Labor Report Upsets the Apple Cart?

 With the employment numbers jumping to 528000 from an expected 250,000 an upset of the apple cart in forecasts and the direction of the economy has occured.  

People are going back to work.  The people going back to work were those who were laid off or idled due to the pandemic.  It was the service industry and the travel industry.  It was all those who couldn't pay rent or their mortgage that the Government protected from eviction or foreclosure.  So why the upset?

The low interest rates that created the situation we are in created a wealth of opportunities for risk takers and the growth industries.  Investment are measured against "Risk free rate of return".  That means 90-day T-Bills.  When T-bills went to 0% or less the sky was open and mana fell from heaven. Every idea under the sun came out of the minds of the aggressive  risk takers with little or no alternative to invest measurement of risk to.  

The majority of investors in America are  institutions.  That means your pension fund, your insurance company and even your bank and broker.  The risky investment took off, earning per share became another useless measurement of the past.  There was a new normal. ( How often have I heard this comment.)  A rationalization to keep the money flowing to high risk investments as there is no other choice.  Does the investor keep their money in fractional return risk free investments or do they plunge with the crowd into stocks selling at multiples of income growth and no earning now or for the foreseeable future.  What they offered now is appreciation.  The Greater Fool theory in operation.

More assets created more disposable income created and excess savings with no place to go; other than, joining the crowd.  Price became a useless measurement.  We have money and we want it!  I will show you how much money I have and over pay for it and make you give up.  I WIN!   REALLY?

Somewhere in the latest research from the McKae Properties Research Team came a report from either RedFin or Zillow that the last 10% in home prices was all worthless over bidding.  

Open house are a common site along with Garage Sale signs today.  A welcome return to the past?  

The cost of living, is even putting into question the weather of California?

WE BUY HOUSES are still common so the correct has not taken hold.  That leaves those who were considering to sell a chance to get out with something near the top their neighbor got.

Buyers now have the chance to buy a house without over bidding and or worry of over bids.  Bank financing and appraisals save buyers from getting into over their heads.  Things are beginning to get back to normal.  The High End Market is seeing a stronger supply of sellers than the past.  The low end market is seeing some relief in affordability

Price cuts are not a local situation, they are all over the country.  Even realtors are in dismay of the situation.  Take an Hawaii or Incline Valley cut of a $5 million property of $5-10,000 to our cuts of $500,000 to $1 million.  I take that as the highly educated of our area see more risk ahead.  Best position is to be n cash while interest rates are rising and the return on T-Bills go higher and higher.

Where to Go?  I saw that Intel was building a massive chip factory in Chandler Arizona.  Wife and I stayed in Chandler many times at her parents home in a +55 Community.  Christmas and New Year's was fun.  Cold in the evenings, parties at the Club House, Formal dressing with bands.  Sunrise brought out shorts and 3 different golf course to choose from, Laying by the pool, water classes, or just sipping a "cool one" by the patio talking to new friends.

I looked at Zillow prices....My Word.  The town house we sold there was up almost 100%...That was 18 years ago so it is logical.  I asked the same McKae Properties Research Department for forecasts in Chandler on home prices due to the Intel Plant.  DOWN 46% they said from Zillow forecasts!  It doesn't matter what potential an area has the trend has reversed.

Is the the worst or can it be a collapse in housing?  Poppy Cock!

The FED is only bringing rates back up to a level where inflation, asset inflation subsides and people can once again afford a home and pay rent without have two jobs.  Remember it was the ultra low interest rates that created inflation and risk taking that escalated asset prices. 

What you really have to worry about is the FED"s balance sheet.  At present there is $8.9 Trillion dollars in assets.  Those are all the bonds the FED has bought to put money into the system to keep from a collapse. A collapse from the Lehman Crisis of 07-8 to the Pandemic of 2020.  The average balance before the FED embarked on Quantitative Easing, damn that word and concept, was less than $1 trillion.

The big risk is money is pulled out of the Money Supply.  The you know what will hit the fan!

We are going through a transitional phase when the business cycle changes and high risk tech and growth stocks cannot compete with risk free rate of returns.  Money does not flow like water from the horn of plenty.

Recent balance sheet trends

Choose one of the 5 charts.

Total Assets of the Federal ReserveSelected Assets of the Federal ReserveCredit Extended through Federal Reserve Liquidity FacilitiesSupport for Specific InstitutionsSelected Liabilities of the Federal Reserve

ZoomView 1 monthView 3 monthsView 6 monthsView year to dateView 1 yearView all

 Total Assets (In millions of dollars): 4 504 7On October 12, 2015 the FED owned $4.5 Trillion in assets today it is over $9 Trillion,

As the economy grows bonds can slowly mature.  Money supply created by the FED s replaced by economic growth and investments in corporate America.

