A Rising Tide Lifts All Ships

 We certainly do not have a rising tide; other than, interest rates.  The issue with the rising rates is that they have occurred in a quick like fashion that does not allow the market place to adjust.  The result the tide is going out.  As a result many of the rocks, debris and sunken ships are exposed.  This is especially the case when the rates rise without time to adjust.

The issues of the past indicate the problems of the future.  Whenever the FED has found themself behind the curve the quick action to raise rates to catch up to inflation has created issues.  This goes back to the 70's and the eventual result of the end of the 70's with the numerous financial crisis that occurred.  The reoccurrence of the lowering tide has created issues in the past and they can be seen in the present.

The issues are complicated by the various securities created by Wall Street and Banking.  Specifically: LDO...loan default obligations, and CDO....collateral debt obligations.  Insurance companies and pension funds were a great buyer of these items due to the higher rates and perceived less risk.   

The risk is the same as the Lehman crisis...the debt obligations fail, the loan default obligations cannot handle the size of the defaults.  When this happens financial institutions FAIL.  That is what happened in the United Kingdom. Their pension funds are defined benefit plans that bought these investments for the certain return that would fund the retirees benefits for their lives.  When the CDO failed the benefits were unfunded and the UK stepped in the support the market.  These defaults will continue to occur as long as the FED raises rates in their fight inflation game.  AsI have stated in the past, this is an asset disinflation goal.  Bring down the value of assets has some terrible consequences.  Investors who bought on margins get maintenance calls.  Developer who have short term loans for developments see the cost of carry rapidly rising beyond the cost of carry and are forced to sell irrespective of price.

This is a pitiful experience just to stop inflation and take down asset values; in order to, make homes once again affordable.  Fine home prices are down, rates are up; no longer employed and can't qualify for a loan.  Waste of time to put America on Welfare to stop inflation when all that was needed was to open the supply chain.  Drill more wells, create more gas and oil and refine more in the US to drive down gas prices.  This will drive down commodity prices.  Not all farmers are on electric tractors.  Even so, how can electric tractors charge when the electric grid fails.  Get out ole Dobbin.

Where are we today in or real estate market.  The Realtors Association is calling for 0 growth in prices for 2023 for California with declines in some ares of 10%.  Those areas that have seen too fast of a growth.  Does that really matter when qualifying for a 7% mortgage is putting buyers out of the market?  While our market is not freezing up.  Sellers cut to sell homes and buyers buy for cash.  

I believe there are numerous opportunities that will befall the astute buyer in this market.  I see income properties as the best place to look.  

I do not believe that the stock market will give the reward it once did.  I believe we are in the 70's and the idea of buy and hold is done!  Investors will become disenchanted.  They will look for secure investments that pay income.  Real estate is far better than a stock market that goes up 800 points one day and down 400+ the next.  Volatility does not breed confidence.

