The Price of Everything!

The prices of everything, everywhere, are going up.  A house in Phoenix is going up, a Ford F-150, a plane ticket to New York City, they are going up for as much as everything all over the country.   Well, maybe not San Francisco.  There the prices of homes are all down from 10-12%.  The only part of the country and the State of California that is not going up?  Down from 10-12% where the rest our metro areas are up over 12%. 

For pseudo-scientist, aka Economists, it is a dismal picture!  They, along with the people that brought you the last recession, aka Wall Street Banks, say it is only temporary.  "A transitory event that will disappear."  Mark Zandi, the chef Economist at Moody's...yes Moody's the people that gave AAA ratings to bonds supported by mortgages that went into default and put us on the verge of economic collapse WORLD-WIDE......“Inflation is one of the mysteries of economic study and thought. A difficult thing to gauge and forecast and get right. That’s why the risks are high.”    How can inflation be a mystery?  If people can charge more for products in short supply they will.  What is a mystery of one of Economists solid formulas, The Law of Supply and Demand?

The Federal Reserve is taking a pretty big risk with their calculations over a economic study that is "difficult thing to gauge and forecast".

Is this transitory, and does that mean prices will come down?  Will that include housing prices, since housing prices are part of the inflation index?  Oh yes, and when will inflation cease to become transitory?  Will it stop at 13.5% as when President Jerry (can't walk and chew gum at the same time) Ford launched "WIN", Whip Inflation Now?  Remember he had his training in running the Country as Speaker of the House...hint, hint, hint.

The Federal Reserve reported that the May rate of inflation was 5%.  That is the fastest rate in 13 years!.... which was when the economy over heated from the housing boom....Sound familiar....went off the cliff and sent us into the GREAT RECESSION.

Let us not leave the pointer on housing.  Used Car prices climbed 7.3% last month and 29.7% over the past year.  Did you take your old jalopy in to your dealer for some work?  I did, boy did they have deals for my car at Blue Book Wholesale to buy a new car for a premium.  They would make more money on my used car than selling a new car.

Not all things are being priced into the stratosphere.  Healthcare and education are flat, including smart-phones, technology and internet services have been relatively flat.

All eyes are on Houses and Cars.  Interest rates are low and the cost of buying them are low, so why not pay up??? Sure, good idea, you are making a rocket ship rise straight up to a technical blow off!  BLOWOFF? sure it happens in real estate and cars.  The Federal Reserve said they are not raising interest rates until 2023...THAT"S 2 YEARS FROM NOW...we all maybe be speaking Chinese, or North Korean, or Russian..Far better than in a corner reading the Koran and growing beards and long hair and having our women wearing tents with mesh for seeing through...Well at least we can listen to Yellow Brick Road, In a Gadda da Vida and getting high on great California MJ we bought at Safeway.  

Let's get serious here!  The Federal Reserve already began the rate increase.  The Federal Reserve tightened, the rate on which banks get paid for having money on deposit with the FED.  Not much, .37% if I am correct.  But that is not bad for a bank that does not have any clients to borrow money to: if they do, they want 100% certainty they will pay it back.  That means money is being drawn back from supply.  The FED can continue to do that without keeping a thumb on the interest rate we get paid.  Just slowly draw money out of supply.  Wait until inflation stops and then we can go back to normal.   WAIT ON THERE.  What if the "F" factor comes in and inflation rates do not decline.  What if we have not supplied enough lumber, what if there are not enough plants here in the US to produce semi-conductors....what if?  Well, then we sell some bonds and pull more money out of the system.  Interest rates go up from lack of supply of money.  Prices come down on houses and cars? Business slows down.  Stocks go down.  IPO's stop. Layoffs in the high tech industry.  Another Recession.  Foreclosures and defaults.  Sound familiar?  

Now that goes back to when I was about 50 years younger and I really believed they , the economist , knew what they were doing and I believed the Politicians.  Come on Gary, were you that gullible...sure was, and so were you, your parents, and grandparents.  Today you people are a bit more savvy, AREN'T YOU???  Screw it man, we're getting our advice from Reddit.  We're getting those hedge funds shorting companies that are going out of business.  We will make more money and just sit back "bragin" to our buds on Reddit.  