Minimum wages will increase, labor will get higher wages, home price will come down and affordability will match off and all will remain level.  Inflation will come down as home price increase attribute to inflation will offset other increases.

People want to own a home, it is not a trading vehicle.  They raise families in them.  They grow old in them.  We need to get out of the will it go lower syndrome.  So what if it does, you refinance at a lower interest rate.  You save more.  You work in the garden on weekends, have family over for cook outs.

It is time to get back to basics!

New Listing (30)
List Price Increased (4)
List Price Decreased (15)
Transaction Fell Through (2)
Listing Back On Market (3)
Contingent (6)
Pending (29)
Changed to Sold (24)
Changed to Rented (0)
Listing Expired (5)
Listing Canceled (8)

One more dip in the Stock Market coming?

What's Really Happening in the San Mateo & Santa Clara County Housing Market?

 Higher interest rates, Low unemployment, Help Wanted signs, Empty store fronts, are all indicating to the passer by that the economy is confusing.  " Residential sales are down substantially on a year-over-year basis, inventory is on the rise, and price reductions are becoming more common."

The reader should keep in mind that our real estate market moves differently than the rest of the United States and the rest of the State of California.  The "media" which reports real estate is 4-6 weeks behind in their reports.  Sort of like listening to a delayed broadcast of a baseball game while watching it live.  

Sales are definitely down from June of last year some 30%.  Last year was also the hottest housing market we have had in the past 12 years.  So it is bound to have some pause.  Still it appears there was about 5% over biding during the slow down.  So things are not that bad.

What is really bothersome is the "Feeling" of this market environment.  Like the run up the past 12 years in San Mateo and Santa Clara County have been dominated have been dominated by the FAANG Stocks.  Quarterly Revenue growth was astronomical.  With that growth has been a similar growth in stock values and employment.  All have added to higher housing prices and a highly affluent class of employees. That has come to an end.  Higher interest rates, higher inflation have attributed to lower sales and earnings, either or both, for FAANG.  Layoffs in an industry that saw nothing but new hiring and a strong class of headhunters have started.  Growth has given way to profits protection and eliminating costs.  The overall stock market collapse has created the realization that "I should have sold" being a standard to, "honey, what happened to our retirement portfolio".  Growth stocks are down, 60,70,80 %.  A rally during this past earning quarter is being called a Bear Market Rally.  

This all impacts the Housing Market.  CRASH?  This is not a crash, it is a correction from over zealous buyers and investors both flush with cash looking out the rear view mirror, without viewing the larger picture out the front window.  

What it means for the buyer is that you have more time, more choices and less competition of all cash offers and over bids.  To the sellers it means that you will not get the price your neighbor got 3, 6 or 12 months ago.  The seller must realize the market will go back to a barter of back and forth offers and counter offers with financing and appraisal contingencies.  

There should be a realization that the real estate agent does not make the market.  The market is a "willing buyer and willing seller" agreeing with the help of the negotiating skills of a buyer's agent and a seller's agent.  Homes do sell, it takes a little longer and a little less than past sales.

The U.S. gross domestic product contracted in the first quarter by 1.5%.  The stock market will tumble again.  inflation will remain high and be a continued reason for interest rates to go higher.  Pending homes have fallen for six straight months.  They are now below 2019 levels.  The buyer now controls this market not the seller and the lack of inventory.

This will not be a straight forward recession.  While job cuts in mortgage brokers and hiring freezes in the high tech industry exist, there are two job opening for each person unemployed. That means wages must go up.  Wages went up 5.5% from a year ago.  That did not match the 8% rise in the cost of living. 

While recession usually means bad news for the commercial market, it is booming!  Apartment building demand is high and the rental market investor in single family homes is high.  Look at East Palo Alto single family residential market as an example of the single family rental market....OVER BIDS.

Warehouse demand is strong as retailers are looking for space for product to avoid supply side disruptions.

It all comes down to the $9 trillion that the FED has created and it still shows in the FED Balance sheet.  Investors are looking for stability and do not want volatility.  Have the Crypto players lost enough to put them back into sensible investing?

The real problem in real estate is the office market.  SF Chronicle writes, "Downtown is Dying.  Why our pandemic recovery is dead last in the nation".  Heard on the Street in the Saturday/ Sunday Wall Street Journal writes, "The Future of Our Empty Downtowns.  The reason?  Over specialization in tech and finance.  The employees can all work form home!

