American Cash Hoard Could Cushion a Downturn

There is something missing from the "Media" that must be addressed in forecasting Home Prices.  What you and I have either read or seen has dealt with Recession, Bear Market in Stocks and forecasts on the housing market.  All forecasts are based upon history.  History going back before anything a dramatic as what we have experienced in past 2 years.

Certainly as Lord Toynbee wrote "History Repeats Itself" there is truth.  History is not alway repetitive in circumstance that eventually lead to a conclusion.  Let us take the Federal Reserve System and the Board of Govenors action to lower interest rates and take on a strategy of using Quantitative Easing.  A never in history event would not result in "History Repeating Itself". In fact it is more of creating a new history.  The back page of the Friday, June24, 2922, Edition of the Wall Street Journal Business & Finance Section points out Americans usually lack something heading "A LOT OF CASH".

Consider that the FED unleashed $9 Trillion into the the US economy to stop an economic collapse from the Pandemic, and then to create inflation.  The trouble with considering this large amount of money.  (More money and assets on the FED Balance Sheet were created Historically!) It fed the pockets of everyone from Wall Street to the average American.  

At the end of the first quarter 2022, U.S. Households held $17.9 trillion in cash and cash equivalents.  This was up from $13.7 trillion they held at the end of the first quarter 2020.

Now comes the most interesting statistic.  People in the top 10% held 32% more in cash and cash equivalents, BUT people in the bottom half HELD 45% MORE! It rose for whites, black, hispanics.  It rose for college graduates and high school graduates.  It rose for Millennials, Gen-Xers and Boomers!  In addition; the equity in home values increased at multiple factors, portfolios increased.  The economic wealth of U.S. Households are or have never been better going into a fear of a Recession.

Jobs are still in demand.  Virtual jobs out distant demand in work in location jobs.  The ability of households to find lower cost of living communities allow workers to work were affordable.  Those areas tend to be smaller, safer and have as good as or better schools.

The cost of living by inflationary costs do affect the portion of take home pay that is not spent...SAVINGS.  that portion fell to 4.4% in April.  In pre-pandemic era it was 7.6%.  Even with inflation it will take until the end of 2023 per Barclays Economists to drain off excess cash.  Even so, there is an offset of higher interest rates increases to balances.  

This does not mean consumers will spend willy-nilly.  They have learned just as the Baby Boomers Parent learned from the Depression Era Parents.....They Saved!  

Consumer appetites, in my opinion, have most likely been sated.  All the durable goods have been bought.  Cars will last to at least 200,000 miles.

The type of Belt Tightening that has happened in past Recessions may never happen! That will blunt any Recession or any depth to the economic downturn.  

Then we have "Guns or Butter" in economic spending.  Thank you President Putin.  Guns built and expended need to be replaced.  Oil is needed, drilling must increase.  Nuclear plants need to be built that are far better than any ever produced.  Think this, there is only one producer here in the U.S: GE and Westinghouse, a privately owned company.  Plants are now smaller and more efficient, thanks to Bill Gates Foundation.  Companies are moving back to the U.S.  Finally, as noted prior; Butter are Consumer Durables and they have been purchased

The positive outweigh the negatives.  Housing Prices could see some hesitancy to follow higher.  Buyers could find areas outside the Bay Area that fit their budgets and life style.  Companies could build in less expensive areas and draw employees away from the Bay Area.

Through natural selection home prices for the Bay Area could see reality and more listings will compete for sales, price cuts will become a standard, agents will offer incentives.  Homes not sold will come on the Rental Market and rents will decline.  All sound good for buyers and renters.

Just looking at the MLS Listing Summary for the past 7 days there has been increases in homes listed, prices cut.  Compare the current Summary to last weeks Summary and make your own opinion..,

Market Watch

New Listing (87)
List Price Increased (2)
List Price Decreased (22)
Transaction Fell Through (3)
Listing Back On Market (0)
Contingent (5)
Pending (25)
Changed to Sold (41)
Changed to Rented (0)
Listing Expired (2)
Listing Canceled (15)

Asset price Re-evaluation

 The stock market is definitely in a Bear Market, as defined by a 20% correction from past highs.  Lower lows and lower highs all create for a trend downward.  Interest rates had a big day in the terms of Mortgage Rates this past week.  At one point I saw a 6.4% 30 year mortgage offered.  30-year conventional per the local Mercury News were quoted at 5.9%; which is unique to the 30-year jumbo at 5.44%.  Whatever the rate, they are up substantially from the past week and the month prior and going back to one year ago.  The days of The FED is Your Friend are done.  Easy money and frivolous spending is out.   There are 75 new listings in the past 7 days, up from 63 a week ago.  23 price cuts and fewer sales and closes as the days and weeks prod by.  Agents are sending out emails offering higher commissions to agents representing buyers....as if we are pimps who work for the highest bidder.  Agents who prided themselves on numerous listings now are offering wine and cheese parties to promote their listings.  