Forecast For Home Prices

Housing Inventory Snapshot				September 27, 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	$1,684,222	+4.65%	$1,648,066	+2.85%	48 / 24	1 / 2	707	-46
Luxury Single Family	$5,806,059	+8.79%	$4,122,160	+5.17%	63 / 24	6 / 0	218	-21
Condo/Townhome	$799,395	-0.39%	$792,049	+2.46%	50 / 28	6 / 3	314	-30
Luxury Condo/Townhome	$1,618,389	+2.94%	$1,495,192	-1.88%	48 / 25	6 / 5	99	-15
San Mateo County, CA
Single Family	$2,150,105	+10.68%	$1,813,964	-6.39%	43 / 26	2 / 6	368	33
Luxury Single Family	$8,724,443	+7.76%	$6,391,389	+11.58%	82 / 55	-1 / 35	122	10
Condo/Townhome	$831,665	-2.26%	$876,045	+5.67%	63 / 38	7 / 1	158	-11
Luxury Condo/Townhome	$1,744,896	+2.32%	$1,793,932	+2.92%	51 / 45	6 / 37	51	-3
Santa Cruz County, CA
Single Family	$1,247,080	-1.19%	$1,158,033	-7.21%	61 / 28	5 / -1	167	-9
Luxury Single Family	$3,492,781	-7.08%	$3,873,643	+39.02%	76 / 40	-6 / 21	58	-1
Condo/Townhome	$745,295	+9.23%	$828,300	+8.17%	101 / 16	34 / -13	27	-10
Monterey County, CA
Single Family	$974,197	-1.87%	$941,456	-5.39%	58 / 29	9 / 3	260	-17
Luxury Single Family	$7,525,922	+3.44%	$4,466,748	-6.27%	136 / 34	13 / -29	80	-4
Condo/Townhome	$667,814	+9.10%	$760,548	+34.48%	35 / 22	2 / 2	28	2
Contra Costa County, CA
Single Family	$824,289	-0.13%	$844,027	+3.08%	45 / 31	6 / 6	913	-66
Luxury Single Family	$2,642,391	+2.34%	$2,257,463	+3.78%	48 / 27	3 / 2	304	-25
Condo/Townhome	$512,059	-2.77%	$518,569	-3.69%	39 / 28	2 / 7	205	-2
Luxury Condo/Townhome	$1,189,069	-0.36%	$1,109,913	-5.18%	36 / 21	6 / 6	67	2
Alameda County, CA
Single Family	$1,037,578	-0.45%	$1,080,484	-1.21%	42 / 27	3 / 4	864	-7
Luxury Single Family	$2,623,511	-2.11%	$2,231,097	-2.33%	43 / 30	1 / 6	287	0
Condo/Townhome	$627,126	-2.38%	$642,219	+4.01%	47 / 28	6 / 0	348	-29
Luxury Condo/Townhome	$1,144,026	-2.92%	$1,071,603	-3.93%	46 / 24	6 / 3	116	-2

It is called Asset Dis-inflation

Asset Dis-Inflation

The FED has publicly stated that interest raises are being done to stop inflation.  If you paid close attention to FED Chairman Powell's last remarks, he stated he wants to lower "home prices" for all Americans.  

Elon Musk stated in one of his posts that his view was the FED was looking at asset dis-inflation.  That to me also mean Stocks, Bonds, Investment vehicles of all color and types, and Real Estate

What we have seen so far is that Real Estate prices are dropping across the United States; irrespective of location.  Luxury Home Sales Plunge Across the U.S. per a Wall Street Journal article dated September 23, 2022.  Locally the Luxury Market is defined by Atherton, Woodside and Portola Valley.  Prices in those markets come down by 7 digits in some cases.  One Woodside home was originally listed at $110 million with several price cuts it is now at $48 million.  Days on the Market are increasing and Sales Price to List Price have come down to a discount to list of 5%.

Of course stock market values have declined 20% plus.  Some of the high tech stocks have declined 60%.  At the same time Oil stocks are up over 20%.  

All adding up to the FED's real goal of bring down asset prices in stocks, bonds, real estate and other assets.

So how does that relate to home prices in Silicon Valley?  

High end Luxury Homes will continue to see pressure.  Sellers who are executives of High Tech Companies that have relocated will sell with a company relocation benefit program.  They know that they have the company buying their homes, that is the put.  

Added to the Luxury Relocation and Liquidation there are the "Fix and Flippers" who find themselves with inventory and no buyers.  Foreclosures are happening, but there is no discussion of that in the Media.  Personally I have been called upon to give "Broker Price Opinions" for properties foreclosed or in pre-foreclosure.  The horror stories of Financial ruin are written in the valuations.  

For the seller, ask yourself a question,"would I buy my house for what I am thinking of asking to sell it for". If No, sign the papers and move on.  One or two more interest rate increases will hit the real estate market hard!  For those who say yes, then stay and wait out the storm. They all pass.  