This is a 70's market.  When the Modern Portfolio Theory of buying indexes turns out to be a loser.  Individuals without experience of stock picking loose out.  Real Estate will be the only answer to the build up in savings.  That is why Commercial Apartment Buildings are in demand.  6.75% to +8% Cap Rate with rental increase is certainly a better choice than taking a shot on Meta's recovery.  Maybe that is why the recent writing on why the Luxury High End in our area is at record levels....The Captains are not going down with the ship!

Todays summary of MLS Listings for San Mateo and Santa Clara Counties

New Listing (33)
List Price Increased (2)
List Price Decreased (29)
Transaction Fell Through (1)
Listing Back On Market (1)
Contingent (5)
Pending (32)
Changed to Sold (34)
Changed to Rented (0)
Listing Expired (2)
Listing Canceled (14)

McKae Properties Silicon Valley Real Estate Market Commentary: The Prices Come Tumbling Down

McKae Properties Silicon Valley Real Estate Market Commentary: The Prices Come Tumbling Down: Some years ago I came face to face with a competitor over a Menlo Park Listing.  The owners were from Oregon.  They had owned the property f...

The Prices Come Tumbling Down

Some years ago I came face to face with a competitor over a Menlo Park Listing.  The owners were from Oregon.  They had owned the property for some time.  They were faced with updating and correcting many problems that would put them in violation of the Landlord/Renters Act if not repaired.  When they faced the costs of updating the house and property and rent the recapture rate was too far out based upon their age.  They opted to sell.

The agent I had known from his association with another Brokerage Firm of national recognition.  He was now an independent.  Going independent was not something new.  The real estate brokerage firms at that time had a scale of payouts based upon production.  The more the agent produced the higher the payout.  The exception to the rule were the agents who consistently were larger producers.  They got the highest payout both realtor and brokerage could agree upon.

The realtor made a proposal that put me back.  "I will buy the property, all cash, close in 10 days or at your discretion, no commission, no inspections, no state and federal regulatory forms. " 

I had the standard of disclosures, 5% commission, inspections, marketing plan and price based upon similar properties both active and sold.  I LOST.

The sale went through under a 1031 exchange.  The couple went back to Oregon. The realtor used an LLC, sub-divided the property, built two homes and eventually sold them for 4 times his purchase price.

This was my first introduction to the Fix & Flip buyer.  Coming from the investment community the concept of creating value from building and remodeling was not new.  But seeing it applied to residential single family homes was an eye opener,

Soon, this type of buyer began to proliferate the market place.  Realtors began to go independent and began prospecting as they did when they were with the major Real Estate Brokerages.  This time it was for themselves.  There were and are firms who will process a transaction for a minimal amount of money leaving the agent with well over 90% of the commissions.  If no commissions the cost of the transfer could be done directly with a local title company.

Sensing a change in the market banks and lending institutions began to offer construction contracts to the Fix & Flip buyer.  Terms were fairly easy.  70% of improved value loan required a qualified Broker Price Opinion of what the property would be worth when completed per a formal written opinion.  This started a new source of business that had gone idle after the Lehman Crash and the various Volker Rules.  The terms of the loans all varied by the institution but all were similar in the end.  Once the occupancy permit was issued by the City of County, the loan was due and payable within a set period of time. 

The search began for target properties. like any other realtor  The easiest target were the properties east of Highway 101.  Most were in lower income areas, many were rentals and many were in neglected condition.  Covid accelerated this market as the rent holdouts and foreclosure protection put the Mom and Pop landlords financially tight positions.  When a buyer sent out letters of all cash, no commissions and inspections there were responses.  The renters got Cash to vacate their back rent debt forgiven, the seller got out and what was left was financial opportunity.

This upset the statistics from reality.  The purchases did not show up in the multiple listing services.  Realtors did not see sale and the media only saw what was listed.  The assumption was no sales, lack of inventory was mistaken.  There was a very active "Dark" market outside of the MLS system. 

It was not too long for the major real estate firms to realize the game.  They too got into the game by working with large builders and buyers of income properties.  The negative to this was they still wanted a commission.

The Federal Reserve was pumping money into our financial system in record amounts with the total being around $9 Trillion.  A great deal of money seeking investments.  All types of Risk Assets soon saw astronomical rises.  New assets came about through the invention of technology and Wall Street Banks.   What was missed was the large source of funds available to the old stand by....Real Estate and a new buyer community.

Areas like East Palo Alto,East Menlo Park, East San Mateo saw a dramatic change in their character.  The character change was influenced further by the development of the Facebook Campus, and the numerous start ups that allowed inexpensive housing in the Cal Train Corridor to prosper.

Compared to the homes of Palo Alto, Menlo Park and San Mateo, Hillsborough and Burlingame; these homes were cheap!