The premiums of list to sales are also declining as with the days on the market increasing.  This is usual for the summer.  Cancelled, expired and withdrawn listings continue to expand.  This is normal for the June forward period.  There is one area in which sales to list and days on the market continue to maintain strong interest....East Palo Alto.  

Luxury Realtors are now seeking other areas in which the markets remain strong, Redwood City has many agents that once would never take a "Deadwood City" listing are popping up.  Woodside, Los Altos, Palo Alto and Menlo Park seem to find the market more favorable to them in /redwood City.  All a sign of a softening market.

In the Broker Price Opinion work, there continues to be work by "Fix and Flippers" in the East Menlo Park and East Palo Alto area.  Once forgotten rentals that only the destitute would rent are now being stripped remodeled and marketed quickly for reasonable prices.  Alas, Home Depot enhancements, but; never the less, a major improvement form the rat infested former home, where abandoned cars sat in the front yard and weeds grew with abandon.  The neighbors of these new remodels are now seeing pride in ownership and update and work on their landscaping.  A new wave of home ownership is happening.  While cheap interest rates created riskless abandon.  It did help create a new wave of home ownership.

Broker Price Opinion is now spreading from the "Fix and Flip Market" to the luxury high end market as long time owners are now thinking about downsizing.  From Atherton, to Menlo Park Allied Arts, to Los Altos Hills; owners are interested in what their home is worth.  All of this should be good for the inventory market.  Too long home owners and buyers looked at their home as a FAANG stock.  Yes, it is the largest part of an estate, but it is not easily liquidated as shares in common stocks.  

Now what about the stock market?  Did you know that if Exxon Mobil had remain in the Dow Jones Industrial Average and was not replace by Sales Force. The difference would be Exxon up 75% and Sales Force down 75%.  Now look at the other companies that were removed in the hey day of growth and  high technology.   Wall Street has a way with playing with your pocket book.  

My son-in-law says they always come back.  Well youngster you weren't here in the 70's and many never came back!  

Now is this the 70's of Stagflation and recession.  While I read the "experts" tell me that the high interest rates will cause a recession, I still do not see anything else than an asset value re-evaluation.  The change in the use of interest rates, the negative interest rate and the creating of money supply by the FED buying Bonds in the after market has created a large reserve of cash in the populace's savings.  Most average citizens are not big investors.  Yes, they have a 401-K plan and a retirement plan at work; but by-in-large they only play the market.  Once burnt they stay out for a long time.  So, we will see if the Crypto craze vanishes as quickly as it started; along with MEME stocks.

My energy portfolio has done exceptionally well.  The merger acquisition part continues to add profits.  Mergers will continue to be the place to go as equity prices decline.  A company is worth more to an acquirer than that in the public market so just keep your eyes on mergers.  The new place is Biotech.  Forget about the ETFs, Tokens, Index plays and anything else created by a kid from Wharton in the back room of an Investment Bank.

In closing for all of you who have expressed your appreciation in this Newsletter or Blog, send me your referral to ad to the list.  A Referral is your greatest complement.

New Listing (75)
List Price Increased (2)
List Price Decreased (23)
Transaction Fell Through (0)
Listing Back On Market (0)
Contingent (6)
Pending (41)
Changed to Sold (49)
Changed to Rented (0)
Listing Expired (0)
Listing Canceled (10)

Bear Market Rally in stocks, Real Estate Market Softens

 Real Estate is an Asset Class that represents store of value.  Unlike stocks, bonds, coins, commodities and crypto, real estate offers offers livability.  

I have always had issue with the concept of interest rates being used to control the economy and inflation.  It is really nothing more than an adjustment of supply to match demand.  Common sense and affordability will control the rest.  The increase in rates with more to follow will affect real estate prices just as it has stock and bond prices.

