Shortly after Trump's election the Census came out with one of their Employment Reports. My wife, Cindy, once worked for the U.S. Census as a field worker for the reports on employment. She thought it would be interesting to see how Silicon Valley worked. The report I am referring to did not deal with the Silicon Valley employees. It dealt with labor force calculations in the best way to describe it, immigrant population employment. Generally recognised out of the report were laborers in the service industry and agricultural industry. It was a well known acknowledgement in the footnote, I recall, as that many were most likely non-citizens here on temporary status. Back in time when I graduated from Wisconsin I did volunteer work for the TB Association searching for positive skin tests for TB on non-citizens who crossed at Brownsville Texas to work in the fields in the harvesting and canning industries. The Census is stuck on the political mindset that our border crossing immigrants are really emigrants and they will be returning to the mother countries. A good thought for apolitical group?
When I looked at the numbers and thought, "what if Trump sent them all home, and temporary workers were really temporary worker of the long ago past?" Good thought. Employment number would not look that good was my next thought. The next thought was, "what would the FED do". Not too simple, lower interest rates to pick up economy and get natural US citizens to work. In order to do that those industries would need to raise hourly wages from the poor immigrants who were paid below grade wages due to their questionable status. Economics would need to address technology to improve efficiency in the industry improving net profitability to offset higher wages? Then there is increased demand due to a growing economy and higher incomes willing to pay for increased costs.
The next thought is "what would that mean inflation"? Not necessary! Why because inflation is a function of a basket of costs. The greatest part of that basket is HOUSING! No immigrant workers renting more rentals or sales when rents decline to a point it is better to sell, do a 1031 exchange to a commercial property.
So where does that go? I see the commodities market futures pricing interest rates and Banks and Economist pricing in the economy. Interest rates for 2025 down to 3.25%, Mortgage rates at 6% and housing prices up 4% across the U.S.
Next part of my evaluation is what will cause interest rates to drop. I know the FED is an artificial factor in interest rates. They only affect the short term. Mortgage rates are the long term. What would cause Mortgage rates to drop? The Ten Year Government Bond would need to drop. The Ten Year Bond prices all consumer lending rates. DOGE, Department of Government Efficiency, will cause the lowering of interest rates as the Government will need less to borrow from DOGE cost cutting. The reduction in the cost of running government means the balance of payments go from deficits to surplus. Not difficult. It went that way during the Clinton Administration. In fact the Treasury stopped borrowing in 30-year Maturities.
Interest rates are a factor of Supply and Demand. If the Treasury stops borrowing the cost of borrowing declines. This ends supply. Demand will not change as banks, foreign sources, retirement funds, investors need Treasuries for their investment portfolios. Demand increases, price increases and yields on existing bonds decline.
Interest rates on US bonds in the World Market Comparative, now go to or below European Government Bonds. Who ever would ever believe the greatest country in the world would have to pay more than the poorest and or less efficient, and prone to governing upheavals? As of December 15, 2024 per CNBC the 10-year U.S. bond is 4.395%, the 10-year German Bund is 2.262%, the Japanese 10-year is 1.0472%. France is below, 3.04%, and has gone through 4 Prime Ministers, THIS YEAR, Italy is below, 3.39%, and I can't recall how many governments have fallen. Then too is our ernst ally, England, 4.4%, can't get itself together whether they are part of Europe or Still Rule the Waves? France is socialist and work 25.6 hours a week or less, with benefits that include a 5 weeks paid holiday a year, plus 11 additional holidays off.
Where does that leave California. The Golden West will prosper. David Sach the AI and Crypto Tsar is from Silicon Valley. AI is from Silicon Valley. Do I need to go on? The State is changing per the last election from Blue to Purple and San Francisco from my observation was 25% for Trump when it was in sub 7% level in 2016. The coast is turning RED and our Governor is looking for a place to land...politically that is. I cannot see home prices in Silicon Valley not go up and go up further than the 4% national forecast. The movement out of the state will see a movement back when jobs and income rise with opportunities. Silicon Valley is spreading out to Santa Cruz where rents and homes prices match Redwood City to Half Moon Bay where the same has occurred. Down to Gilroy over to Los Gatos....need I write more?
Real Estate is bought based upon what one pays a month, not the price. Oh, I know there are those that haggle over price when the the cost of owning declines. They are the losers! Let's take a $1,500,000 Starter Home somewhere in the Silicon Valley. At a 7% mortgage the annual interest rate paid, no consideration of principal payments with 20% down is $7000 per month or $84,000 per year. When one looks at a 6% mortgage it is $5000 per month or $60,000 per year. Then one must consider taxes going down under Trump and the Possibility of the SALT exemption on property taxes rising from $10,000 the benefit to buy is huge! Property taxes on a $1,500,000 house is $18,750, at 1.25% rate. The limit of a $10,000 deduction leave the owners with a $8,750 extra cost of housing or $729.19 additional cost of housing. Our California Republican legislators want it to double to $20,000 some want it eliminated. Eliminate it and Trump and successors are in for a long ride on a Perfect Red Wave....oh how I loved to surf those waves when I lived in Hawaii!
So, my dear residential reader, buy now look to refinance at lower rates and forget what the cost of the purchase is and think about what you pay monthly. As long as I have owned a home the cost to buy was never below the proceeds of a sale. The trend is your friend.
Let me take that one more step for the Commercial Buyer., or real estate investor I have one prospect who has thought price is the the way you buy commercial property. Over the past year, he tells me, he has paid over $220,000 in expenses keeping empty properties! In the meanwhile, had he bought even at a lower cap rates of 6% or 6.5% and sold those empty properties he would have not lost cash flow. GO FIGURE THAT RATIONALE?
An additional thought is the rental real estate market. The State has passed in 2024, I believe, 11-12 laws limiting or penalizing landlords. HABITABILITY rules. Gone are the landlords who rationalize spending to improve heating or plumbing a roof leak or faulty appliances. Again, I recall the story of a LA landlord who forced a renter out so the landlord could make improvements and take the rents to market. The renter found the right attorney and sued...award to renter was $250,000! Rental properties will slowly flow onto the market for resident buyers. Thus making inventory expand and price decline as those home need updating.
Just watch the declining numbers of hispanics on the street looking for pick up jobs to indicate where rentals will go!
GET SMART! BUY NOW!
As before, call or write for any question you may have and think of me of your "in the know real estate professional".