How about the buyer?  There is no better time to buy than in a weak market.  As I suggested in the prior paragraph to sellers who would buy their house in today's market, you have the ability to wait out the storm with a home at a discounted price.  As interest rates move back down you can refinance.  My suggestion to buyers is offer 10% less than the list price. The buyer now have a property that will survive, mentally, from another decline from interest rate increases.  

There will be opportunity in two areas.  

1. Fix and Flip properties that are forced sales.  

2. The other is the developers who have inventory to liquidate.  Every Saturday and Sunday the San Jose Mercury News has a real estate section that details all the developers from Tahoe to the Coast and from Napa south to Gilroy.  These developers are offering discounts to sell homes.  You will need your realtor to negotiate this, so don't forget about me!  10-year builder warranty goes with them and some developers will pay closing costs and even offer a loan.  

For the investor, the same opportunities are available. I believe the developers are the best area to focus on due to the 10-year builder warranty.  You cannot trust what is under the Fix & Flip house.  Paint and putty will hide a lot of sins my father use to say.  Electrical, plumbing, foundations can all be hidden until after close of escrow.  In foreclosures the sales are all "AS IS". The buyer needs to fully research.  Sometimes the cost of research will lead to a canceled offer.  There is no way to recapture the cost.  

WHY SILICON VALLEY?  High Tech is always hit when interest rates rise.  Is is called the "risk off trade" as the risk free rate of return is moving up and offers a safe no risk place to park funds.  1 and 2 year T-Bonds are now at 4.03 & 4.27% respectively with 90-day T-Bills at 3.27%.  High tech cannot compete for funds or investors. Neither can Venture Capital deals.  According  to 

Layoffs.fyi Tracker 648 startups w/ layoffs ∙ 81693 employees laid off ∙  in 2022

OUCH!  

The Wall Street Journal announced that many of the pension plans that invested in Venture Funds will have to take a 25% haircut.  Another OUCH!

So with layoffs in high tech where are the employment numbers coming from with such good results? It is all those businesses that had lay offs during the Pandemic while work at home High Tech prospered. People are going back to work from Pandemic layoffs to cure the bottlenecks in the supply chain that are really causing inflation.

The BIG NEWS that is not being publicized locally is Pacific Coast Oil once known as Standard Oil of California, now known as Chevron has sold their corporate headquarter in San Ramon and moving the bulk of their corporate employees to Houston Texas; while it still maintains its corporate headquarters in California.  PER WALL STREET JOURNAL September 29, 2022.

 

Large corporations moving from California and staff relocations is not positive for maintain housing prices or rentals in our Bay Area.  Oracle, Schwab, HP and Chevron moves after being founded here in 1879!  Add to it the slow down in Facebook, Google and Apple.  

We may be surprised one day with the FED announcing they are done with rising interest rates.  For those who hung onto their portfolios they will see some regain in valuations.  For those who bought a home they will see lower interest rates and demand increasing. 

What will cause to FED to Stop Raising Rates?

The last week the markets entered an unusual perilous phase of asset volatility.  

Surging volatility in what is supposed to be the safest assets, fixed income instruments.  The FED could disrupt the financial system's plumbing.  

This would force the FED to prop up the markets by halting the rise in interest rates and halt the quantitative tightening program ahead of schedule.

The other worry is the the whipsawing markets will expose weak hands among asset managers, hedge funds and other players who have over-leveraged unwise risk positions.  Margin calls and forced liquidations would force the FED's hand as it has done so many times in the past.

Buyers are in an opportunistic environment. 

This is why I recommend to buyers to buy now and forget about lower prices.  You may just wake up one morning and find the house you wanted is gone and others are back on the market at higher prices.

WHEN WILL THIS HAPPEN?  If I knew would I be writing these letters?

I see foreclosures occurring, I see margin calls on stocks.  I see liquidations.  The only thing missing is the media catching on.  When they do, buy, buy, buy.  They are always late to the party.