One in 5 listings in the US has had a price cut.  We have not seen that so far in our area. As I watch the Daily MLS Listings summary for our area, I do see agents offering buyer agents more in commission to motivate their buyers, I do see more yard sales, I do see more open houses.  Sooner or later the trend in the US will follow through to our area.

Californication or the movement of Californians flush with cash to parts east to buy has finally slowed down, says Redfin.  Further Redfin states that the FHA buyers are now finding that they are not outbid by All Cash Buyers.  Unfortunately, HFA loans are not dominant in our area.

Further proving the softness is that New Home Sales, nationwide, declined in April 16.6% from March.  Meanwhile the inventory of unsold homes in the US jumped 8% in April to 444,000 a 13-year high.  Now this is not 2008 and home prices are not falling.  The average price of a home in the US ticked up to $450,600, up 45% from 2-years ago.  That number should tell you why Californication is going on when the median price in our area is over $1 million.

BOTTOM LINE:  While the frenzy is over, there is still Pent-up Demand from those who have been searching for the past 2-years.  It looks like we will see a sellers market will remain in our area.  For the frustrated the only recourse is "Go East Young Buyer, Go East"

Stock Market comment:  For those of you who have asked my opinion on various stocks that have "hit the tank" as we use to say when I was a trader and stock broker, we are in a Bear Market Rally..  The FAANG stocks have declined over 20% and some more than 50% to 70%.  This is a transition phase when those FAANG and related growth stock were the dominant investment in a low interest rate market when the FED was the investors friend.  That era has gone.  

Short sellers, or traders who believe their target stock has been over priced, sell to buy back lower at lower prices and borrow stock to deliver to the offset buyer.  Interesting part of this pairing it is really a triad.  The stock that is borrowed is lent from a mutual fund, investment advisor or similar related firm.  When prices decline to a point of being over sold, the short seller buys to cover the short sale. This starts the rally in a Bear Market.  Individual investors or traders sensing a bottom jump on the band wagon and prices escalate quickly.  Then all stop and the funds and investors who missed the initial sell begin to sell positions.  Down it goes.

NO, it will not always go up as it has for the past years.  This is a different phase of a market.  The FED is not a friend. 

Sell your growth stocks and look for high end real estate.  The Luxury Market is strong and there is seldom a Bear Market there!

Wall Street Slumps Real Estate Cools Off

 The rise in interest rates are beginning to show the economy is slowing down.  Stocks are the most liquid of assets. Stocks and bonds are more immediate in price changes. Real Estate is slower in reaction.  Real Estate must be watched to gather trends.

I personally look at the MLS Daily Summary.  It lists all the new listings, pending sales, sales, with drawn, cancelled, expired, sold, and most important back on the market.

The MLS Listing indicates a sellers market as home prices stay relatively firm. Sales occur at over list in most of our markets.  Price cuts are beginning to mount.  We are still in the active season in the Real Estate market.  Once we get into June and the sales of April and May close escrow, we will see if a slow down in price or listings occur.  It is my observation that the listings are very strong now, I doubt they will slow down.  Why, too much money has been placed in remodeling and updating by contractor, speculators and home owners to want or can pull homes off the market.

The Thursday, May 19, 2022, Wall Street journal front page right column had The Stock Market Slump first and the Cool off in home prices next. 

Sooner or later the media will come about to see the impact of how higher interest rates will create asset weakness.

The worrisome part of this slow down is in the Subprime Borrowers.  They are the first line of first home buyers that are seeing their loan commitment drop and their credit card balances increase due to higher interest rates.

Two more interest rate increase are for certain.  It is certain that all forms of debt will see interest rates increase.  Along with the debt increase the interest paid on intermediate to short term US Government Bonds will increase.  It will be hard to not accept a 5-year US Treasury Bond at 5% or 5.5% versus a buy the bounce in a FAANG stock or Nvida, which so many clients and real estate agents ask my opinion of.

How does a buyer or seller operate in this market?

For the buyer, place offers in 10% under the list, make the offer contingent on financing and appraisal. If the appraisal comes in below list tell your agent to see of the seller will take a modification of purchase price to the appraisal.  Get ready for rejections.  Sooner or later you will get an acceptance.  In this manner your interest rate rise are partially being borne by the seller in a lower sales price.

If it is a MUST BUY, try talking to Homeward or DIVVY to buy the home for cash and allow you buy it back with your financing.  i never used them, but found them in an article on Startups.

