Wall Street Slumps Real Estate Cools Off

 The rise in interest rates are beginning to show the economy is slowing down.  Stocks are the most liquid of assets. Stocks and bonds are more immediate in price changes. Real Estate is slower in reaction.  Real Estate must be watched to gather trends.

I personally look at the MLS Daily Summary.  It lists all the new listings, pending sales, sales, with drawn, cancelled, expired, sold, and most important back on the market.

The MLS Listing indicates a sellers market as home prices stay relatively firm. Sales occur at over list in most of our markets.  Price cuts are beginning to mount.  We are still in the active season in the Real Estate market.  Once we get into June and the sales of April and May close escrow, we will see if a slow down in price or listings occur.  It is my observation that the listings are very strong now, I doubt they will slow down.  Why, too much money has been placed in remodeling and updating by contractor, speculators and home owners to want or can pull homes off the market.

The Thursday, May 19, 2022, Wall Street journal front page right column had The Stock Market Slump first and the Cool off in home prices next. 

Sooner or later the media will come about to see the impact of how higher interest rates will create asset weakness.

The worrisome part of this slow down is in the Subprime Borrowers.  They are the first line of first home buyers that are seeing their loan commitment drop and their credit card balances increase due to higher interest rates.

Two more interest rate increase are for certain.  It is certain that all forms of debt will see interest rates increase.  Along with the debt increase the interest paid on intermediate to short term US Government Bonds will increase.  It will be hard to not accept a 5-year US Treasury Bond at 5% or 5.5% versus a buy the bounce in a FAANG stock or Nvida, which so many clients and real estate agents ask my opinion of.

How does a buyer or seller operate in this market?

For the buyer, place offers in 10% under the list, make the offer contingent on financing and appraisal. If the appraisal comes in below list tell your agent to see of the seller will take a modification of purchase price to the appraisal.  Get ready for rejections.  Sooner or later you will get an acceptance.  In this manner your interest rate rise are partially being borne by the seller in a lower sales price.

If it is a MUST BUY, try talking to Homeward or DIVVY to buy the home for cash and allow you buy it back with your financing.  i never used them, but found them in an article on Startups.

For the seller; get your agent to get a CMA, comparative market analysis, no more than 3 months and the shortest being the most acceptable.  Place the list 10% under the CMA. Do not look to sell at the high price.  The seller wins in higher yield on money market accounts to store their proceeds in, and lower prices for the move to a new home.

Remember this, buyers and sellers get hurt in a rising interest rate market.  Waiting hurts both!  A recession in a inflationary market is called STAGFLATION.  It happened in the 70's.  It is financially and emotionally painful!  

Bear markets in stock will historically last 2 years.  That would make the end after or at the next presidential election or the congressional election in November 2022.  Inflation is the worst to survive, 27 months on average.

Follow this graph to chart the home market.

Gary McKae

The End of Free Money

Wake up call has been blown to all quarters.  Interest rates are rising and the era of Free Money has ended.  The days of the stock market strategy of "Buy the Dips" and "it always will come back" are DEAD! The FAANG stocks are all in Bear Markets and every, or at least every, 2022 IPO is under water.  Sooner or later it returns to the 1970"s inflation and rising interest rates.

The FED has made the big change of ending the "FED PUT" to being the furnace that burns investors in aggressive growth strategies.

Where does that leave real estate?  A falling stock market and disenchantment with investing during the 70's led those left with cash using real estate as an investment alternative.  The money from the stock portfolio goes into a newer or bigger home, remodeling the existing home, or buying investment properties.  

The future does not change much from the past.  Don't expect it to.  As Yogi Berra once said "it's deja vu all over again".

Investors turn to real estate, but what happens to all those buyers?  Now we go to Econ 101, the Supply Demand Curve....remember that one?

