Happy Thanksgiving...or is it?

 It does not seem so long ago that Wall Street, the Euphemism for the place were all savy investment decisions are made, was forecasting consecutive declines in interest rates from the (FED) Federal Reserve Board.  The FED would cut interest rates at every meeting.  Surprise!  The FED comments are that the economy is going too nicely along with inflation at a 2.1-2.3% on an annual basis for us to do so.  

Inflation rate may be well and good for the Nation at 2.3% annually, but we here, in California, we have some issues.  While gas prices at the pump have moderated a bit, the taxes that our Governor and Legislators put on gas keep the State of California as the highest in the Nation.  Add to that we have to contend with housing prices the highest in the Nation!

Next with all the push on the quality of the air and the carbon issues, the ability to convert to all electric has some road blocks.  The major roadblock is PGE ability to provide electricity.  As I look at the Nextdoor Neighbor site for parts of Silicon Valley there seems to be a regular outage somewheres in SV.  Poor Redwood City seems to be hit on a weekly basis.  Buying Gas Generators for power are hotter than pancakes, as the old saying goes.  Neighbors complain about the noise, the lack of power and the COLD in the house as furnaces are out.  Well that is for Silicon Valley.

Once one goes to the next Valley of our population, Sacramento Valley, solar panels are more common than EV vehicles.  

California Food prices are not really abating, or at least that is what my wife tells me.  Retired friends complain about medical costs and the cost of food.

Next we go to Savings Rates.  From 2020 to present the savings rate in the Nation is 2.3%.  That is down from 13.3% prior to the Pandemic in 2020 and during the Pandemic when savings skyrocketed to 38%.  

The Stock Market is cheering for the Trump Administration and getting a bit ahead of itself as the new president has not even been inaugurated.  His Cabinet and Staff have yet to be confirmed.  A bit like declaring a winner of a race before the bell to start has not even rung and the contestants are still in the locker room!

Housing prices continue to remain strong in sales, while the forecasts from Zillow are forecasting 2-3% declines in the next year.  New home sales are slowing down and existing homes sales see more price cuts and sales below list than that of a booming housing market.  

Mortgage rate hover around 7% and whenever this is a dip in rates below 7%, the Housing Industry shouts hooray!!.  A bit like a person coming out of a comma and the staff is already getting out clothes to discharge and getting the wheelchair ready!

With savings depleted the ability to afford home improvement lacks support in interest rates; even though, the equity in the home can support a Home Equity Loan, the borrower cannot afford the payments and the ability to take one out.

Where does that lead home buyers and sellers?  A Mexican Standoff?  Sooner or later prices need to adjust downward.  Sooner or later the migration to affordable parts of the state will continue.  I look at this as once living and working in New York City.  Great for a single person.  Not so great for a family.  The result is living outside the city and commuting.  That is similar to other big cities like Chicago.  Or even my home Town of Milwaukee Wisconsin.  

On the commute issue, I watch home prices on the East Coast.  North Carolina is up 3% and rising.  That seems to be the same for Tennessee too!  Florida and Texas have home prices declining and Arizona is up.

Rents too are adjusting downward.  Last year rents moved quickly and landlords were quick to raise rents and rent their homes and ignore work to make home habitable.  "Don't like it Move."  That creates other problems as lawyers and tenants revolt and lawsuits with State supported legislation force landlords to comply or pay heavy awards by Superior Courts and settlements by landords or their insurance companies.   

The commercial Real Estate Market is still reeling from the Pandemic.  Large Commercial Properties slowly go into default and foreclosure.  While it is not a newspaper item they are there.  Cap Rates that dictate buyers' and sellers' willingness to meet in agreement are slowing rising much to the chagrin of sellers and celebration of buyers.

The rotation of Commercial Properties in trouble have graduated downward from large properties to national companies, like CVS and Walgreen, even Starbucks is closing stores and buyers for their once sought after lease investments are finding it hard to get a buyer to take a risk for fear the store will close and they stopped getting rental income.

Throughout it all we should be happy and give thanks. Give thanks we are not in the Ukraine, the Left Bank in Israel, or Lebanon.   Give thanks we have a home or a roof over our heads, not a tent under a freeway bridge.  Give thanks we are not in a Cancer Ward, give thanks our children are healthy.