All good things come to an end.  The FED increased interest rates to stop inflation, the virtual workers movement from working from an office had an impact on demand.  Higher mortgage rates put many homes out of reach.  Fortunately the homes East of 101 were still affordable.   They continued to move quickly.  This kept the flow of funds to pay off bank loans profitable to banks and lender alike.  The over bids continue in these comparatively low priced homes.

As rates increased soon the fear of Recession began to become a new conversation item in media.  Silicon Valley firms began to layoff employees and many accepted the virtual employee.  The virtual employees found small towns of Californai very acceptable.  El Dorado Hills became a community of young people with families and affordable homes, as many of similar communities have today.  Even the luxury market buyer found gated communities in Loomis and Granite Bay far more affordable than Atherton, Los Altos, Menlo Park, Woodside, Portola Valley or Hillsborough.

PRICES COME TUMBLING DOWN

Sooner or later it was bound to happen.  Fear of Recession, inability to qualify to higher interest rates and pure simple fear of the future has caused price cuts of listed homes and sales price below list.

The pressure is now on the Fix and Flip buyer.  The banks all want their money within the terms.  There is no way to not evade the due on completion clause.  "Notice of Foreclosure" is now popping up.  Deed in leu of legal foreclosure keeps the property out of legal proceedings.  The bank sells the property and if there is anything left over it goes to the borrower.

As the FED raises near term rates mortgage rates increase.  As mortgage rates increase the pressure is on the buyer seeking finance.  Will they qualify.  Offers will all be subject to financing and appraisal.  Inability to pass will find the property back on the market.  All cash buyers will be faced with higher savings rates and the question is will the price come down and will I be wise to get higher interest on my cash balance than buy?

Sellers will have two choices:take the property off the market, wait, or cut the price and sell.  There really is no choice.  Cut the price and sell.  The price in the future will or could be lower.  To  the buyer it is opportunity.  The price is lower, the rate will be fixed and if they wait a lower price is not that much an advantage as the higher cost of the interest rate on the mortgage.

To the Fix and Flipper, the pressure is on.  Foreclosures are most certain for the novice who will hold out think the market will pop back.  Once the REO market returns buyers and investors will return.  To the average buyer this is a market they are restricted from. There is not bidding at the court house steps, sale occur between banks and well qualified buyers who will buy direct; without MLS REO listings.  To those who want a home put your offers in at what you can afford. 10% under the list or more.  The sellers of Fix and Flip have little choice.

I don't see much outlook for sellers in this market.  The speculators need to be washed out before our market returns to what it was before the FED flooded the economy with cash!

RENT DOMINO FALLING?

Rent is a function of value.  Consider the rent like interest you receive on an investment.  When interest rates rise and property values fall, rent cannot stay up!  Silicon Valley rental yields historically are about 3% of property value.  That means if you are renting a 3 bedroom, 2.5 bath house for $5000 per month the value of the house is $2.2 million.  If the prices of homes weaken the 3% remains the same and the rent declines.  

There is competition of rent to owning a home.  Rent can't go beyond the cost of home ownership. There is always a premium a buyer is willing to pay once they were a renter.  The corporate property owner is generally an apartment building.  Turnover occurs and rents rise on a regular basis.  The single family home is generally a "mom & pop" situation.  They will normally collect rent and repair the structure and most cases take care of the water and landscaping expenses.  They don't raise rents annually, but they are difficult to come immediately to make repairs.  When there is a property manager, he too will be difficult to get to work on the property if it becomes apparent there is a substantial amount of deferred maintenance.  The property manager usually get a 6% annual fee for their work.  Once the calls become more often then spend more time and make less.  At some point the property manager would rather ignore the requests and get the renter to move.  Property Manager and Owner win with a higher rent and a higher % fee to the Property Manager.  

Rents are not that easy to monitor.  This is an off the grid type of market.  Signs in the window, postings on Craig's List and Zillow or Zumper or another such service and no fees to a realtor.   Once it rents there is no notice of the rent agreed upon.  It becomes a word of mouth situation of a private under ground of real estate agents.  Today, prices are coming down.  Competition out of the area pulls rental prices down as does the value of the home.

This is all a part of killing Inflation.  The FED is committed to killing inflation so rents and home prices must go down.  This is opportunity.  The home buyer is the greatest benefactor than the renter.  Home prices will once again increase once the FED has killed inflation.  Home values will see value from accretion of equity from mortgage payments of principal and interest added to the increase in property value over the next 10-20 years.  Renters will still fight with landlords and land lords will want to get the most for as little cost to them.  Interest rates on mortgages today will be cheaper than in the future.  Whether the price of the home goes down further is of little consequences when the cost of the mortgage remains fixed and at a lower rates than the future market rate as the FED raises rates or shrinks money Supply by either selling FED inventory of bonds or letting them mature without re-investment the proceeds.