The Problems are the Path: Affordability

 The National Association of Realtors, NAR, creates and Affordability Index on a regular basis.  It really defines how the FED uses certain tools to determine inflation. It also gives insight on how various real estate markets will perform.  I see the CPI as being 30% home prices and rents.

The index is simple, the higher the number the greater the affordability.  The lower the number  the more unaffordable the area.  

Last letter I took a swipe at our state legislature and those who support multiple housing units in all the state towns.  I spent too many years in local politics not to realize that politicians want to get elected.  It is not logic of the laws they pass.  They capitalize on voter ignorance more than voter intelligence.  If the voter based elections on their representatives intelligent work there would be a 99% turnover in all political posts!  In my opinion and experience.

Woodside, as an example, is to put in multiple housing they would need a very large septic system.  The present sewer systems is limited in Woodside by capacity of the sewer project servicing Woodside.  Woodside septic systems are plagued with high water tables which flood septic drain fields.  Woodside has  impermeable soils, that makes the drain field unable to filter out the septic water.  Next is the cost of construction.  An acre of land in Woodside per San Mateo County Health will only tolerate a 3 bedroom 3 bath home's septic system.  5 acres may take five three bedroom/bath homes of 2000 square feet.  Woodside also has a limit on the size of a house to about 6000 SF; therefore, only three houses.  Cost of construction is about $500/ sf for a Home Depot house.  The cost of the land $5 million, if you can find a level one without slope to handle a large septic system, and if the town laws allow the building of more than total 6000 sf of covered area.  The rough total cost is $10.25 million, or $2.05 million per unit.  Is that affordability?

Now we get to Affordability, a score of 100 equals income to needed to qualify.  The Least affordable homes in our area are 1. San Jose, Sunnyvale, Santa Clara with a rating of 38.5 with a medium income of $159K and Income of $414K to qualify for a home.  2. San Francisco, Oakland, Hayward with a rating of 44.3 and median income of $141K and qualifying income of $319K.  

It comes to affordability not on supply to create affordable homes!

Now when it comes to affordability, let's look at those areas that Californians have migrated to.  A score of 100 equals income to needed to qualify: Boise ID @ 114.3, Boulder CO @ 101.3, Charlotte NC @ 153.1, Dallas @ 167.4, Austin @ 137, Houston the new home of HP @ 169.9, Memphis @ 175, Phoenix @ 139, Portland @ 117, Tucson @ 142 all show why Californians have moved out.  In fact; over the past 2 years 700,000 have moved out of California.  

Next to consider is "market vulnerability".  Sorry to the doomsday folks, there is no recession that will collapse our local economy.  Buyers and sellers are in a stand off. Buyers have cash and can pay all cash.  Sellers can hold until economics make them adjust their home price.  That leaves unfordable housing to exodus to areas in California that is affordable or a move out of the State.  Many of my low income buyers are looking at new housing projects of east bay and central valley

The recent 7 days is a clear example of that to me.  Each week this year there have been increasingly less new listings. Sales are eating up inventory.  This will happen until demand out distances supply and price will move up not down with interest rates increasing.  Again this past week I have seen homes that have hung on the market 20-30 days plus and BOOM 15 offers!  Boom; multiple over bids after a price cut or several price cuts. Fidelity Title weekly reports keep all our area in a sellers market based upon homes for sale, inventory and days on the market.

One last comment on interest rates and inflation. I have stated in past newsletters that the FED is looking at Asset inflation more that real inflation.  While many of the media reports focus on prices of eggs, gas, and consumer items, the real issue is asset value.  They are like politician's selling their services not reality.  Nothing to me means more than AFFORDABILTY in housing.  

My additional comment is on the Stock Market. Interest rates increases are a death knell for growth stocks!  Growth stocks pay no dividends.  Go back to the Schwab money market account.  Do you want the volatility on FAANG or a steady 4% return that could go higher?  The FED will continue to raise interest rates in the near future, in my opinion.  I don't think higher mortgage rates will affect buyers, except the potential affordable stressed buyers will move out of state to affordable areas.

There are opportunities here in our area.  Investors continue to look for a home to fix and flip.  Buyers do not want to fix a home and will pay for an up to date interior with new paint and landscaping.  The difference between "what was and what is",  is a handsome profit for the investor.  