I had spinal meningitis when I was young.  I was told I would not survive.  I am here.  I came home partially deaf.  Angry? yes.....then I saw a worker who was in a wheelchair crippled the day before his wedding in a car accident 30 years ago. I was thankful......So Should We Be Thankful...GOD BLESS!

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

The Problems are the Path: Year End Comments

The last 2 months of the year are, or were, normally tied to "clean up" work.  Inventory was thin.  The properties that remained on inventory were usually: left overs from the year that have not sold, properties added due to moving or estate sales, and like in prior years from notice of defaults and foreclosure notice.  Buyers were generally on their hunt to find price weakness and reason for the reason WHY these properties have lingered on the market.  The general answer to WHY were they were OVER PRICED from the start.  Either they were overpriced due to condition or comparatives.  

From 2020 forward we have had a dramatic change to the Supply/Demand ratio.  The Pandemic took supply from the marketplace.  Whether that the supply was housing, restaurants, workers entertainment and travel.  Everyone was hunkered down in their homes fearful of the infection from others fearing all the horror stories of death.  A Present Day Black Plague was circulating the world. 

The Federal Reserve stepped in as the People in the White Hats to save the World and Humanity by lowering interest rates, buying long term bonds all to create historically low rates in the hopes of saving the world economy.

Their action had a two-fold effect.  It fed Speculation and eventual Inflation as as supply could not meet demand when the Pandemic was declared beaten.  

The risk of Speculation can be seen in the Commercial Real Estate market where improper leverage was taken and unrealistic growth was found.  Unrealistic when workers went to the "work from home" status.  The result was and is large commercial projects are being sold for a fraction of the cost of purchase or construction.  Those that are hanging on are doing so with the cooperation of lenders not wanting to take another return to the past Banking Crisis.

So, where does that take us today in the 11th Month?  Inventory in residential homes are still in short supply.  Commercial properties are still feeling the impact of high interest rates that occured to stop the supply side inflation.  It appears on a daily basis there are more small commercial properties being advertised for sale.  Small malls find in hard to get an empty site filled due to a closing of a business.  Banks are closing locations; as are, large pharmacies, large bargain centers.  All are feeling the recessionary effect of high interest rates and finding competition in the form of online competition.

COMMERCIAL PROPERTIES:  The correction in the Interest Rate Curve has had a major effect on the terms of purchase.  As short term rates declined and the FED is longer buying bonds, but liquidates their balance sheet and allows them to mature, long term interest rates move up.....NOT DOWN!  Investors seek higher Cap Rates for their investment. Where once 4,5,6% rates where acceptable.  It is now 7,8% Cap Rates are made in offers.  The credit of the property does not have much effect as even those with high credits are shunned as the fear they too may close a property in a cost cutting program.  

RESIDENTIAL PROPERTIES:  The day of low mortgage rates is behind us.  Something, if we remember, as in gas at pump lower than a $1 a gallon!  Therein lies the first problem with inventory.  Many homes have extremely low mortgage rates.  Rates are  1/2 of today's mortgage rates.  Then sellers must look at the cost of a new home and the capital gains and the property taxes that are going to dramatically rise from their present day property taxes on sale and purchase.  That is for those sellers who remain in California and are not qualified to transfer their present property tax to their new home in a reciprocal county.  

So where does that lead us as buyers or sellers?  

The State of California is a bifurcated state.  Silicon Valley with its Technology Engine keeps churning out businesses and technology improvements to keep jobs strong.  The money to invest in the new business keep growing and investing.  Along with that growth, property values will not depreciate over time.  There may some blips, but history tells us they are only opportunistic blips for buyers and then moving up. There is the normal loss of population to other states of some 300-400 thousand net a year.  (A minor impact). Those immigrants will create the opportunity to purchase at a discount as they must move.

Once the view of outside of Silicon Valley is made, the areas within the state that saw growth from the"Work from Home" movement find the movement has stopped.  Stopped and inventory of homes for sale are growing.  Price cuts in these areas are the norm, and sales are less than the price cuts.  There the long term outlook is not asset appreciation but the quality of life.

To those who are moving the price of the move is not solely benefiting in Quality of life and cost and savings, it is the frustration in finding a new medical professional, dentist, accountant, cleaner, grocery, and most importantly....new friends.  The adjustment process is not an overnight process. It will take years to develop new friendships.  Frustrating months to find a barber, hairdresser, dentist or doctor.  

So my Dear Reader, Where do you fit?

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