The Problems are the Path: Has the FED broken the Housing Market?

An interesting subject was posed recently by El-Erian, Chief Economic Advisor for Allianz.  He states that The FED has destroyed the housing market in both supply and demand.

I have very little to support the actions of the FED as compared to similar events in economic history.  The old adage, "Economic advances don't die of old age; they're murdered by the Federal Reserve", is not working now.  FED actions in raising interest rates that will eventually affect force jobs to create layoffs, then people stop buying and in general we drop into a recession.  Homes are foreclosed, earnings stop, savings are eliminated.  The last time this worked in a resilient economy Chairman Volker took interest rates to 14.5%.  We had a recession, foreclosures, bank failures, and large unemployment numbers added to a bear market in the stock market and the bond market.  This was very effective FED action for one reason, Savings were eliminated by the bear market in stocks and bonds and savings wiped out by inflation and job loss. So far, everything is fine.  Homes are selling, people are looking for homes, jobs are still in demand.  unions are striking and getting large pay increases.

The FED prepared for a recession; from the Pandemic, that never came. People and technology adapted.  When homes and rents became too expensive, people moved to locations that were less expensive and  telecommuted.  Office buildings that once were a feature of our civilization emptied.  Cities that flourished due to work forces that either lived in the city or commuted to the city vanished!  The tides rolled out and all the sunken ships and trash became visible.  What was now visible was always there, it was not visible as the workforce busy on the streets to and from work.  To and fro from gyms and restaurants vanished.  Now the street people and there issues became something to solve.  Why now?  It was always there!

El-Erian is looking at the past and does not see the adaptability and change that comes from record savings and the expansive growth in Money Supply.  The FED Balance Sheet has dropped but remains exceptionally high. The Fed or Federal Reserve Balance Sheet had a record +$9 billion at its peak to a little over $8 trillion.  That is money in the savings accounts of all citizens and corporations in the US.  The ability to have savings allows for a new life, a new business, a new investment.   The ability of a recession by the FED is made more difficult due to the savings accumulated.  It is a win win for the public.  As interest rates increase, the return on savings increase.  Pay a little more, NO PROBLEM!

Soft landing and no recession.  Going back to the late 70's to 1983 when mortgage rates peaked at 14.5%, the concept of a soft landing was once spoken of but never achieved.  Volker choked to death the growth.  Then drove down rates to stop the economic system from imploding.  As much as rates have increased the "Soft Landing"appears to be in force in Real Estate.

We still have vibrant real estate market where ever you look in California.  It is not a Silicon Valley uniqueness it is a uniqueness of the real estate market all over the United Stated States.  When I look at the markets all over Silicon Valley and other parts of California where there was population movement I see the same thing.  The High End Luxury markets are on the verge of going from Seller's market to Buyer's market.  The rest of the various towns and cities are solidly in a Seller's Market.  Now let me give you an evaluation of the market's.  They all have sold prices 8-20%+ less than list in the past +30 days.  What that shows me there are buyer's irrespective of interest rates and FED action.  Buyers that have accumulated savings and can either buy for cash or buy down interest on mortgages.  Seller's are willing to discount their list price.  " A willing seller and a willing buyer", the "Perfect Wave".  

To the light inventory, it will remain as such until rates come down.  That time will be much farther away than most think.  4% average mortgage rates will not be seen quickly.  The FED governors are slowly making comments that there is time for their work.  What that means rates will remain high! Then they will peak and fall.  The average cycle is ten years.  Nine more years to go!

Low cost basis will not change.  So get use to light inventory.  The new market will be in the new towns that have been established or older towns that have changed in character from Cowboy/Gold Rush towns to modern up-to-date communities.  Have you ever driven to Folsom?  I have and it seems like another Scottsdale Arizona.  The hills around El Dorado Hills are dotted with new projects.  Want an Atherton house, This stunning take on the desirable Belgium Farmhouse style.  Located in the Serrano Country Club this 4800 square foot home boasts California lifestyle living with pool, spa, cabana and pool bath. From the high end appliances, custom cabinetry, top of the line lighting and thoughtfully curated tile, this one story great room concept brings the outside in with a large covered loggia for maximum entertaining. Additional standout amenities include 5 car garage for all of your toys and solar system with battery back-up. $3,560,000.  The Serrano Country Club initial fee today is $23,000.

