The Problems are the Path: Residential Inventory Building Commercial Real Estate Revival

It will remain to be seen in the upcoming months if the Trump Administration will help the residential housing industry by increasing inventory and improving affordability issues.  The Commercial Real Estate industry appears to rebonding from the depressed levels and excess inventory.

Returning back to the work place will put additional pressure on residential housing.  The potential from higher interest rates for a longer period could put pressure on price and more inventory could accumulate.  That would create some respite in prices and help affordability.

There may be one pressure point for increased sales of the Retired Baby Boomer residentials. INSURANCE, the increases in California insurance is nothing when compared to other states.  The San Jose Mercury News recently had an article on insurance increases in all 50 States.  California has lower percentage increase than Florida and Texas, and lower than most other states, except a few.  Will a retired Baby Boomer sell and move to another state for lower insurance prices, simply due to lower home prices?  

What about the first time home buyer, where do they move?  The best answer lies in the profits of builders.  This is the sector of housing that develops new housing projects.  All one has to do is open the weekend San Jose Mercury News and the section with Housing Developments from south of San Jose to the east up to and including Reno.  Projects are for sale. Projects with incentives for buyers as mortgage rate buydowns. price cuts, improvement packages.  While builder's profits are increasing, so is there inventory of homes for sale. Price cuts and special terms create sales.  This draws buyers from areas where prices a high and inventory is low.

That is not enough to increase inventory enough to get affordability into the picture.  Affordability will only happen with economic benefits.  So we are now looking at the Trump Administration to create a viable economy with the ability to make housing affordable.  The major factor in affordability is NOT PRICE!  The Major Factor in Affordability is the COST OF MONEY.....INTEREST RATES!  If Trump is able to lower interest rates it will not make any difference if the price of the home is $1.5 million or $2 million, $700,000 or $800,000.  What will make the difference is how much a month the buyer pays for the mortgage, property tax and insurance. 

If there is Motivation in the California State Legislature it will be in the Rental Market of Residential Housing.  At present there are many rules on how a landlord may treat a renter.  Unfortunately, there are many landlords who are ignorant of the laws and their ignorance creates violations.  What is lacking here is equal representation of a renter to a buyer in the disclosure process.  At present a landlord, agent or management company can tell the renter the house is ready to move in, while the buyer of a residential structure must be shown documented forms that the property IS READY TO MOVE INTO!

I believe if the rental market of residential homes is regulated like the sale of residential homes there will be an inventory of substandard homes in the housing market. Landlords reluctant to follow Full Disclosure Laws may take an option of selling the residential property and exchange the proceeds to commercial income property that is not residential through a 1031 tax free exchange.

When the State of California overhauls the rental market with the same standards of the residential full disclosure sale market the housing inventory for sale will increase.

Back to Interest Rates, the FED met January 28 and 29 on interest rates.  No change with the note that inflation remains high.  This is an indication we will see the present level of interest remaining the same for at least the next 3 months, in my opinion. The forecast is for two cuts in 2025 looks to be accurate.  Consumer confidence has declined in past two months which may put pressure on the FED to lower rates.  Then we have President Trump.

President Trump made it Very Clear at his Zoom Call in Davos Switzerland interest rates are too high and must come down on a world wide level.  The cuts in Federal Employment by him will have some affects on economic numbers.  The Census has already announced a slow down in manufacturing.  The Recent Report has some figures that do not bode well for the economy.  Manufacturing is down and so is economic activity. The recent sell off in the stock market will have the FED taking a steady attitude on interest rates.  

The Year Curve, or the rates on government bonds from short term to long term rates have a steady increased in rates from one year maturity onward.  That to me, that means rates will come down with in the year and be less than the 10 year bond yield.  The Ten-year bond is the maker of mortgage rates and credit card rates.  The rates are seen on www.CMBC.com, on the Bond Tab.

As I observe real estate prices I begin to notice that properties are longer on the market, price cuts are becoming more common and sales are less that list.  Rent prices are seeing the same in price cuts.  The actual rent is not covered by either MLS listings or sources like Zillow.  With all the cuts, activity is still very active.  Sales may take longer, sale prices maybe less than a year ago; but residential homes are selling!  What I see as being a precursor of lower asking prices is that if I take the cost of owning a home in Mortgage payments and compare it to a similar property for rent.  The rental is the same or more than ownership cost. 

Lower cost of living in residential housing will result in the FED lowering interest rates.  Helping affordability.

The Commercial Real Estate Market is seeing light at the end of the tunnel.  Investors who once shunned the beleaguered U.S. Property Market are coming back!  U.S. Office-Building Sales increased 20% from 2023 to $63.6 Billion.  With a large cash reserve the investors are expected to see sales activity to accelerate in 2025.  Norges Bank Investment Management, the Norwegian Sovereign Wealth Fund,  purchased last year 50.1% of eight properties in Boston, San Francisco and Washington D.C. at a value of $1.9 Billion.  Last year it also purchased an office Building on Sand Hill Road in Menlo Park, CA.  Venture Capital haven for Silicon Valley bodes well for the outlook in Silicon valley for new business startups and employee growth.

New York City is seeing a bigger growth in office building purchases exhibiting the tunnel maybe be getting behind the Commercial Property Market.

Led by a bevy of big-ticket tech deals, office leasing volume in Silicon Valley has soared to 2.4 million square feet in the fourth quarter, the first time the quarterly total has topped 2 million square feet since Q2 2019.

A leasing surge of more than 4 million square feet in the second half of 2024 pushed the full-year deal; volume over 5.5 million square feet in Silicon Valley, setting the stage for a potentially robust office recovery in 2025.

The overall office availability rate in Silicon Valley dropped by 160 basis points, or 1.6%, to 25.9% in the fourth quarter, down from 27.6% in Q3 2024.  Available sublease space in Silicon Valley totaled 6.6 million square feet at the end of 2024.  A drop of 25% from 8.8 million square feet available at the end of 2023. 

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