Time to Consider Investment Property

Interest rates are going up and will go up further in the future.  The stock market most of Silicon Valley buys in taking a BEATING.  There are no vestal virgins in the temple the Visigoth's have taken them home.

So where do you put your investment savings.  One area that has always held up is rental or income producing real estate.  From single family homes, multi-family and apartment buildings.  They offer cash flow and tax shelter with appreciation from the growth in income to the amortization of mortgages.

I have a great You Tube visual for you to watch.

If you've ever thought about buying an investment property, here's a solid video from the "Meet Kevin" youtube channel. 

Kevin definitely gives some solid "insider" tips in this video. 

If you'd like to continue the conversation and start the process of finding a great local deal, feel free to reply to this email or text me @ 650-743-7249 anytime. 

Gary McKae, gary.mckae@exprealty.com

Buying Stocks vs Real Estate Investing -- Which is Better?

The Real Estate Market is Still Under Pressure

 Mortgage rates jumped again this week, giving no relief to the price-weary homebuyers still in the market.

The rate on the 30-year fixed mortgage increased to 5.66% from 5.55% the week prior, according to Freddie Mac, and is up more than a half-point from two weeks ago. While lower than the 5.81% registered in June, the rate remains over 2 percentage points higher than the start of the year.

Higher borrowing costs have left cash-strapped homebuyers at a divide. Some folks have opted to put off their purchase plans and wait for better market conditions, while those who remain are taking advantage of the dip in competition to strike a bargain with sellers.

“The increase in mortgage rates is coming at a particularly vulnerable time for the housing market as sellers are recalibrating their pricing due to lower demand, likely resulting in continued price growth deceleration,” Sam Khater, Freddie Mac’s chief economist said in a news release

Ronda Lee

Wed, August 31, 2022, 7:31 AM·3 min read

As the housing market cools and returns to pre-pandemic norms, sellers — once in the driver’s seat — now have to readjust.

A new Realtor.com survey found that 92% of sellers accepted some buyer-friendly terms and 41% accepted some contingencies in the contract. This is a stark contrast to the bidding wars and contingency waivers last year and earlier this year.

“We're seeing a shift from a seller's market to a buyer's market for at least a few months and now is the time where buyers can actually ask for more,” Krystle Moore, CEO of Pacific Shore Capital, told Yahoo Finance Live. “We're not having to ask for no contingencies or going over list. We're not seeing those things happening anymore, so buyers definitely do have the upper hand.”

A return to normal means that sellers won’t be receiving multiple offers and that homes in need of repair won’t sell as high.

GOLDMAN SACHS ON HOME PRICES:

On home prices:

• "Our model suggests that home price growth will slow sharply in the next couple quarters (+8½% quarter over quarter annualized rate (AR) in Q3, +3% quarter over quarter AR in Q4, corresponding to +14% Q4/Q4 in 2022), as the imbalance between supply and demand continues to shrink, mostly through lower demand. Thereafter, we expect home price growth to stall completely, averaging 0% in 2023. While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.

• Our market continues to show weakness.  Home prices in San MAteo and Santa Clara on average dropped a little over 5% from last month.  It is the second month in a row that home prices have declined.  The high end market is now selling below list.  Price cuts are becoming the norm and days on the market are increasing.

• It is still my belief that waiting to get a better price on a home is not as favorable as a lower mortgage rate which the buyer will have for 30 years.  The but what if rates come down are offset with the refinance option.  I wouldn't count on "what if".  Opportunity can escape.  Those homes still on the market will see seller's who are willing to negotiate price.  Leaving the Bay Area was shown in a recent article on the revival in home prices San Mateo and Santa Clara where still down while San Diego and Los Angles were up over Pre-Pandemic.  

• The virtual Zoom towns have shown the greatest weakness in prices as the return to the office and escape from the Bay Area appears to have ended.  Now the movements will be based on the "cost of living".