We are in a present or once past situation in which there were more buyers that sellers.  A majority of buyers had , or have, a "Commitment Letter" from a Bank or Lender.  The past ones were good for 90 days and most of the past ones from the beginning of the year were at 2.75%, or at the onset of 2022 were at 3.13%.  When the FED began raising interest rates the new letters jumped!  2.75% from 2021 expired and jumped to 4.75%, then letters went o 5%, then to 5.25 and now at 5.4%, each jump cut a group of buyers out of the supply demand curve.  The lowest level in the affordability buyers are cut out.  They have either to make up the difference with a larger down payment or look elsewhere in affordable areas.  East to Sacramento, Modesto, or south to Gilroy are the new destinations, or out of the State of California.  The remaining buyers will have, or had,  their commitment letters cut.  The $2 million down to $1.6 million and downward for the rest.  As the buyer level is adjusted the overall market should see price adjustments too.  A recent buyer in Castro Valley bought a 3/2, fully remodeled and landscaped for $1.171 million, listed a $1.2 million and appraised $1.21 million.

The high end of the buyers will not worry of commitment letters, they pay cash.  But with portfolios down 20% or more, there is a tendency to feel a bit poorer.  IPO's will stop, but cash draws for investments in startups will not stop. Cash levels will increase, stock portfolios will be liquidated and the desire to pay up for Atherton. Los Altos, Los Altos Hills will begin to stop.

When the pressure begins from bottom to top the home prices will stop the dramatic increases.  Prices will stop increasing, some listing will see price cuts and some offers will be below list.  

This too will see a return to Bank Foreclosures.  Where will they come from? Where the potential will lie is in the Fix and Flippers in the "Starter Home" market.  It seems that East Palo Alto has been a haven for the Fix and Flip group.  Once these homes have been completed the bank loans become due and payable.  The Flipper's all have a forced sale or find the property in the hands of lenders.  It this a certainty?  No, but a possibility once the new loan commitments cut deeply into the qualifications of buyers.

Inflation does not stop without pressure from interest rate increases or supply increases to dampen prices.  At 8.5% annual inflation it appears we will have inflation with us for awhile.  Cheap goods from Asia have stopped either by lock downs from Virus or Tariffs.  The replacement require new plant in the US.  There will be little doubt in my mind that prices will move higher for those goods.  Oil is shipped to Europe; along with Natural Gas where the price paid is higher than the US.  Drilling has not increased as the Biden Administration has put policy changes that inhibited drilling and exploration.  So We pay the price.  Go electric is difficult as the Grid System can barely cover present needs without the expansion of electric vehicles.

The Fed may not increase 3/4% at the next move.  The estimate is for 1/2% increase in back to back FED meetings.  That could take mortgage rates on 30-year's to 6.4% from the present 5.4%.  More reason for believing that buyers will be reduced.  With the reduction of buyers, listing prices should see some caution in expecting over bids or quick sales.

There is a benefit for those who buy and look for an appraisal.  The appraisals are based upon the past 3 months.  The last three months have sales higher than the purchase price?  If so, good that means the buyer will not worry about paying more in a down payment.  

I still recommend buyers do not hesitate when they find a home they like.  Buy it!  Don't worry about any near term market weakness.  There is never a Bell to Ring when a bottom occurs.  As the buyer pays their mortgage the equity value increases with each interest and principal payment.  That is call amortization.  That is why real estate is a long term asset.  When the kids are in college or getting married the mortgage is paid off.  Don't live off of equity, no HELOC loans.  Pay off the mortgage, remodel and keep the home current.  You will be rewarded in the end!

Stock Market Collapses, Interest rise and Mortgage Commitments Fall!

 Real Estate keeps flying off the shelves like at a discount market with bonus points.  You don't need to give away Green Stamps to sell in this real estate market.  California, our area especially, has the most $1 million home sales in America.  Even lowly Dead Wood City (Redwood City) has gone into the top with homes selling at $2000 per square foot.  Does this end or do we still buy.

