The Problems are the Path: Bifurcated Market in Silicon Valley

Silicon Valley has always been in my experience a unique real estate market.  A sort of a Camelot where the high walls of technology, money and education kept out the evils of recessions and a financial crisis.  A place were housing prices in the High Tech Community remained stable with only a few exceptions coming from overzealous speculators caught with properties that have rising cost of carry from increasing interest rates and fears of economic slowdown.

Today, or at least since about February/March prices have differed.  The starter home areas of Redwood City, San Carlos and San Mateo have seen demand and multiple offers with over bids.  As you look at the "roll up markets" like Palo Alto, Menlo Park and Los Altos, the prices have remained strong with a few over bids and multiple offers, as compared to the first time buyer markets as previously quoted.

When one looks a the high end luxury markets you begin to see weakness and markets that go from a seller's market to a buyers market.  Those cities are Atherton, Woodside, Portola Valley and Los Altos Hills.

The cause of the bifurcations is clearly the rapid rise in interest, the failures of Silicon Valley Bank and First Republic Bank, work from home virtual employees, the beginning of Artificial Intelligence and Technology layoffs.

Those who have rented through the Pandemic have saved and are tired of renting.  They are ready to buy affordable, in their terms, homes.  That takes them to 1350-2000 square foot homes priced $1.5 to $2.3 million.  The market for those homes is not that available.  The Baby Boomers or present day owners have Golden Handcuffs.  They either have a low interest rate on their mortgage or own the home clear. They also see no reason to sell and create a large capital gain.  When one party passes away the property basis is brought to current market value and a sale will not create a large, if any, capital gain.  The main issue with those homes are they are in need of updating.  This now brings in the "Fix and Flip" contractor/speculator that can buy or offer to buy with no contingencies, all cash, and give the seller the illusion that by not paying any commission to a realtor they are ahead of the game.  Realtors have a difficult time competing; even though, the price an open market sale will create is in most cases better than the Fix and Flip offer.  The commission issue is a hard nut to crack as the seller looks at pay $100,000 or more in commissions and snaps back, "I never made that kind of money when I worked".  

The situation creates the bifurcated market or at least one arm of it.  The starter homes are fully updated homes that become highly desirable to first time buyers.  

The other end is the demand side and supply side slide.  As many technology workers now look at whether they will have a job or whether they will move to greener pastures the tendency is to hold or do nothing.  When supply comes on is goes, but not as fast.

The Luxury end has prices at nose bleeding levels that only a very small percentage of the population can afford.  They too must think about the economic situation.  Prices in this area are weak and have come down by 10%-20% or more without a "dead cat bounce".

Media research created a statistic of 4 out of 10 Californians want to leave the State.  Starting anew in your retirement years is a tough one to consider as probable.  Especially when thinking of out of state movement.  For my experience those buyers who state, crime, homelessness, drugs and in some situations the political environment El Dorado and Placer County are a target move.

I manage and train a group of new agents who are in their new career as a realtor.  Some are retired looking for a second career.  Others are virtual employees who want a side gig to supplement their income.  Others are or want to be full time agents that need a second job to carry them over until they can create a steady income in real estate.   Where are their new clients buying?  Placerville, Roseville, Granite Bay, El Dorado Hills, Loomis, Elk Grove and select parts of Sacramento. Two Agents are using the new home projects in Elk Grove for income buyers.

The markets in the above stated areas are in a Buyer's Market.  There have been numerous price cuts.  Builders went overboard to accommodate the influx of Bay Area immigration.  They now have excess inventory to sell at great discounts.

What does the real estate market portend for the near future?  Interest rates will increase on a gradual basis until the end of the year per Jerome Powell, Chairman of the Federal Reserve Committee.  Rising interest rates will have a number of effects.  1. employment and wage growth will decline. 2. The economy will move toward  a recession.   Wells Fargo forecast is a recession in late December and 1st quarter 2024.  3. With both wage growth stopping, employment declining and a recession.  The plan is for inflation to decline.  DON'T COUNT ON IT!    During the Carter and Ford administrations we had Stagflation.  A stagnant economy with inflation.  It took Paul Volker to raise interest rates to 14.5% to break inflation and create rising unemployment when he lowered rates.  