• List price is not sales price as we see below.  The history of market action will see the point when list price is down and sales prices are up.  That will be the bell to sound a bottom.  Until then, as long as the FED continues to raise rates and liquidate their balance sheet we will see higher mortgage rates and weaker prices for all assets from growth stocks to real estate

• Housing Inventory Snapshot				August 28, 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	$1,609,432	+2.14%	$1,602,468	-0.84%	47 / 22	9 / 4	753	-154
  Luxury Single Family	$5,337,174	+10.85%	$3,919,539	-2.06%	57 / 23	10 / 5	239	-53
  Condo/Townhome	$802,514	-0.78%	$773,063	-7.98%	44 / 25	8 / 5	344	-64
  Luxury Condo/Townhome	$1,572,169	-2.72%	$1,523,805	-3.66%	41 / 20	6 / 1	114	-18
  San Mateo County, CA
  Single Family	$1,942,666	+0.74%	$1,937,808	-0.33%	40 / 21	1 / 5	335	-17
  Luxury Single Family	$8,096,115	-1.71%	$5,727,911	-3.33%	83 / 20	2 / 2	112	-6
  Condo/Townhome	$850,930	+0.62%	$829,057	-3.77%	56 / 38	5 / 12	169	21
  Luxury Condo/Townhome	$1,705,320	+3.92%	$1,743,087	+2.62%	45 / 8	1 / -4	54	2
  Santa Cruz County, CA
  Single Family	$1,262,070	-3.16%	$1,248,044	-1.21%	56 / 29	7 / 11	176	-18
  Luxury Single Family	$3,759,096	-0.90%	$2,786,350	-7.00%	81 / 19	5 / -1	59	-2
  Condo/Townhome	$682,323	-5.48%	$765,717	+3.83%	68 / 28	12 / 10	37	-9
  Monterey County, CA
  Single Family	$992,740	-5.24%	$995,047	+0.08%	49 / 26	6 / 5	277	-10
  Luxury Single Family	$7,275,753	+13.67%	$4,765,556	+5.82%	123 / 63	18 / 47	84	-7
  Condo/Townhome	$612,103	-1.81%	$565,529	-13.10%	33 / 20	-1 / 11	26	0
  Contra Costa County, CA
  Single Family	$825,352	-4.42%	$818,768	-8.48%	39 / 25	5 / 4	979	-58
  Luxury Single Family	$2,581,967	-6.68%	$2,175,229	-7.84%	44 / 25	8 / 8	329	-15
  Condo/Townhome	$526,661	-1.05%	$538,428	+7.74%	37 / 21	4 / 5	207	-11
  Luxury Condo/Townhome	$1,193,359	-0.96%	$1,170,500	+1.91%	30 / 15	0 / 3	65	-7
  Alameda County, CA
  Single Family	$1,042,248	+0.07%	$1,093,767	-2.90%	39 / 23	3 / 5	871	-47
  Luxury Single Family	$2,679,999	+3.99%	$2,284,248	+4.59%	42 / 23	5 / 7	287	-28
  Condo/Townhome	$642,430	-1.61%	$617,471	-6.33%	41 / 27	4 / 8	377	-24
  Luxury Condo/Townhome	$1,178,446	-0.78%	$1,115,407	-1.01%	41 / 21	5 / 6	118	-13

   The worst market is San Francisco's Commercial market .   Commercial Properties once for sale have ben removed from the market.  Offers of 70% below 2019 values indicate investors have little taste for the risk ahead.  24% vacancy rates from "the work at home" syndrome have had a big impact on values based upon cash flow and cap rates. That appears to be only one of the potential issues keeping investors out of the San Francisco Commercial market.  The City's budget is taking a hot, lack of conventions, empty storefronts, homeless encampments and open air drug dealing have investors assessing the risks to realities of the San Francisco investment climate.