Rents continue to decline, Luxury Market gets Soft Commercial in Danger of Major Defaults

 The Lock down is now beginning to hit various real estate markets.  Follow that up with various real estate ballots which can do more harm than good.

Bay Area Hotel Loan woes are intensifying.  Five Hotels in the East Bay, South Bay, and San Francisco all deemed luxury, high end lodgings are suffering severe financial difficulties per the Thursday October 29th issue of the Mercury News.  What the Pandemic hasn't shut down the ballot measures could.  

Proposition 15 will tax commercial properties at market; rather than, the Proposition 13 rules of the past.  This passage will put Proposition 13 for residential in the target next.  Prop15 will raise a pittance of $11 billion of so.  A far cry from the deficits the State of California and counties are facing.  I doubt if raising taxes will replace the loss of business the shut down has created.  

Another Ballot measure will stop the transfer of property taxes upon death to heirs.  Under the present law the parents property tax remain to the heirs the same as their parents paid.  This encourages the heirs to rent the property and economically prosper with low property tax rates.  Should the law pass, I bet we see some properties go on the market.  

These two Ballot items are considered a" divide and conquer" by Matt Regan, a senior vice present of the Bay Area Council.  What's next?  Proposition 13 protecting residential homes.  

Rents continue to fall.  30% drop in rents as of today.  I doubt that trend will reverse.  

The movement out of the state continues and with them population numbers to support representation in Congress!  San Jose has been replaced by Austin, Texas, the Silicon Valley Hub of Texas in population ranking.  Following the move to the "Red State" is Elon Musk and his purchase of 2000 acres to build the largest factory in the world.  The technology scene is burgeoning in the Sun Belt Cities and the exodus from California can only accelerate as our cost of living and high tax rates place a burden on raising a family or just simply existing.

The rent issue has more consequences than a simple cut will cure.  10% of California renters face eviction without more aid.  The consequences of the Pandemic Shut down is being reflected in those who are most unable to burden it.  Another shut down will be more than the undoing of the poor and middle income.  Many of the well-to-do will find themselves in the place of the middle income and poor.

This mounting case of unpaid rents is not only a California issue.  The The Federal Reserve Bank of Philadelphia calculated outstanding rent debt will reach $7.2 Billion before the close of 2020.  Moody's Analytics estimates it could reach nearly $70 billion by year-end if there is no additional stimulus spending.  Even some higher income renters are falling behind, UCLA has found.  

With all the pessimistic comments Zillow is optimistic for the future.  The beach community of Aptos, Rio Del Mar are expect to have a 9.5% 1-year forecasted increase in value.  Redwood Shores, that beautiful Planned Urban Development along the Bay is forecasted to have a 7.1% value increase.  In the Woodside/Emerald Hills 94062  zip code along a 7.3% increase in value is forecasted for a 1-year basis.  Central Redwood City has the same 1-year growth forecast of 7.1%.

OUR LOCAL MARKETS REPORT:

ATHERTON: 7.07% decline from September to October Average Sales Price.

MENLO PARK: 3.6% decline from September Average Sales Price.

PORTOLA VALLEY: 43% decline from September to October Average Sales Price.

REDWOOD CITY:  9.2% increase from September to October Average Sales Price.

WOODSIDE: 40% decline in average sales price from September to October.

High End Luxury Market is getting hit in Portola Valley and Woodside.  

This is a snap shot of the entire market as of today October 29, 2020.  

New Listing (59)
List Price Increased (0)
List Price Decreased (19)
Transaction Fell Through (2)
Listing Back On Market (1)
Contingent (19)
Pending (47)
Changed to Sold (61)
Changed to Rented (0)
Listing Expired (3)
Listing Canceled (10)

Days on the market for the average area is 30 days.  This is not a buyers market.

If you are looking for a bust of a balloon....DON"T!

 I recently spoke to a few buyers.  They had the attitude that we will see a bust in real estate for a sundry of reasons.  Yes, people are moving out of state and the area.  Yes, the rental market is collapsing.  Yes, prices of being cut, some drastic and some minor.  Others opine that the Democrat sweep with raise taxes, destroy high tech. Still other like to look back at the Financial Crisis of 2006 and think this is the model of the near future crash like 2006/07.

So sorry to disappoint you.  I agree that there are a number of factors that can weigh on the real estate market.  They a not deal busters.  The key is interest rates.  They are  just too low and the Fed is willing to fund capital into the system.  Congress too is willing to send checks and fiscal support to the American Public  That does not seem to me to be the making of a collapse or bubble busting.  