For the seller; get your agent to get a CMA, comparative market analysis, no more than 3 months and the shortest being the most acceptable.  Place the list 10% under the CMA. Do not look to sell at the high price.  The seller wins in higher yield on money market accounts to store their proceeds in, and lower prices for the move to a new home.

Remember this, buyers and sellers get hurt in a rising interest rate market.  Waiting hurts both!  A recession in a inflationary market is called STAGFLATION.  It happened in the 70's.  It is financially and emotionally painful!  

Bear markets in stock will historically last 2 years.  That would make the end after or at the next presidential election or the congressional election in November 2022.  Inflation is the worst to survive, 27 months on average.

Follow this graph to chart the home market.

Gary McKae

The End of Free Money

Wake up call has been blown to all quarters.  Interest rates are rising and the era of Free Money has ended.  The days of the stock market strategy of "Buy the Dips" and "it always will come back" are DEAD! The FAANG stocks are all in Bear Markets and every, or at least every, 2022 IPO is under water.  Sooner or later it returns to the 1970"s inflation and rising interest rates.

The FED has made the big change of ending the "FED PUT" to being the furnace that burns investors in aggressive growth strategies.

Where does that leave real estate?  A falling stock market and disenchantment with investing during the 70's led those left with cash using real estate as an investment alternative.  The money from the stock portfolio goes into a newer or bigger home, remodeling the existing home, or buying investment properties.  

The future does not change much from the past.  Don't expect it to.  As Yogi Berra once said "it's deja vu all over again".

Investors turn to real estate, but what happens to all those buyers?  Now we go to Econ 101, the Supply Demand Curve....remember that one?

We are in a present or once past situation in which there were more buyers that sellers.  A majority of buyers had , or have, a "Commitment Letter" from a Bank or Lender.  The past ones were good for 90 days and most of the past ones from the beginning of the year were at 2.75%, or at the onset of 2022 were at 3.13%.  When the FED began raising interest rates the new letters jumped!  2.75% from 2021 expired and jumped to 4.75%, then letters went o 5%, then to 5.25 and now at 5.4%, each jump cut a group of buyers out of the supply demand curve.  The lowest level in the affordability buyers are cut out.  They have either to make up the difference with a larger down payment or look elsewhere in affordable areas.  East to Sacramento, Modesto, or south to Gilroy are the new destinations, or out of the State of California.  The remaining buyers will have, or had,  their commitment letters cut.  The $2 million down to $1.6 million and downward for the rest.  As the buyer level is adjusted the overall market should see price adjustments too.  A recent buyer in Castro Valley bought a 3/2, fully remodeled and landscaped for $1.171 million, listed a $1.2 million and appraised $1.21 million.

The high end of the buyers will not worry of commitment letters, they pay cash.  But with portfolios down 20% or more, there is a tendency to feel a bit poorer.  IPO's will stop, but cash draws for investments in startups will not stop. Cash levels will increase, stock portfolios will be liquidated and the desire to pay up for Atherton. Los Altos, Los Altos Hills will begin to stop.

When the pressure begins from bottom to top the home prices will stop the dramatic increases.  Prices will stop increasing, some listing will see price cuts and some offers will be below list.  

This too will see a return to Bank Foreclosures.  Where will they come from? Where the potential will lie is in the Fix and Flippers in the "Starter Home" market.  It seems that East Palo Alto has been a haven for the Fix and Flip group.  Once these homes have been completed the bank loans become due and payable.  The Flipper's all have a forced sale or find the property in the hands of lenders.  It this a certainty?  No, but a possibility once the new loan commitments cut deeply into the qualifications of buyers.

Inflation does not stop without pressure from interest rate increases or supply increases to dampen prices.  At 8.5% annual inflation it appears we will have inflation with us for awhile.  Cheap goods from Asia have stopped either by lock downs from Virus or Tariffs.  The replacement require new plant in the US.  There will be little doubt in my mind that prices will move higher for those goods.  Oil is shipped to Europe; along with Natural Gas where the price paid is higher than the US.  Drilling has not increased as the Biden Administration has put policy changes that inhibited drilling and exploration.  So We pay the price.  Go electric is difficult as the Grid System can barely cover present needs without the expansion of electric vehicles.

The Fed may not increase 3/4% at the next move.  The estimate is for 1/2% increase in back to back FED meetings.  That could take mortgage rates on 30-year's to 6.4% from the present 5.4%.  More reason for believing that buyers will be reduced.  With the reduction of buyers, listing prices should see some caution in expecting over bids or quick sales.