What happens to real estate prices.  My opinion is that the high prices of the Bay Area will finally break.  Rents will come down.  Foreclosures in the commercial real estate market will be the main subject as which large structures in San Francisco goes back to the lender as owner and or developers hand in the keys as rental rolls collapse further.

Commercial markets with good cash flow will be in demand.  Landlords will find competition from newly constructed multi-family and apartment structures too hard to fight and they will sell out to speculators of Fix and Flip to do remodel and sell to those still willing to live in the area.

On the Fix and Flip Remodels for sale in the after market.....Buyer Beware...Caveat Emptor.  Remember when you walk into a newly remodeled home of the 1950-60's vintage, you are walking into a great facelift.  Underneath it is still a 60-70 year old home.  By code, generally, when there is improvements that go beyond a % by the various town codes the home must be brought to current code.  That is the Uniform Building Code recently adapted by the City or Town of a code that is updated annually.  First thing to look for is to look up.  Is there a sprinkler system?  NO?  Now you need to do some research with the local planning department on permits and the % of work completed that required the house to be brought up to current codes.  Those codes are tough.  They will require a sprinkler system, plumbing, electrical, steps, railings and much more.  The worst thing you want to do is to get emotionally involved.  There is always another bus or elevator coming.  The last thing you want is to have my experience on our first house in Woodside.  We were required to update all plumbing.  We tore out the old pipes and put in new pipes.  The electrical went from old to new wiring.  A new electrical panel was installed.  All we were doing was replacing the old aluminum windows.  

Don't expect your agent to do the work.  The agent cannot take the responsibility of due diligence.  Legally he is not responsible for your work to review the disclosures and do your due diligence.

This is an excellent You Tube video on what to watch for: Kevin.

Another item to be aware of is you are not buying a property constructed by a national firm. It is an LLC or a Corporation that was established solely for the purchase remodel and sale of the property you are looking at.  Once the property sells and money is distributed the LLC and or Corporation is a empty  shell.  There is not a 10-year warranty as on  project of homes you see advertised in the paper.  The roof fails, the short circuit starts a fire, the toilet overflows or is rotted and falls onto the floor below.  Check with your insurance company.  The agent can't help you.  You signed the disclosures.    

As before, call or write for any question you may have and think of me of your "in the know real estate agent". 

The Problems are the Path: Opportunities Adjustment

 One of the greatest difficulties for any investor or real estate buyer is to realise the adjustments that occur during a market cycle.  This past month; in fact, the past several months, we have seen home prices increase from the levels of December 2022 and January 2023.  The adjustments are difficult to see.  The easiest method most people have is to look at what a house sold for, the amount over list, and if possible where there multiple offers.  When the novice looks at those number the most likely outcome is for the assumption of the revival of a bull market or an increasing trend upward in home prices.  In stock broker and trader term this bounce up from a sharp decline in prices a "Dead Cat Bounce".

The market place we see is dominated by borrowing costs, rising interest rates, bank failures and bank lending criteria.  As banks are saddled with bonds with low coupons that eventually must be sold at a lost. Credit card loans, car loans and in general consumer loans come into question during a period of rising interest rates and a recession.  

So far, the employment market has continued to witness net demand and net increase in employment while the technology industry is seeing a net loss.  The pressure will continue for the FED to raise interest rates to stop employment to stop inflation.  That seem a bits on an Anachronism.  Beef prices are up as there are less cattle,  Oil prices are up due to OPEC decision to lower production.  I find it hard to believe how interest rates will increase production of either one of those commodities.  

Now is the time to look carefully at the residential market to determine how buyers and sellers should plan their decisions.  Below is a chart we will need to review.