Near term I do believe you have seen the drive upward in prices have ceased and the trend is come off the top, but no new high.  No bust and collapse but simply and decline in prices 10% or so but with liquidity and buyer acceptance.  We can expect to see prices bouncing along with a small trend down by mere fractions.  The equity values have too many head winds to stop an out right advance.  The biggest issue as I see it is the rental market.  Renters, have been from my experience, predominately Facebook, Google and Start up employees.  They were a mixture of HB-1 from India and Asia and recent US graduates looking for the life of San Francisco and the wealth creation of Silicon Valley.  They drove up rental prices.  Their first destination was Valencia Street and the Latin district of San Francisco.  Rents were dirt cheap and the night life fun and full of excitement.  The rents increased and many of the low income people replaced ended up on tents surrounding the area.  Then the renters jumped at East Menlo Park.  Prices of homes were cheap, $700,000 or so with walking distance to Facebook  Other looked along the Cal Train route to find affordable housing and sooner or later low priced homes.  The perks of many were Uber or Lyft cards.  They jumped on Cal Train and took Uber or Lyft to work.  Some used bikes to get to work after a Cal Train ride.  Just like college, but what a salary!  Not long for a Facebook person to take down $250,000 a year, buy an old house fix it up and turn around a neighborhood.

I recall an interstate truck driver in East Menlo saying he wants me to handle a sale because he can't park his truck on his front grass.  Sell it, and he's moving to a rental he owns in East Palo Alto.  Soon that changed.  Police regulation increased with supplements from Facebook and neighborhoods took on a new face and life.

As prices increased the HB-1 crowd had a different attitude of home ownership.  They were returning to India and starting their own start up and buying homes for their parents and family members with what was just a down payment on a home here.

All Good things come to an End!  The pandemic changed everything.  Work from home became the vogue.  Facebook saw 50% or more in the future working at home.  Google and Twitter followed suit.  Apple joined the crowd.  The Startups were bought out, failed or moved, to those that stayed expenses were cut to survive for those that hung on, the Uber and Lyft tickets ended.  Now the exodus began.

The Virus now chills the California Landlord's Pricing power.  Who needs Rent Control and legal action?  it usually is on the ballot at the top and prices really never see those highs again.  The CPI indicates the hits to the economy and the rental market follows suit. 11.4% unemployment does not mean high rents.  Renters unable to work, move to where they can work and where living costs are low.  The rental class is the mobile class that affects and directs our local economy the most.  $5000 a month and no pets, becomes $5000 a month pets accepted, then $4500 per month and pets, next is $4250 per month pets and landscaping.  Where to next Landlord?  The apartments start out with one month free rent, then two and next three.  The law of supply and demand dictated by a mobile economy with out roots.

Within this group are the barely making it.  The school teacher, police, and fire fighter.  The municipal staff at the low end of the pay scale.  What will hit this area is the forced sale of homes due to the cost of living and layoffs due to Virus fighting mandates.  

The tourist industry is on the brink.  

Two Silicon Valley Hotels have defaulted on their mortgage.  Bed and Breakfast's fail.  Air B&B's once a great cash flow that too many leveraged on, is now the knife at their throat.  This is the Canary in the Coal Mine!  A debt default means the mortgage that have been pieced together as investments called "Collateralized Debt Obligations" in bond portfolios are discounted and investors who bought them lose value.  This is the same thing that caused the crisis of 2006-07. if not in investments the Banks now have non performing loans and their ability to lend deminishes.

All this means sooner or later low end houses begin to flood the market.  That is our potential market unless we see relief.  That pain for us is pleasure for those outside the area.  Tahoe homes are picked up and in shortage.  Homes in the foothills and Sacramento area go to multiple offers.  As a result the over all statistic is one prices in california are going up.  Take the statistics apart to get the real picture.

Still the high end home hold.  Prices go off 10% and sell.  Days are the market remain low, indicating a sellers market.  Renters who were waiting for the market rise to stop are now shopping.  Their jobs are not dependent on work at home, their positions do not allow them to live elsewhere.  

Prices have been weak but the market has been resilient in Menlo Park, Palo Alto, Woodside, Atherton and Portola Valley.  Parts of Redwood City too have been resilient.  

Zillow has been forecasting 6% home price appreciation for the next 12 months.  This is a big change from the flat to slightly negative of a few months ago.

Renters who have saved, repaired their credit rating if they lost a home in 2006-07 can now look to find their home with low interest rates and amenable sellers.  This looking to move up, take the lower price at sale with the benefit of a lower price at purchase.  