As long as those factors remain the same we have a healthy real estate market!

Need Help?  Let's talk!

The Problems are the Path: Clearing the Road Part II

Interest rates rise.  No end in site, YET!  CPI rises, the best Valentines gift for your Lady Faire is a Dozen Eggs.  Price cuts are beginning to tumble out in the Ultra High End and Luxury Markets.   Spec Builders in the Luxury Markets are trying to sell projects on a "To be completed basis".  Once in demand "medium priced homes" are beginning to see price cuts.  The Medium Price of an Oahu Home has now broke below $1 million to $986,000, inventory doubles.  Locally, the real estate forecasts bounce like a drop of water on a hot skillet.  The latest forecast is a rise for 2023 of 1.5%, from a slight decline.  We will not know what the future will bring until 30 days from now. Then, the inventory of homes once taken off the market at the end of 2022 may come piling back on the market.  Real Estate Markets across the Nation are all seeing price cuts.  The once "hot markets" that the "Work From Home" group flooded to are weak.  Slowly there appears to be a dribble back to San Francisco and the Bay Area as the mobile work place returns to the office.  The Commercial Market is in the worst condition I can remember since the Great Recession of the 70's.  Google and Meta are reconsidering their Real Estate Projects in the Bay Area.  Affordable housing is a joke as the homes built cannot be afforded by the income of those on the street.  Progressives seem to think by making Atherton and The Curry Family build an apartment building will solve the inability to pay for housing.  Something wrong with the Economics I was taught here!  That is all we need here is for Atherton, Hillsborough, Portola Valley and Woodside to have "The Projects" to end the Camelot of Silicon Valley.  Good Job to all the Progressive Politicians in Sacramento!  Where Khrushchev failed, you Won!

Keep the faith, you will not have a bell ringing when the bottom occurs.  So buy what you can afford and wish to live in for the next 20 years.  Sellers get off the idea "it always comes back".  Tell that to the fellow who bought Nvidia at $330 per share!

Bond Traders and Junk Bond Investors say...NO RECESSION, as highly indebted companies, the first to go into bankruptcy during a recession, have seen loan prices rally and defaults remain low.

BTW: Happy Valentines!

No greater gift than wife, daughters and granddaughters wishing Happy Valentines!

The Problems are the Path: Clearing in the Road

The problems we have seen in the real estate market started with the aggressive push in values due to cheap money by the FED and the expansion Money Supply of over $9 Trillion to the FED's Balance Sheet.  Today the FED's Balance Sheet is $8.58 Trillion.  FED rates have went from below 1% to 5.25-5.75.  That relates to Morgage rates of less than 3% to a high of 7.3% in 9 months!  Or; $2,500 per month Interest Only mortgage on $1 million to $6,083 per month.  A rather large jump in a period from roughly March 2022 to November 2022.  

In my past commentaries of early 2022, I had forecasted a decline in the average price of homes in the Bay Area which occurred. What did also occur was a decline across the US in home values.  The largest declines where in areas where the "work from home gang" went to live.  San Francisco saw the biggest drop in home values in the Bay area and Rents.  

I was amazed on how well the Santa Clara valley, aka  Silicon Valley, held up and more surprised in the areas that stood firm against price declines.

The supply demand curve from ECON 101 would have indicated that a rise in interest rates would correlate to demand to decrease homes; along with,  price decrease.  Not so in all cities in the Santa Clara Valley.  Of course the outer areas of California that benefited from migration out of SF and surrounding Bay Area Cities, and areas out of the State of California had some substantial declines as the desire to move was negated by costs and job security.

It was my belief, if you are constant reader, is to remember the FED was not really after inflation per se, but after Asset Inflation.  Asset Inflation in terms of Stocks, Bonds, Commodities and Esoteric Investments outside the realm of the Securities Exchange Commission or the Federal Reserve oversight.  The result of the rise in rates was to correct the Risk Free Rate of Return when investors consider investing.  When investors then look at investing they look at what if I did noting.  What would i get in T-Bills and Bonds? Today using the Bond Curve, the yield on 1 month Bills are 4.56%, 3 month are 4.66%, 6 month are 4.88%, 1 year are 4.86, 2 year are 4.45%, 10 year 3.63% and 30 year are 3.67.  What is that yield curve telling you about the bond market's forecast on inflation and interest rates?  To me it is saying that the FED will raise rates  for most of this year.  Thereafter the FED will let the rates alone. within 2 years rates will be lower and 10 years plus no inflation and possibly rate cuts.