Housing Inventory SnapshotMay 28, 2023
 Average List Price30 Day TrendAverage Sold Price30 Day TrendAverage DOM: active/sold30 Day TrendNumber of Active Listings30 Day Trend
Santa Clara County, CA
Single Family$1,922,905+1.58%$1,850,190-0.90%50 / 174 / 34744
Luxury Single Family$6,738,211+3.12%$4,750,412-1.13%95 / 218 / -11149-4
Condo/Townhome$835,602-7.89%$875,970-1.93%41 / 203 / 21924
Luxury Condo/Townhome$1,671,791-9.57%$1,722,213-3.57%53 / 17-3 / -5634
San Mateo County, CA
Single Family$2,769,312+3.22%$2,236,001+11.11%57 / 180 / -229532
Luxury Single Family$12,685,313+7.52%$8,160,000-19.82%80 / 154 / -208816
Condo/Townhome$811,087+6.45%$863,995+9.17%112 / 29-3 / 210315
Luxury Condo/Townhome$1,832,608+1.97%$1,777,211+2.58%47 / 1814 / -31314
Santa Cruz County, CA
Single Family$1,371,541+0.20%$1,312,014+0.68%63 / 281 / -1116424
Luxury Single Family$3,958,942+2.66%$3,821,000+16.67%56 / 66-27 / 21487
Condo/Townhome$769,149+0.29%$697,949-16.75%40 / 4010 / 19264
Monterey County, CA
Single Family$1,422,558-1.89%$1,116,436-1.79%58 / 36-7 / 619633
Luxury Single Family$7,991,852-8.24%$5,283,000+23.41%116 / 231 / -16210
Condo/Townhome$824,099+6.76%$563,329-14.36%47 / 15-5 / -1019-3
Contra Costa County, CA
Single Family$992,351-4.06%$957,186-3.82%39 / 25-8 / -146171
Luxury Single Family$3,323,831-2.07%$2,752,274+1.90%45 / 18-5 / -615224
Condo/Townhome$517,738-4.27%$542,502+5.36%44 / 232 / 114412
Luxury Condo/Townhome$1,161,467-10.30%$1,149,296+0.87%38 / 20-2 / -13485
Alameda County, CA
Single Family$1,015,707-0.40%$1,128,559+2.31%37 / 21-3 / 139910
Luxury Single Family$3,505,450+6.42%$2,307,973+2.52%50 / 155 / -11327
Condo/Townhome$618,547-0.95%$617,927-4.71%39 / 29-5 / 918316
Luxury Condo/Townhome$1,163,005-4.42%$1,151,585-0.49%27 / 14-10 / -7618

As you review the chart look at the average price of list versus the average price of sale.  The two counties we are most interested in is San Mateo and Santa Clara.  As you look at those prices the listing price is up and the sale price is down.  In some cases the sale price is up on a 30-day trend.  This indicates that a price cut occurred during the 30-day period,  The price cut may have been not enough and the sale price is down.  The sale price is up on a 30-day trend which indicates the price cut was severe and buyers over bind the market.  San Mateo stands out as the most desired county for the non-luxury market buyer.  

These reports are narrow in view as they only look at the 30-day trend.  The real trend is the year to year trend, that is compared to the shorter trend.  The best place to find that report is on Zillow.  On average the year on year trend is down 10-20%, while the shorter term is up 1.3% to 3%.  This is what would be called a dead cat bounce. A slight increase in prices after a large drop.  As an example 94062 the Woodside and Emerald Hills and Menlo Country Club area of Redwood City, the average price today is $2,475,570.  One year ago the average price was $2,693,953.  The one year forecasted value is +.7%.   There are 69 homes for sale and 19 have sold.  Not too impressive, but certainly opportunistic with buyers and sellers at even terms.  In Granite Bay, one of the move to area of the exit from Silicon Valley, the typical home value is $1.087,327 and the year ago typical value was $1,167,931 with a forecasted increase in the future year of 1.3%.

There is also an indicator of affordability.  Look at the Counties to the east, south and west.  As affordability puts pressure on home buyers.  The attitude of not staying in place permeates the country.  That not staying in place puts pressure on supply and demand.  