First of all, you are not buying Meta or any one of the other FAANG stocks.   You are buying a home to live in.

I finished speaking a friend who I have known for over 40 + years and lives and works in Lake Tahoe.  We spoke about housing prices and interest rates.  He remembered when he bought his home in Zephyr Cove and paying 12.5% mortgage rate, and felt he had a deal.  I recalled that we bought some few months before his purchase in Cow Hollow San Francisco and paid 14.5% for our mortgage.  We too felt we had a deal and loved our 1904 Edwardian.  So what's the difference between double digit interest rates and the last increase?

I recalled how a client called and told me he had his commitment letter cut 30%!  The mortgage rate quoted for the commitment went to 4.75% from 2.75%.  NOW WHAT?  Well, you either come up with the difference in down payment to stay at the same home price or cut back and look elsewhere where you can comply to the loan commitment.....BUT..."that's a 30% increase in my down payment!  I'm looking at a 50% down not 20% down."  It is what it is!  Rates are still a bargain.  They will not decline!  The FED has already said that on May 4th there will be a 1/2% increase and two more to follow.  That means that today's mortgage market in the Sunday paper was 5.42% for a 30-year mortgage. That will take it to 6.92%, my approximate guess to a 30-year mortgage.

With inflation at 7-8% annually that still means mortgage rates will be under inflation and a great deal!

So buyers need to look at the economics and whether they wish to live an a specific area, or will another area make do?

My friend of over 40 years has told me how buying on Lake Tahoe and the communities surrounding it are in a construction boom!  He just bought a 6000+SF home with 5+ bedrooms and baths on 2.5 acres for $2.4 million.  A GREAT DEAL, COMPARED TO REDWOOD CITY 1350 SF HOMES AT $2.4 MILLION.  Yeah he said.  "They are your people.  They are coming up to Tahoe and buying and working remotely.  No taxes, bigger homes, cheaper homes and new construction. What a Deal!"  

Now where does that leave us in our real estate market?  Two types of real estate transactions.  For those who have owned for sometime, retired, semi-retired or just ready to move there are numerous options, sell and look for fresher grounds.  To those looking to get that home in Atherton and Woodside the options are just one BUY!

Stock options need to be re-priced, portfolio's are down.  Hopefully there are large cash reserves.  Cash is King in this market.  All Cash buyers will win, always!

Even though the stock market is down, and in my opinion it is never too late to raise cash!  Real Estate will always be the best asset to hold.  It is your Real Estate!

Are there any bad omens out there?  Certainly, interest rates are one.  Fix and Flippers are another.  

No matter how you look at it, there are people who have limited budgets and do not have have options and a large stock portfolio.  They need to find a home with good schools for their children and still be in proximity to health and shopping and work, if necessary.  

In my opinion, communities like Redwood City have been discovered.  Redwood City has fairly good schools, great in some areas and not so great in others.  Private schools in the City and some nearby.  Shopping is near and the health care is excellent from Palo Alto Medical to Stanford, as examples.  The neighborhoods are safe with neighbors who look after one another.  

Fremont, El Dorado Hills, Granite Bay and Sacramento area have all been discovered and continue to grow in population and home prices.

I am still of the opinion that it is a buy in real estate no matter where you look. Interest rates lower than inflation put the benefits to the buyer and the borrower.  Homes have been fixed up by the Fixer Flipper market, which takes the onus off the buyer for updating a new purchase.  That in itself is worth the purchase.

Bad omen to the potential problems.  Fix and Flippers have dominated the first time buyer market.  That market is impacted by the rise in mortgage rates.  That buyer may just ship east across the bay to find a less expensive and a more affordable home.  If that begins to create a trend, which I take is happening now, it will put pressure on the Fix and Flipper as their loan is based upon completion and sale.  That either occurs in a market sale by the investor/contractor or the bank takes on and sells at cost.  That could lead to a softness in our market at least for an interim factor.  Is it occurring?  Well, so far I only know one one situation of an upscale property in the Sacramento area that a colleague was given an REO to sell.  So far, the only indication locally has been my broker training agents in the terms and conditions of listing of bank owned real estate. 