Blood letting in high tech growth names have been shattering.  From any of the FAANG stocks to other Techies, they all went to declines have been in high double digits. We started out the year with Media forecasts of lower home prices of 10% or more and negative forecasts on Tech names.  What happened?  The tech stock rallied.  Home prices did not decline measurably in Santa Clara Valley.  The Bond market is forecasting what is reasonable for rates which should be a good indication of mortgages.  Tech stocks were, in my opinion, Short Cover Rallies. That rally maybe short lived as President Biden plans to attack Silicon Valley that has a universal support of a divided Congress.  This is music to the ears of Investment Bankers as they envision Mergers, Take Overs, Spin Offs and restructuring.  The Asset Managers that will be in vogue will be Risk Arbitrage.  For better information on that subject look up Risk Arbitrage on Google and seek out Ivan Boesky's, Risk Arbitrage, a book I contributed to.  Ivan was very clever.  Inside information made him the darling of Wall Street and time in a Federal Prison.

In home prices:

• Rates down: since November, 30-year-mortgage rates fell from 7.3% to 5.99%, lowering the typical U.S.  mortgage payment by $260 per month.
• Sales are up: from November to December, pending home sales increased 2.5%, the first month-over-month increase since May.
• Competition is stronger: in January, 37% of newly listed homes had accepted an offer within two weeks of their debut, faster than at any point since last July.

Supply/Demand has given me a reason for the stability of prices in our area.  78%, per US Census, home ownership in the U.S. is in Baby Boomers.  Baby Boomers are not selling!  They will not pay higher property taxes to downsize or move.  They will not pay high Capital Gains Taxes on sales.  They will wait until they die, or at least one of the spouses die.  At that point there will be a step up in valuations to current market appraisals.  Sales will then create "0" Capital Gains taxes.  What is left is property taxes.  At death proceeds go to heirs and no property taxes.  The end result is home buyers will still be faced with low inventory.  Inventory will increase only subject to Baby Boomer death rates.  Compared to their parents Baby Boomers are in better health.  They have better health care.  They diet and are aware of what they eat and the conditions that are detrimental to their health.

There is one measurement of real estate health that is difficult to follow.   It is the Fix & Flip market.  This is a very difficult market to trace and measure.  F&F buyers directly solicit the Baby Boomer+ market with no commissions, no disclosures, immediate cash payment, no repairs, and move in a time schedule that fits both our calendars and no Real Estae Brokers or Agents.  With that the homes that come on the market on the MLS are once they are repaired and updated.  There is no prior sale in MLS records.  The only method to find out the history is to search County Title Records to discover sales and change of ownership.  This is the most interesting part.  The sale are well below list.  The repairs are noted in the improvements for tax basis and the ownership is not in individual name but LLC or Cooperate entities.  Sales are Cash and there are no mortgages.  As long as this market remains strong Bay Area Real Estate will remain strong.

Buyers will find there is less competition, there will be less over bids, seller's are more realistic in sales prices than the "Pie in the Sky" attitude that dominated in the prior years.  Sellers still have a slight advance  from the sales of homes in and around list price as inventory will remain low!

The Path has more Problems

Welcome 2023 with an out pouring of new listings.  As we ended 2022 the number of active listings began to lessen by the month, week and day; until we had the old stand firm group who just wanted out.  As I look at the Hot sheet I have established with MLS Listings I see all the new listings for the past 7 days; along with, sold, pending, contingent, list price decreased, canceled, expired and withdrawn.  The new listing's out distance the sold's so far.  Price cuts are starting to emerge.