There is only one sector that can create supply.  That is the fix and flip market.  That market is impossible to analyze statistically.  The reason is, the sales are all off market between owners and investors.  It is hard to determine what the potential supply that will hit the market and when.  What I do see from rentals is that homes that once were on the market and failed to sell are turned into rentals.  A good deal for renters as those homes are new homes without the issues of years of renters and wear and tear.  The first time buyer has a difficult time with those sellers.  Cash offers are meaningless, limited supply keep prices up.  It is only those homes that were purchase late in the cycle as in last year summer have a difficult time breaking even after repairs.  They either turn into rental are are sold for a loss.  To those homes that investors fail to realise the trend is over, the only choice is to refinance to hold over until prices improve.  To those the prices never improve.  To keep myself out of trouble with my fellow realtors, one needs to look at the history and you will notice the price cuts upon price cuts and the "behind the curve".

The Commercial market is in one of the worst cases I have seen in over 40 years from the investment banking side of real estate to present day.  Banks are backing away from any loans to property owners, private capital is staying away from everything from Office Buildings to apartments to shopping centers.  Even the loans for cash flow vehicles as recession proof medical centers are being denied credit.  The issue the lender is preparing for is for the "keys" to be handled to them.  Attempting to recoup loss from the owners is most difficult as they ownership is hidden behind a myriad of Limited Liability Companies and Partnerships that make "Deep Pockets" hidden.

This may not seem optimistic, but it is!  The problems are the path and the opportunities that are created must be the best chance of creating future value.

LATE NEWS.........

I had planned to put this out a week ago.  I decided to wait until the budget got cleared up.  The ability to borrow without a top until 2025 is not good.  This past week the Wall Street Journal had an article on the effect of Treasury Bill borrowing planned at the next auction as a result of the Budget Bill. 

$1 Trillion is planned to be sold by the US.  That will take $1 Trillion out of Money Supply.  No money for investing, no money for mortgages and no or less money for all cash offers.  The reduction of Money Supply has a levered affect on the economy over rising interest rates.  Take money out of money supply and the rise in interest rates is "slamming on the brakes of the economy".  "A Recession is Inevitable"!

Money Supply had expanded to some $9 trillion as of the Pandemic.  The expansion was seen in the Federal Reserve Balance sheet from the FED's buying of bonds and mortgages in the after market.  The time since the pandemic, the FED's portfolio has declined due to the maturation of bonds and mortgages.  The sale of Treasury Bonds and the maturity of the FED's Balance sheet is a net effect.  It just takes assets and turns them into debt.  VERY BAD!

The Treasury Department selling of treasuries takes the game one further.  The savings that were created by the FED's expansion of Money Supply from the Bond and Mortgage purchases proceeds were kept in savings accounts, purchase of stocks and bonds and real estate.  Now we have layoffs in technology, recession warnings.  That gives those with cash holdings a tendency to be reluctant to get aggressive. 

When a Treasury Bill is sold at auction with a 4 or 5% rate, it is far safer to buy the bills than buy stocks.  Buy a new home or hold cash in bills?  Money is banks are questionable with SVB and First Republic.  Chase and Bank America are giving dirt low interest on savings and they have limits of $250,000.  So if you have more in savings it is better to put it in Treasury Bills fully guaranteed by US Government with no state tax.  

Interest rates will not decline soon, there may be a hold off, but that is a toss of a coin.  Rates will go up.  The forecast of Wells Fargo is a recession in late 2023 and for certain in early 2024.  

This will all add up to opportunities for Real Estate buyers.  Foreclosures will build up further.  

For home buyers holding off is not a wise option.  It is far better to buy a home with a +6% mortgage than when prices decline and a new mortgage is 8%.  Just do the math yourself.  Calculate the interest rate paid for a year at 6.5% and then take 20% off the price of the home and calculate the interest paid for the year at 8.5%.  On a $2,200,000 purchase at 6.5% and a purchase at 20% less with a 8.5% mortgage you will pay over $6000 more per year in interest.

To sellers that proof is already being seen in sales.  Conventional mortgage buyers will see banks unwilling to give loans on the 20% down of list price.  The only over bids and multi offers are coming from all cash buyers who see better security for their savings is Real Estate than money in a bank or the stock market.  

As before, call or write for any question you may have and think of me of your "in the know real estate agent". 


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