Now let's talk about this reasonably.  Trees don't grow to the sky.  Stock's prices don' go up forever.  If you can buy a 3000 square foot home for under $1 million and a 1350 sf home for $2 million wouldn't you look at how far away is the 3000 sf home?  Would you think twice about paying ridiculous prices for rent in a slum when you could own a home for the cost of the rent in a mortgage payment?  A home where there is no homeless, drugs on the street, trash in the gutter, gun fights and they have great schools in gated communities with pool and tennis courts.  Of course you would.  what's holding you back?

Hey, let's get serious here.  There is a time that prices of homes push reality to far and at other locations is wise.  There is a time when rent gets too high, and there is a look elsewhere.  It will come, so prepare.

I for one, like history to lead me.  Home prices are down some 10-12% in SF.  They are up 12% here.  I moved from SF originally and then my stock trader mind saw the prices in the peninsula, Woodside, collapse.  I bought a house in Woodside for the sale of my Flat in Pacific Heights, or at least upper Cow Hollow.  

If you are a home buyer, look around.  You're working from home with a jaunt to work once a month.  Hey..there are other places to live.  Friends...well once you left the last place the friends were farther away and apart.  You called, chatted, texted and soon...new friends came in.   All part of growing up and expanding our network.

If you are a seller, look around and get the best price now to get an underpriced property elsewhere.  Forget about waiting for the price to peak...there are no bells and whistles.  If you do, the price you pay will move up faster than your sale.  That's the way markets move.  

Not going to sell?  Going to live here until they carry you out in a box?   Sure heard that before.  When that day comes you won't know who is carrying you out and doubtful it is in a box, but your kids saying mom and pop need care.  Sell the house put them in a home.  I sure hope you enjoyed your life to the fullest, took you and your spouse on great vacations and tours before they give you boxing gloves to separate salt from sugar.

Bottom Line.  Inflation is not going away.  The FED or Wall Street and the Banks do not control the cost of living.  You do!  Start thinking about Living...Reddit does it right YOLO.

Houses are getting more expensive. There's a fix to that?

More than 17% of the homes in the U.S. are selling above list price.  Would-be homeowners are furious as they lose bidding wars. Many are looking back in time and thinking "Bubble".  Of course it doesn't help for the "Media" to promote Bubbles!

Prices rise and fall for all assets for a number of reasons.  So what makes something a "Bubble"?  The likely reason is so many people have put so much attention in the price of homes, and their home in particular, that it didn't take to much for prices to rise; especially, when there is a low inventory of homes for sale.

A sharp rise in an asset's price is not necessarily a "Bubble".  The fear comes from the fact it is in our homes, which are usually the last thing we think of.  The last thing, at least, until the newspapers need something to publish. 

Millennials represent 37% of the buyer's today.  They are the driving force of our buying marketplace.  They passed the "Baby Boom" Generation in 2020.  It is only natural they move into the home buying market.  They are the class of buyers with wealth that can bid up if they want something.  They are also the generation that will adjust their needs as they evaluate the market place.

The fact is the market cannot accommodate their interest and supply their needs.  Freddie Mac found in 2018 the shortage of buying to selling was 2.5 million homes, in 2020 it was 3.8 million homes.  Get the picture?  Newly built homes dropped form 40% in 1980 to 7% in 2019.  The Pandemic did not help.  Just getting people back to work created bottlenecks.  The bottle neck in lumber was created by the inability to get workers back to work; but also, the lumber industry's failure to build new plants.  The lack of industry in general to build new plants has been universal.  The failure to build in the US created an extreme bottleneck when the foreign plants were either under tariffs or under the lack of workers due the Pandemic.

The term "Go West Young Man" of the 19th Century has turned into "Go East Home Buyer".  The central portion of the state has been more accommodative to buyers than the coastal areas and the Peninsula in general.

San Francisco has been the worst hit of this movement as SF saw a decrease in home prices of 8-12%; while the Metro Average was +12%.

There are some "Warning Signs".  Demand for vacation homes is wearing off.  Although the number of buyers who locked in mortgage rates to purchase a second home in May increased nearly 50% compared to a year ago, "it's the first time in a year the annual growth rate has fallen below 80%," according to the real estate brokerage industry.  Additionally, mortgage-lending rules over the last two months have tightened. Now, under the new rules, second-home and investment property mortgages can make up only 7% of a lender's total pipeline, which refers to the total number of loans that are either in processing, underwriting or closing process.

The future key is: "price of lumber, interest rates, production and productivity and the elimination of bottlenecks!"