There is a benefit for those who buy and look for an appraisal.  The appraisals are based upon the past 3 months.  The last three months have sales higher than the purchase price?  If so, good that means the buyer will not worry about paying more in a down payment.  

I still recommend buyers do not hesitate when they find a home they like.  Buy it!  Don't worry about any near term market weakness.  There is never a Bell to Ring when a bottom occurs.  As the buyer pays their mortgage the equity value increases with each interest and principal payment.  That is call amortization.  That is why real estate is a long term asset.  When the kids are in college or getting married the mortgage is paid off.  Don't live off of equity, no HELOC loans.  Pay off the mortgage, remodel and keep the home current.  You will be rewarded in the end!

Stock Market Collapses, Interest rise and Mortgage Commitments Fall!

 Real Estate keeps flying off the shelves like at a discount market with bonus points.  You don't need to give away Green Stamps to sell in this real estate market.  California, our area especially, has the most $1 million home sales in America.  Even lowly Dead Wood City (Redwood City) has gone into the top with homes selling at $2000 per square foot.  Does this end or do we still buy.

First of all, you are not buying Meta or any one of the other FAANG stocks.   You are buying a home to live in.

I finished speaking a friend who I have known for over 40 + years and lives and works in Lake Tahoe.  We spoke about housing prices and interest rates.  He remembered when he bought his home in Zephyr Cove and paying 12.5% mortgage rate, and felt he had a deal.  I recalled that we bought some few months before his purchase in Cow Hollow San Francisco and paid 14.5% for our mortgage.  We too felt we had a deal and loved our 1904 Edwardian.  So what's the difference between double digit interest rates and the last increase?

I recalled how a client called and told me he had his commitment letter cut 30%!  The mortgage rate quoted for the commitment went to 4.75% from 2.75%.  NOW WHAT?  Well, you either come up with the difference in down payment to stay at the same home price or cut back and look elsewhere where you can comply to the loan commitment.....BUT..."that's a 30% increase in my down payment!  I'm looking at a 50% down not 20% down."  It is what it is!  Rates are still a bargain.  They will not decline!  The FED has already said that on May 4th there will be a 1/2% increase and two more to follow.  That means that today's mortgage market in the Sunday paper was 5.42% for a 30-year mortgage. That will take it to 6.92%, my approximate guess to a 30-year mortgage.

With inflation at 7-8% annually that still means mortgage rates will be under inflation and a great deal!

So buyers need to look at the economics and whether they wish to live an a specific area, or will another area make do?

My friend of over 40 years has told me how buying on Lake Tahoe and the communities surrounding it are in a construction boom!  He just bought a 6000+SF home with 5+ bedrooms and baths on 2.5 acres for $2.4 million.  A GREAT DEAL, COMPARED TO REDWOOD CITY 1350 SF HOMES AT $2.4 MILLION.  Yeah he said.  "They are your people.  They are coming up to Tahoe and buying and working remotely.  No taxes, bigger homes, cheaper homes and new construction. What a Deal!"  

Now where does that leave us in our real estate market?  Two types of real estate transactions.  For those who have owned for sometime, retired, semi-retired or just ready to move there are numerous options, sell and look for fresher grounds.  To those looking to get that home in Atherton and Woodside the options are just one BUY!

Stock options need to be re-priced, portfolio's are down.  Hopefully there are large cash reserves.  Cash is King in this market.  All Cash buyers will win, always!

Even though the stock market is down, and in my opinion it is never too late to raise cash!  Real Estate will always be the best asset to hold.  It is your Real Estate!

Are there any bad omens out there?  Certainly, interest rates are one.  Fix and Flippers are another.  

No matter how you look at it, there are people who have limited budgets and do not have have options and a large stock portfolio.  They need to find a home with good schools for their children and still be in proximity to health and shopping and work, if necessary.  

In my opinion, communities like Redwood City have been discovered.  Redwood City has fairly good schools, great in some areas and not so great in others.  Private schools in the City and some nearby.  Shopping is near and the health care is excellent from Palo Alto Medical to Stanford, as examples.  The neighborhoods are safe with neighbors who look after one another.  

Fremont, El Dorado Hills, Granite Bay and Sacramento area have all been discovered and continue to grow in population and home prices.