Market Watch

New Listing (51)
List Price Increased (1)
List Price Decreased (6)
Transaction Fell Through (1)
Listing Back On Market (0)
Contingent (5)
Pending (14)
Changed to Sold (13)
Changed to Rented (0)
Listing Expired (0)
Listing Canceled (0)

This action is unusual for the beginning of the year.  It is not abnormal for listing's to expire and cancel or withdraw at the end of a year.  They normally stay off until after Valentines Day and then flood the market.  How best to understand the increase is to think about the economics in our situation.

The Media Commentary is now on higher interest rates a Recession and unemployment.  What is unique about this time around is that the inventory is still low and buyers are still active.  This is irrespective on economics.  We have seen a 10% drop in housing prices in the past 12 months.  More of that decline came in March after the FED increased rates by 3/4%.  Commercial properties have been the hardest hit as Virtual work places are more common.  San Francisco is a Ghost Town as compared to the past.  Financial firms which dominated San Francisco were replaced by Technology firms.  Technology firms went Virtual during the Pandemic never to return back to the office.

What is unique about our Silicon Valley Residential Real Estate Market is we are still in a Seller's Market.  Irrespective of the price cuts and sale less than list, buyers are picking up new properties.  Over priced homes languish on the market as they should.  Under priced home are bid up.  Speculators, Fix and Flippers are still active and now looking at listing's to find their next target to update and sell for profits.

In the past Commentaries I stated that the FED was after the Inflation in assets and not necessarily food and goods prices.  When I look at the tech stock prices seeing 60% or more declines all seem to be the norm.  Expansive hiring and real estate purchases or leases have stopped.  Now comes the point that layoffs of the expansive strategies; along with, reducing footprints in real estate to match layoff and virtual employees.

As my Mother once said, "The Road of Life is full of potholes and unexpected delays", so we are here.  We will not know if this is a delay or pothole until it passes.  

What we are in is an Era of Opportunistic Strategies.  Opportunity will come only when we look and have the right agent to direct the search or sell real estate.  Opportunistic Strategies will be in the Depressed Properties Category.  Foreclosures will not be as common as they have been in the past.  Today we will see Estate/Trust Sales, Relocation and Divorce.  The former two will dominate, in my opinion and experience.  

According to the U.S Census report at year end, the State of California had a net movement out of the State of some 340,000 or so.  When one considers the in coming new Californians were dominated by those crossing the border, income and tax revenue must be looked at carefully.  Corporations have moved out, individual of upper incomes have moved out.  That in itself will stop any aggressive pricing and multiple offers.  

Mortgage rates have declined while the talk of another increase in rates by the FED has been dominant. That tells me that the rate increase will be minimum, 1/4%, and that the top of the rate rise is either here or in sight.  I also look at the 10 Year US Treasury bond at 3.42% and a 30-year Mortgage at 6.09-6.15 and see the spread has narrowed.  At one point the spread was 4.00 interest rates and now it is less than 3.00 interest rates. We call that Basis Points.  one basis point is .01 of a percentage point or .0001%

My call is buy a home and negotiate a price that is reasonable based upon must recent sales 30 days is best.

Sellers must become realistic.  The days of over bids are gone.  The days of putting in aggressive pricing is gone.  The day of pricing below last sale is here!

The Problem are the Path: 2023

It seems to me the problems we experienced in 2022 are enough for us to endure, let alone, for another year.  Statistically stock market declines of the 20% range , as the one we experienced in 2022, are not experienced the following year.  Real Estate is a different asset in which to use that statistical analysis on. 

We live in an area that is a Camelot.  Irrespective of what happens in the world around us, Silicon Valley remains resilient and firm.  The large advances in real estate we experienced from the beginning of the Pandemic, were not unexpected.

What we have to work with is the large amount of speculation that needs to be wrung out of our real estate market.   The concept of Risk Free Rate of Return is the major measurement that will or should be used to determine purchases or investing.  

2020 saw an enormous amount of money created in the money supply.  Some $9 trillion the Federal Reserve Governors created and disbursed into the US Economy that also found into the World Economy.  The result of which had the creation of large amounts of savings to support the Covid shut down.  Money has an unusual affect on people.  When one has more than normal there is a tendency to become frivolous in spending.  The result was assets of all sorts became demand items as saving rate of return plummeted to zero or near zero. 