Retiring and moving still have high prices.  Remember there is no bell at market bottoms and tops.  A profit is better than a lost.  Don't choke on your ego.

And the walls They Came Tumbling Down!

Joshua fought the battle of Jericho and the Walls came tumbling down.

 For as long as I have been a residential real estate agent the walls of Silicon Valley were impenetrable to the various market and economic cycles that threatened home prices.  The East Bay and communities around us saw prices decline Silicon Valley remained strong.  It was like a wall that surrounded it.  Just as the Biblical Walls of Jericho came down so are ours.

I have written in the past of the immigration of residents as the pandemic began.  Employers embraced work from home and as they did employees began to look at greener more affordable pastures.

This weekend's San Jose Mercury News and the San Francisco Chronicle have finally put the fact on front pages.

It started with Marisha Kendall's article..."Santa Clara County properties valued at $553B before pandemic".  "We have peaked" said Santa Clara County Tax Assessor Stone.  "Next year, Stone expects to see even more properties to decline in value.  Commercial Properties will be hit especially hard".  

From my view, the commercial market appears to be the greatest vulnerable stone in the wall.  Renters are moving out of the area.  Some to central valley, some out of state.  They are moving out of the Silicon Valley and San Francisco.  Rentals will have the biggest impact on the commercial market as many rentals are left empty.  The additional risk will be to the many large projects; such as, those under construction that line El Camino Real.  The El Camino projects appear to have stopped construction.  Previous pre-pandemic era projects began and finished in record time with rentals in offices and apartments quickly filling.  The pandemic took care of demand as renters moved and offices closed. The Kendall article quoted a commercial realtor noting, "commercial leases are coming down".

Kathleen Pender of the SF Chronicle followed up in the Sunday paper, "Bay Area rents keep spiraling down - SF hit hardest".  SF rental prices plunged 20% during the pandemic.  Whether the quoting of the market rental decline is from Zumper or the Census and Department of Housing and Urban Development which include rents for older units and those of lower-income neighborhoods, rents are declining.  Median rent September 1st is down 6.9% in San Francisco, down 4.1% in Mountain View, down 2.5% in Palo Alto, down 5.1% in Redwood City, down 4.8% in Menlo Park, down 4.9% in Cupertino, down 5.2% in Santa Clara.  Going across the Bay is 0 for Emeryville, 0 Dublin, 0 Union City, 0 Alameda, and 0 in Antioch.

Louis Hansen of the Mercury News follows on with an article "S.F. housing market cooling off"  Hansen states, "Outside San Francisco, the Bay Area Covid-19 real estate market has been red-hot with few homes for sale, quick deals, cash transactions and high-end spacious properties are selling for a premium."  In San Francisco homes for sale doubled with prices dropping 5% to an almost buyer's market classification.

Finally, in the section of the San Jose Mercury News called, "Today's Economy", Jonathan Lanser writes, "Economy pushing Californians inland."  The story is not new.  I saw this months ago when rentals were taking "Pets".  Heretofore, "pets" were not accepted and rents were high by any standard.  

The reason for buying a larger home at affordable prices becomes evident when one looks at the real estate market in the Central Valley, or the Sierra Foothills.  Watching the weekly action in the MLS, I saw price cuts, and sales prices at less than list.  The summer would usually see a cycle of taking a house off the market for the fall buying period.  Not so any longer.  They stayed on and prices were cut to sell.  To me this is the beginning of a buyer's market.  It does not matter if it is Los Altos, Palo Alto, Menlo Park, Atherton or Redwood City.  A listing strategy I observed was to under price a house dramatically and get over bids.   Over price a property and 30 days later it was followed up with a 10% price cut.  Even those homes that were fairly prices did not sell at list.

What is the value of living in a community with shops, restaurants and gathering spots that are gone or cannot be used?  Many of the small businesses have either gone out of business or are on edge.  It Ain't Going to Get Better Soon!  Sooner or later homeowners think "why stay here, let take our equity elsewhere"?  

To those who are deeply rooted in Silicon Valley or are here for the long term, this is the opportunity for buying real estate in Silicon Valley communities.   The pandemic will eventually come to an end.  When it does the value of the valley will be resurrected.  Think long term when you buy your home.  The idea that it is an asset to be traded must be lost from your mindset.  There was a time homes passed from parents to children to their children.  Lets resurrect the traditions of the past.  Remember the parents property tax basis is passed along to the children, while the tax basis is updated.  That in itself is a big benefit for keeping property within aa family.