I am still of the opinion that it is a buy in real estate no matter where you look. Interest rates lower than inflation put the benefits to the buyer and the borrower.  Homes have been fixed up by the Fixer Flipper market, which takes the onus off the buyer for updating a new purchase.  That in itself is worth the purchase.

Bad omen to the potential problems.  Fix and Flippers have dominated the first time buyer market.  That market is impacted by the rise in mortgage rates.  That buyer may just ship east across the bay to find a less expensive and a more affordable home.  If that begins to create a trend, which I take is happening now, it will put pressure on the Fix and Flipper as their loan is based upon completion and sale.  That either occurs in a market sale by the investor/contractor or the bank takes on and sells at cost.  That could lead to a softness in our market at least for an interim factor.  Is it occurring?  Well, so far I only know one one situation of an upscale property in the Sacramento area that a colleague was given an REO to sell.  So far, the only indication locally has been my broker training agents in the terms and conditions of listing of bank owned real estate. 

One thing I do know is, you will not see it in the local news until it is almost over.  News needs adds and adds are realtors, banks and builders.  They don't make money out of anything other than advertising!

When I look at the daily new listings, sold, pending I am beginning to see more listings than pending and sold.  There are starts in price cuts too.  Nothing to tell me we are not out of the "sellers market".  So feel safe,  Buyers should buy now as those rates have two more 1/2% increases forthcoming. For sellers, I do not see any worry of severe price cuts. Just don't get greedy and too optimistic over what you THINK your house is worth.  Let the market tell you.

The best place to look in this market for value is the VACANT LAND MARKET!  Motely Fool had a recent article which I will add here....

KEY POINTS

• The right plot of vacant land can hold nearly limitless potential. 
• A large plot of land comes with more options, but a smaller plot can be a great investment, too.
• The current housing market is making land investing even more appealing.

When you think of real estate investing, you probably think primarily of various types of residential or commercial buildings. And it's true that from single-family homes and apartment buildings to retail, office space, and warehouses, most of the real estate investing we discuss here at The Motley Fool involves buildings of one type or another.

But with all its potential and possibilities, vacant land can be a very exciting investment. Let's take a look at a few options when investing in vacant land, as well as some pros, cons, and considerations.

Thinking big

If you can find a reasonably good deal on a large plot of land in the right area, it could be worth buying and holding on to. It's likely to appreciate in value over time as demand grows, and there are several ways you could make money off of it in the meantime.

Possibilities to explore, depending on the characteristics of the parcel and its location, include selling the mineral rights, setting the property up as a hunting lease, or even leasing it out as farmland. You could also think long term by planting a portion of the land in timber while still making an income through one of the aforementioned methods. (Carbon Credits a new income source in Redwoods)

From 2020 to 2021, the value of farmland, cropland, and pastureland in the U.S. increased around 7%. That's a huge increase for a one-year period. 

Current developments in the housing market are also a huge plus for landowners. After a significant dip, homebuilding is back in a big way. New home construction is up 22% over this time last year, making the prospect of starting a housing development well worth looking into if you think you've found the right land for that type of project.

Thinking small

But what if you don't have hundreds of thousands of dollars to invest in a huge parcel of land? In that case, you may want to simply take it one lot at the time -- one residential lot, that is. If you can buy an undeveloped, or "raw," lot in a new or desirable residential area and make some improvements to the land, you may be able to sell it at a considerable profit to someone looking to build their dream home. Think of this as the land version of house flipping.

These improvements could include clearing a site on the land where a home could eventually be built and creating easy access to that area, if needed. This could be an effective way to take advantage of the homebuilding boom without having to make a huge up-front investment, perhaps especially in a growing suburb. And this way, you can take it one piece at a time.

Should you consider vacant land?

If you've been investing in real estate primarily in the form of homes or commercial property, vacant land can feel like an entirely different ball game. But the most important difference is that you'll need to ensure any land you're interested in will be suitable for your intended purpose (or purposes) before pulling the trigger. This could include making sure most of the land is high and dry and that it isn't subject to any zoning restrictions that could get in the way of your plans.

The vast potential of vacant land is a big part of its appeal. So is its simplicity, in that you don't have to do anything but hold it and wait for it to appreciate, if that's your preference. But the No. 1 reason vacant land is often a safe investment is a bit of a cliché, and for good reason: They simply aren't making it anymore.