When the shutdown was relaxed and we could once again could travel and go out to dinner and entertainment.  A shortage  of employees occurred and prices increased as the supply could not keep up with demand.  In addition to product and services, investments went to historically unsustainable multiples.  Investments were created that really, in my opinion, had no substance to them.  The result was when interest rates began to rise in large multiples the optimism and aggressive buying came to a halt.  

Risk Free Rate of Return went from Zero or near Zero to 3-4% or more.  the result was that many Stock investors saw the need to "Take Profits".  Then it became the term of Sell, but to Who, and prices came down to levels that the Risk Free Rate of Return did not match up to the potential profits.  Stocks have a tendency to be very volatile.  The Tech Stocks dropped 60-80% so fast it gave investors and owners of stock a severe case of acid indigestion!  That decline does have an impact on our area where many residents are employed by or are dependent on work from employees of High Tech Companies.  The lack of the feeling of wealth has a serious impact on the psyche. 

Real Estate is a different type of asset.  It does not have the volatility of stocks.  It was great fun to talk at neighborhood parties on how the value of one's house has appreciated, but it didn't really make much difference other than it was chit chat not investment talk!  Those who saw prices decline just took their homes off the market and are waiting to see what the future will bring.

Today the values of Silicon Valley Homes have seen some depreciation in value, 9% in past 9 months statistician's tell me.  Homes still sell.  Some with slight discounts and some with no discounts.  Look at the fidelity reports I have added below and you will see most cites have a slight to strong seller's advantage. 

What one does not see with the reports from Fidelity is the term "Concessions".  This is when a home sells, but the buyer asks for concessions to pay list or near list.  Concession usually have to do with repairs or replacements of items from the Disclosure Packet.  These items would be a deck that is rotted and needs replacement, a Termite/Mold report that has a repair list with cost associated with it, appliance(s), as examples.  Whatever the case, the concession and offer go as: offer to pay list subject to repairs completed at the close of escrow by the seller.  The net result is the agent sells the property at list per the records. The result is the owner gets proceeds less the cost or repairs or replacements.  The owner in this example is the responsible agent in the completion of the work, the permits and hiring of contractors.  The buyer gets the home they want at the terms they want without the pain of permits, contractors and inspections.

Atherton

Los Altos

Menlo Park

Palo Alto

Portola Valley

Redwood City

Woodside

Housing Inventory Snapshot				December 31, 2022
	Average List Price	30 Day Trend	Average Sold Price	30 Day Trend	Average DOM: active/sold	30 Day Trend	Number of Active Listings	30 Day Trend
Santa Clara County, CA
Single Family	$1,678,668	+0.97%	$1,586,979	-1.10%	90 / 28	26 / 3	302	-243
Luxury Single Family	$6,554,444	+7.23%	$4,055,346	+1.14%	131 / 40	37 / 18	94	-72
Condo/Townhome	$803,021	-3.64%	$816,322	-2.41%	81 / 32	18 / -4	145	-98
Luxury Condo/Townhome	$1,759,559	+0.38%	$1,642,662	+7.66%	89 / 30	28 / 8	48	-31
San Mateo County, CA
Single Family	$2,050,448	+1.51%	$1,840,367	-1.96%	87 / 32	27 / 10	164	-155
Luxury Single Family	$10,310,065	+8.98%	$6,851,000	-13.15%	165 / 69	49 / 40	52	-51
Condo/Townhome	$793,998	-3.61%	$872,463	+4.61%	131 / 48	37 / 6	78	-44
Luxury Condo/Townhome	$1,762,331	-0.13%	$1,719,167	-1.18%	80 / 20	11 / -37	21	-16
Santa Cruz County, CA
Single Family	$1,199,309	-3.98%	$1,168,563	-2.68%	98 / 34	19 / -1	119	-38
Luxury Single Family	$3,768,737	-0.38%	$3,119,211	+12.88%	121 / 36	17 / 22	38	-12
Condo/Townhome	$700,000	+0.58%	$751,237	-9.34%	131 / 34	8 / 19	17	-4
Monterey County, CA
Single Family	$999,545	+1.98%	$843,473	-5.92%	86 / 39	12 / -5	193	-52
Luxury Single Family	$7,413,998	+4.21%	$4,730,301	-46.50%	138 / 51	9 / -54	64	-11
Condo/Townhome	$657,576	-5.06%	$514,636	-17.08%	64 / 30	13 / -3	25	-3
Contra Costa County, CA
Single Family	$799,955	+2.61%	$775,895	-1.64%	72 / 44	14 / 10	422	-300
Luxury Single Family	$2,800,588	+5.28%	$2,111,663	+6.62%	96 / 39	26 / 15	139	-97
Condo/Townhome	$494,120	-6.72%	$487,030	-0.79%	66 / 46	13 / 14	113	-76
Luxury Condo/Townhome	$1,150,104	-9.21%	$1,105,796	-15.38%	68 / 25	25 / 3	35	-24
Alameda County, CA
Single Family	$884,104	-7.97%	$966,237	-6.43%	71 / 34	14 / 4	309	-279
Luxury Single Family	$2,879,763	+3.19%	$1,953,257	-6.98%	90 / 29	23 / 2	108	-87
Condo/Townhome	$623,451	-1.84%	$586,579	-6.10%	70 / 50	8 / 12	140	-122
Luxury Condo/Townhome	$1,232,383	+2.33%	$1,179,144	+8.91%	94 / 40	35 / 18	43	-40