OR

This magnificent property offers an extraordinary living experience with its exceptional features and breathtaking surroundings. Situated on a sprawling 7.3-acre estate, this residence boasts a remarkable blend of luxury, privacy, and picturesque views. As you enter, you'll immediately notice the impressive design and attention to detail. Every bedroom in this home is en suite, providing ultimate comfort and convenience for each resident and guest. These master suites offer ample space for relaxation and rejuvenation. The panoramic vistas from this property are truly awe-inspiring. Enjoy the sweeping views of Folsom Lake, the majestic Sutter Buttes, and , the Sierra Snow caps. Step outside to discover the resort-like oasis featuring a sparkling pool, spa and an expansive patio offering true sanctuary for relaxation and entertaining. The interior of this home is adorned with luxurious finishes throughout. From high-end materials to exquisite craftsmanship, no expense has been spared in creating an environment of refined elegance. $3,499,999

For those interested in Menlo Park: Welcome to this stunning 5-bedroom, 4-bathroom home on an expansive .46-acre lot that exudes privacy and tranquility. Featuring a spacious 3,457 sq ft, this residence offers a versatile layout with a bedroom and bathroom on the main floor, along with a formal dining room, office, and a fully-equipped kitchen featuring granite countertops, a gas cooktop, and updated double ovens. The main floor showcases a sunlit formal living room with cathedral ceilings and large windows providing backyard views, while the family room offers a wood-burning fireplace and a built-in entertainment center. Upstairs, you'll find a loft, a primary suite with a sitting area, and a luxurious bath with double vanities, a jetted tub, and a sizeable walk-in closet. Two more bedrooms, another full bathroom, plus third bedroom with an en suite bathroom complete the second floor. This property also offers dual staircases, newly painted exterior, abundance of local views, lush landscaping with various trees, fire pit area, fish pond, pad w/electrical for possible hot tub. With no HOA or Mello Roos, and its proximity to shopping and Hwy 50, this home is a true gem.$1,185,000

Finally for those interested in Redwood City and San Carlos and 7000 sq ft lots: This is it! Located in desirable Stonebriar with no HOA is the dream home you've been looking for! This completely level 4BR/3BA single story on a large 0.25 acre lot with a gorgeous pool also has an extra wide side yard with its own gate & driveway for RV/boat parking. From the soaring ceilings and flowing floorplan you will be struck by the spacious feel and easy living this home offers. The great room concept in the kitchen & family room is perfect for entertaining and family gathering. The front bedroom has its own full bath, great for guests or in-laws. The kitchen has recently been remodeled with quartz countertops and luxury vinyl flooring. Many cabinets were added to this home for tons of storage. You will love the primary bedroom with its own outside access, and the en suite with separate sinks and a large soaking tub. Best of all it has its own private sitting room which could be an office, nursery, exercise room or ?. The backyard is a beautiful oasis with a gorgeous pool and water feature, and easy care artificial turf & covered patio for outdoor entertaining. It has Owned Solar for energy efficiency, a newer HVAC system & newer self chlorinating pool filter. With easy hwy access, shops & restaurants nearby plus a park and top rated schools, $950,000

There is a reason movement has been happening in Silicon Valley and where home owners can work from home or establish new life styles with highly affordable living.

Income Investors: 

With the rise in rates and the liquidation of portfolios investors are looking for less volatility and stable returns without the gut wrenching volatility.  As written in the past Car Washes provide steady income returns with inflation hedges and recession hedges.

Allow me to give a few California Properties for an example.

• All numbers quoted subject to audit, P&L's for past 3 years and Tax Returns for past 3 years, inspection of property.

I.  For the price conscious: $349,000 with a 39 year lease of $3850/month, Net Operating Income of $122,000 per year gives the investor a 2.86 year pay back.  Cash only!

II.  For an established Wash: $3,200,000, lease of $6000/month, Net Operating Income of $2,788,000.

• 65,000 cars a day. Turn key operation.