GARY MCKAE VACANT LAND LISTINGS:

18.1 ACRES MIDDLETON TRACT LA HONDA APPROX 70% OLD GROWTH REDWOODS, $1.4 MILLION

3.1 ACRES MIDDLETON TRACT $449,000

3 ACRES MIDDLETON TRACT $349,000

Gary McKae

Recession, Inverted Yield Curve and real estate continues to be strong

 There have been 17 Inflation Periods since the 1970's when interest rates were increased by the FED. to combat inflation  All but THREE led to a Recession.  From a statistical and probabilities standpoint the bet is on RECESSION!

That is a tough pill to swallow as we are just getting out of the Pandemic era, still facing continued reinfection by various variants of Covid.

The FED is ramping up rate increases and the reduction of their $9 T bond portfolio.  The first to go in the bond portfolio is the MBS, mortgage backed securities, sector.  There are ample buyers in the banks.  It appears their portfolio composition are light in this sector.  

At a present mortgage rate of 4.75% and the historic average maturity of a mortgage in the MBS portfolio is 7-10 years.  To a bank, as an investor, 4.75% is far better than the 2.8% on present 10-year T-Bonds.  That indicates that there will be a faster redemption within the bond portfolio.  Further indicating that banks believe that home sales will increase from the present level.  Homes will sell, mortgages will be paid off and the average age of the MBS will decline.  This will allow the banks to re-invest at higher interest rates.

Going onto home sales, we are still seeing less homes for sale than demand requires.  When will that end?  That will go to the point of loan commitment letters.  Generally speaking they are good for 90 days.  At the end a new letter and a new rate is committed upon.  At present the rates expiring are in the upper 2% level.   "What to do"?  Buy a house fast, forget about if the color of the interior is not to the liking of the buyer, the kitchen is old, the floors need finishing.  All can be done with out the cost of increased loan payments based upon a present commitment of 4.75%, and very possibly over 5% when the FED increases rates in May.  The belief is the rate increase will be 1/2%.

On a monthly basis, commitments will drop off and new ones will be created.  With those increases in rates adjustments of buyers must be recognized.  The alternatives are 1. buy a smaller and less expensive home, 2. offer a price that is below list but equal to affordability,  3. make offer contingent upon appraisal and financing, 4. wait for home prices to drop, 5. MOVE to a more affordable area.

The last two are the least likely and acceptable to home buyers.   

Silicon Valley is unique to the rest of the country.  We have a wealth of Venture Capital firms looking and willing to invest in new businesses.  We have a wealth in well trained and highly educated workers.  What we do lack is a Service Industry who can afford to live here!  This is the real challenge of the Venture Capital Business.  How to develop a replacement to clerks, cooks and waiters.  Then there are the Fire and Police, Teachers, Health Care workers who are stuck here and we can't replace.

Inflation is 8% on an annual basis.  Where does it go from here?  Historically it does not stop on a line in the sand.  Supply must increase or demand decrease.  That seems difficult as it means investment by farmers, miners and oil companies and borrowing when interest rates are increasing.  Supply does not turn on like a faucet.  Drought and rain can cause issues for crops.  Finding oil and gas takes time.  Processing all of the above take time.  While time is being taken interest rates keep rising until.  The economy CHOKES!

Where does this process affect home prices?  That is a BIG Question.  In the 70's we had Stagflation.  A stagnant economy and inflation.  Interest rates were increased by the FED.  Bond prices declined.  The stock market declined too!  The irony of the 70's was residential housing was active and prices rose.  People did have money and jobs.  They did not invest in stocks and bonds to lose their investment.  They bought a home!  Yes there were foreclosures as some lost jobs.  The foreclosures sold at lower prices and there was always an eager buyer for a willing seller.   Professional traders and investors always made money in their investments.  It was the average "American" who stopped buying mutual funds and long term bonds that went to real estate.

Slowly we should see a real estate "sellers market" turn into an "balanced market".  The Month of March Report on Housing in the Bay Area is out.  Santa Clara County Luxury Homes declined for the second month in a row.  The average list price of $5,493,329 was down 3.69% from the proceeding month.  In San Mateo County, it too declined the second month in a row, the average list of $10,367,196 was down 3.69% from the preceding month.  The average sale of $7,155,493 is down 1.12% for the preceding month.  Whereas, single family homes continued to increase in both list price and sale price with shorter days on the market.  This further indicates to me the upper end of the market who do not buy with a mortgage sense a slow down.  Those who buy with a mortgage are buying before their commitment letter expires.

It all stops when the FED stops. Let's hope we have Putin solved by then and supply returns to the market.