As the forecasts appear to indicate a continue weakness in home prices, it has been a very selective market as the Fidelity Reports will show.  I expect real estate prices will be as selective by area too!.   

Fix and Flippers still are active, they are also under pressure as the homes they are flipping are starter homes subject to loan approval.  The forecasts are for the FED Fund Rate to go to 5% plus.  If so, mortgage will go beyond 7%.

What affect will that have on home prices?  I expect very little in the areas I have selected in the Fidelity Reports.  Cash is King and negotiation will be open, with sellers more interested in moving and willing to negotiate with buyers.

HAPPY NEW!

Harry Potter Christmas Eve: The best Christmas themed Harry Potter music...

Year End Greetings

 When Saul of Tarsus set out on his journey to Damascus the whole known world lay in bondage.  There was one state, and it was Rome.  There was one master for it all, and he was Tiberius Caesar.

Everywhere there was civil order, for the arm of the Roman law was long.  Everywhere there was stability, in government and in society, for the centurions saw that it was so.

But everywhere there was something else, too.  There was oppression for those who were not friends of Tiberius Caesar.  There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or fill the hungry treasury from which divine Caesar gave largess to the people.  There was the impressor to find recruits for the circuses.  There were executioners to quiet those whom the Emperor proscribed.  What was a man for but to serve Caesar?

There was persecution of men who dared think differently, who heard strange voices or read strange manuscripts.  There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage.  And most of all, there was everywhere a contempt for human life.  What, to the strong, was one more man more or less in a crowded world? 

Then, of a sudden, there was a light in the world, and a man from Galilee saying,  Render unto Caesar the things which are Caesar's and unto God the things that are God's.

And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God.  Inasmuch as ye have done it onto one of the least of my brethren, ye have done it unto me.  And he sent this gospel to the Kingdom of Man into the uttermost ends of the earth.

So the light came into the world and the men who lived in darkness were afraid, and they tried to lower the curtain so that man would still believe salvation lay with the leaders.

But it came to pass for a while in divers places that the truth did set man free, although the men in darkness were offended and they tried to put out the light.  The voice said, Haste ye.  Walk while you have the light, less darkness come upon you, for he that walketh in darkness knoweth not whither he goeth.

Along the road to Damascus the light shone brightly.  But afterward Paul of Tarsus too, was sore afraid.  He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.

Then might in come to pass that darkness would settle again over the lands and there would be burning of books and men would think only of what they should eat and what they should wear, and would give heed only to new Caesars and to false prophets.  Then might it come to pass that men would not look upward to see winter's star in the East, and once more, there would be no light at all in, the darkness.

And so Paul , the apostle of the Son of Man, spoke unto his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:

Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage.

Page 1-16 Friday December 24, 2021 Wall Street Journal Opinion , Review & Outlook, editorial written in 1949 by the late Vermont Royster and has been published annually  since.

MERRY CHRISTMAS FROM THE MCKAE PROPERTIES TEAM