One thing I do know is, you will not see it in the local news until it is almost over.  News needs adds and adds are realtors, banks and builders.  They don't make money out of anything other than advertising!

When I look at the daily new listings, sold, pending I am beginning to see more listings than pending and sold.  There are starts in price cuts too.  Nothing to tell me we are not out of the "sellers market".  So feel safe,  Buyers should buy now as those rates have two more 1/2% increases forthcoming. For sellers, I do not see any worry of severe price cuts. Just don't get greedy and too optimistic over what you THINK your house is worth.  Let the market tell you.

The best place to look in this market for value is the VACANT LAND MARKET!  Motely Fool had a recent article which I will add here....

KEY POINTS

• The right plot of vacant land can hold nearly limitless potential. 
• A large plot of land comes with more options, but a smaller plot can be a great investment, too.
• The current housing market is making land investing even more appealing.

When you think of real estate investing, you probably think primarily of various types of residential or commercial buildings. And it's true that from single-family homes and apartment buildings to retail, office space, and warehouses, most of the real estate investing we discuss here at The Motley Fool involves buildings of one type or another.

But with all its potential and possibilities, vacant land can be a very exciting investment. Let's take a look at a few options when investing in vacant land, as well as some pros, cons, and considerations.

Thinking big

If you can find a reasonably good deal on a large plot of land in the right area, it could be worth buying and holding on to. It's likely to appreciate in value over time as demand grows, and there are several ways you could make money off of it in the meantime.

Possibilities to explore, depending on the characteristics of the parcel and its location, include selling the mineral rights, setting the property up as a hunting lease, or even leasing it out as farmland. You could also think long term by planting a portion of the land in timber while still making an income through one of the aforementioned methods. (Carbon Credits a new income source in Redwoods)

From 2020 to 2021, the value of farmland, cropland, and pastureland in the U.S. increased around 7%. That's a huge increase for a one-year period. 

Current developments in the housing market are also a huge plus for landowners. After a significant dip, homebuilding is back in a big way. New home construction is up 22% over this time last year, making the prospect of starting a housing development well worth looking into if you think you've found the right land for that type of project.

Thinking small

But what if you don't have hundreds of thousands of dollars to invest in a huge parcel of land? In that case, you may want to simply take it one lot at the time -- one residential lot, that is. If you can buy an undeveloped, or "raw," lot in a new or desirable residential area and make some improvements to the land, you may be able to sell it at a considerable profit to someone looking to build their dream home. Think of this as the land version of house flipping.

These improvements could include clearing a site on the land where a home could eventually be built and creating easy access to that area, if needed. This could be an effective way to take advantage of the homebuilding boom without having to make a huge up-front investment, perhaps especially in a growing suburb. And this way, you can take it one piece at a time.

Should you consider vacant land?

If you've been investing in real estate primarily in the form of homes or commercial property, vacant land can feel like an entirely different ball game. But the most important difference is that you'll need to ensure any land you're interested in will be suitable for your intended purpose (or purposes) before pulling the trigger. This could include making sure most of the land is high and dry and that it isn't subject to any zoning restrictions that could get in the way of your plans.

The vast potential of vacant land is a big part of its appeal. So is its simplicity, in that you don't have to do anything but hold it and wait for it to appreciate, if that's your preference. But the No. 1 reason vacant land is often a safe investment is a bit of a cliché, and for good reason: They simply aren't making it anymore.

GARY MCKAE VACANT LAND LISTINGS:

18.1 ACRES MIDDLETON TRACT LA HONDA APPROX 70% OLD GROWTH REDWOODS, $1.4 MILLION

3.1 ACRES MIDDLETON TRACT $449,000

3 ACRES MIDDLETON TRACT $349,000

Gary McKae