• 30 plus years car wash previously

• With All These Water Restrictions in California, the Car Wash Will Be Soon The Only Place To Wash a Car (many HOA already have this water restriction/car washing, in their regulations).

• Seller’s Financing

• Brand New Machinery and Equipment. 110 feet of tunnel. Great for Full, Flex or Express Car Washes or any modification.

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

The problems are the Path: Recession, SBA Loans for Income Property

 As I look at the commentary from Media I am reminded of the research articles while in the investment business.  If the Firm had a good relationship in investment banking the Stock Brokerage firm involved never had a bad commentary. They had a hold or accumulate.  Never a Sell was issued unless the firm were no longer investment banking clients.  

To me the same is true for real estate commentary.  When one looks at the various papers that service a local market will never have anything negative.  One can only look at the advertisements and find the dominance of realtor adds.  To say the least, keep the clients happy!

With the advent of internet news and the various services that provide us with updates and commentaries we now get some news that puts a true light on our real estate market.  Now, that is not to say that real estate is not a good investment or should be looked at as a negative for home residential purposes.  It only means that sellers need to become aware of the real value of their homes and buyers should also be aware of what the true value of the home will be.  This especially the case when appraisal and loan contingencies are part of a purchase offer.

The FED recently made some changes in bank reserve requirements.  A 20% increase in reserve requirements will and have an affect on the criteria lenders will use in providing loans for housing.  There will always be a loan available for Real Estate.  The exception being that the value and lender criteria will be a higher than it has been in the past.

Yahoo Mail recently had a post that should catch the eye of every buyer and seller. 

Home Values In 2 SMC Cities Cooling More Than Most

Two cities in San Mateo County are among the top 25 where home values have declined most over the last year, according to a new report.

Written by Lucas Combo the article points out that our local cities have had a decline in home prices.  I quote, "More than a dozen California cities saw typical home values drop by double-digits over the last year and dozens more are part of a widespread cooling trend for real estate, according to new data.

The investment firm SmartAsset analyzed Zillow's Home Value Index, tracking the fluctuation in values for single-family homes, condos, and co-ops from May 2022 to May 2023.

Researchers found Bay Area homes experienced the most dramatic drops in the nation, claiming the top four spots on the list. Dublin comfortably led the pack with a whopping 15.4 percent decline in typical home value, shedding nearly $230,000. San Francisco was second, where values tumbled 13.3 percent."

"Some parts of the Peninsula saw some significant movement, too, led by San Mateo. Prices there tumbled just over 12 percent — ranking eighth nationally — and the typical home was valued at $1.5 million in May, down about $200,000 over the year. Redwood City also made the top 25, shedding $166,000, 9 percent."

I realise that many of the buyers today have been frustrated with higher than list sales and multiple offers.  That is to due to the lack of inventory.  It does not mean home prices have returned to what many think of previous periods.  We are faced with higher interest rates as the Federal Reserve keep the fight against inflation in their targets.  

I look at the daily 7-day average of listings, price cuts. pending, contingent and sold homes in the Peninsula.  On average 1/3 of the new listings will see older listings cut prices.  Why?  Overpriced, unaffordable, buyer qualifications are just some of the reasons.

I also keep track of home prices across the US in places like Oahu, outer areas of California like El Dorado, Fulson, Placerville and outside the State in Arizona, Texas, Florida and North Carolina. All the areas that outbound Bay Area residents have sought for affordability and new work environments.  The price cuts are just as noticeable as they are here. 

What I have discovered is many Peninsula residents who work from home have found better environments at affordable prices in the areas to the east of us in California.  There have been some that sought the northern areas of California; as Redding, Red Bluff for an example.

There is a major issue I take exception to is in the Fix and Flip homes up for sale and for rent.  These homes have been part of the Speculator movement to create value.  Unfortunately these Speculators are not national home construction firms which have a reputation to protect and will be there long after the home is purchased to back their 10-year home contractor warranty.  Once the Fix and Flip are sold the LLC or Corporation that sold them fold and there is no recourse for the seller if they discover that the home was not built to standards and or in some case with only minor permits.

It is very important that the buyer have a knowledgeable and experienced agent to represent them that works on those issues or permits and compliance to living standards are per the Uniform building Code in acceptance at the time of construction, remodel or purchase.