ON LUMBER: Lumber will show us the future.  In early May 2020 the price of lumber on the commodity futures market was $1,600 per 1000 board feet.  This added $36,000 to the cost of a new home; on average, new homes sell for around $400,000.  (What a deal!) On Monday it was back below $1000 per 1000 board feet.  It is still elevated.  Before the Pandemic lumber was never above $500 per 1000 board feet.  It takes two years to build a lumber mill.  The return of workers now can increase supply immediately.  Watch the lumber prices then watch for builders to resume in areas where land is available.  Unfortunately it is not in downtown Menlo Park and Atherton or Palo Alto.  It is in the Sacramento area where builders are once again starting to create projects for new home buyers and +55 retirement communities.  These areas are price conscious.  Builders will hold back projects until lumber prices return to a level buyers will pay to move.  

The Old Chinese Curse..."May you live in interesting times"

Inflation forecasts — like everything else — have been too conservative

GENERAL COMMENTARY

If there's been one consistent theme during the recovery it has been analysts, strategists, economists, and forecasters of all stripes have been incorrect in judging the resilience of the U.S. economy.

The May Luxury Real Estate Report has almost all Luxury Market in Real Estate in the U.S. in a "Seller's Market". (see link at end of report).  The days on the market are short and the buyers outnumber the sellers.

There are many reasons for these circumstances of events. 

1. The Pandemic has allowed many to work from home, thus saving time and money.  
2. The IPO market has been HOT!  
3. New money creates pent up demand to overflow into buyer demand. 
4. Supply in homes for sale is limited for a number of reasons:  a.Sellers do not want to venture out for fear they and their home will become infected.  b. Higher future property taxes. c. Capital gains taxes.  d. Questions of where to move.  e. Establishing new relationships with professionals.
5. The California Department of Real Estate has not made that easy either.  Buyer's must confirm intention of purchase before they could view the property. 
6. Thus we have a limited amount of sellers and an over abundance of buyers.

Forces that will affect asset prices are interest rates and cost of goods.

At present we have an increase in inflation rates to 4.2%.  This is well over the 2% Federal Reserve target.  

The question that will affect the markets is will the recent reported inflation rate force the FED to change?  Will the FED begin tightening on rates.  The answer here may be the recent decision of the FED to sell their inventory of Corporate Bonds and Money Market ETF's.

Selling by the FED takes money out of circulation which will lead to an increase in supply forcing higher interest rates to gather buyers. 

Adding to inflation is the Cost of Goods.  The lack of employees returning to work has led to limited supplies from Wood, Cattle and various other commodities.  A principal reason for the increase in prices is because workers who process the commodities would prefer to stay home and collect unemployment and U.S. Government subsidies than return to work.  Thus creating limited supplies and higher product prices. 

The FED's answer to the current rate of inflation is that it will only be temporary.  

If September 2021 ends the extra $300 in unemployment benefits, will it lead to a mass drop in unemployment and prices.  If that is correct the FED will begin selling their bond inventory before they raise rates. The  FED will be behind the curve.  The market place will raise rates as corporate borrowers go to the marketplace borrowing in anticipation of higher future rates.

Janet Yellen, former FED chair and Secretary of the Treasury, has stated higher interest rates are good for the economy.

LOCAL REAL ESTATE MARKET

Buyers should expect to compete.  Sellers should expect short days on the market and competitive interest in their property.

Cost conscious Buyers should begin to look outside the Peninsula to the East Bay and beyond.  Prices are beginning to escalate in the East Bay and areas around Sacramento where home sizes are larger and prices are substantially less than here in the Peninsula.  The change in the ability to work from home is benefiting those who can move.  The benefit is larger and less costly homes with just as good as, and better than, current Peninsula schools, no homeless communities and safer neighborhoods.

For the empty nesters it is more a function of where to move before a decision to sell.  The move outside of California becomes more controversial as statistics show Californians are more inclined to move within California than the are to move outside of California.  

With each Broker Price opinion I am asked to perform I find that prices are declining, ever so slightly.  In Portola Valley and Emerald Hills the declines have been 4% on an annual basis.  When I look at the Loomis and Granite Bay area the forecast is +12%.  Still the 12% forecast of price increases are well below the comparative home in the Peninsula.

May Luxury Home Market Report

Fears of Foreclosure are Wanning

Over 14% of Renters Are Still Behind as Eviction Moratorium Nears Its End

Thank you

Gary McKae,  01452438, eXp Realty of California  01878277