Park has good schools, but larger lots and price per square foot less than Palo Alto.  Woodside is an enigma.  It has an excellent school, large acreage and proximity.  Redwood City is affordability.  Atherton can bounce around in any market.

We may be seeing a major adjustment in the nature of our citizens and socio-economic nature all brought out by the virus.  Only time will tell if the trend will continue?

Anyone have a Crystal Ball?