Real Estate has a business cycle just as our economy has a cycle.  1. Development, where values increase, 2. Maturity, where values stabilize, 3. Decline, where values decrease, 4. Revitalization where the life cycle begins again.

The question is where are we in the cycle?  The cycle is not the same for all areas.  Some areas of California are in the Development Phase, as in towns to the east of the Peninsula into the Central section of California.  Some are in the decline phase as in San Francisco.  Others are in the Revitalization Phase, as it may apply to parts of the  Peninsula.  So far it has been hard for me to find areas of Stabilization.  Stabilization is what we all would prefer.  A market where both buyer and seller feel they have gotten a fair price for their home.

The condition of the Commercial Market makes me tend to feel that we are at a point that we may see lower prices in Commercial Properties at the Declining Phase.  How this will affect residential is something we will soon experience.  The major difference in Commercial Real Estate is Cash Flow.  There is a point in valuation of Commercial Properties that the Cash Flow becomes competitive to the Risk Free Rate of Return of Treasury Bills and Bonds.  When that happens the buyer sees a rate of return with some potential for appreciation.  Then comes Revitalization.

That is why in my last blog I made the case for Car Washes for income buyers.

The best partner in buying a car wash is the SBA, Small Business Association of the US government.  They have the tools that become essential for buyers to determine value. 

The SBA qualified lenders will require P&L statements accompanied by Federal Tax Returns to base their loan.  The lenders will then determine what is a fair price for a qualified loan to pay for a property; such as a car wash, with a down payment of the buyer.  The buyer will then know based upon the SBA lender evaluation if they will receive and positive return on their investment and how long in the future that return can be counted on.  

There are no guarantees in the life of any investment as recessions and natural events cannot be forecasted.  At least a buyer will have an experienced partner in the SBA lender to give the the buyer a "What If" evaluation.

The SBA will not help you buy the Bank America Building, if it is for sale.  The SBA and lender will work in an up to $5 million loan for the development of Small Business formations.  They will not help the buyer to accumulate a string or properties.  The SBA will generally stop at 3 properties.

Recently the SBA has liberalized and changed criteria to help in the development of Small Businesses. It is a worthwhile investigation for those of you looking to diversify your investments or start a new career.

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

The Problems are the Path: Car Washes for the Income Investor

Interest rates continue to rise; along with, mortgage rates.  Retired investors take on unhistoric risks by shifting their portfolio's weighting to equities.  Sellers of real estate continue to hold off as the mortgage rates are above the average rate of an existing mortgage of around 4%.  Banks continue to see warnings of an equity crisis.  Nicolet Bank of Wisconsin sold bonds classified as "Held to Maturity" and took a $ 9 million loss.  Large commercial office buildings face a interest rate adjustment that will force giving keys to lenders.  All the time home prices in the affordable areas of Silicon Valley take a jump of 5%.  The stock market has a major rally led by High Tech Stocks.  Venture Capital money stays hidden from new ventures as the window to Initial Public Offerings remains closed.  "Sell in May and Go Away" did not work for the stock market.  At least so far.

The real estate market is not confusing.  Residential buyers are sick of renting and will buy with the savings from the Pandemic; irrespective of price.   That certainly makes sense.  To those buyers who must stay close to the area and report into work, it is sensible.  To those buyers who have children in local schools it is sensible. 

Luxury homes move, but at a lower pace and not at over lists.  Luxury Homes see more in inventory with less new construction homes as compared to the affordable homes of the $1-2 million range.  The $1-2 million range homes are usually fix and flip homes of 60 year old homes with new interiors and landscaping.

So where are the opportunities?  Income real estate in recession proof sectors.

"Use Your Common Sense",  my Father once told me as a young boy.  For those who have cash savings looking for investments that are not volatile and provide a steady cash flow there are numerous opportunities that are protected from recession and stock market volatility.  Storage Centers, Rental Real Estate, Car Washes, just to name a few.

Rental real estate has some issues in Silicon Valley.  "San Mateo County Board of Supervisors Working Draft of July 10, 2023, An Ordinance Adopting a New Chapter of San Mateo County Ordinance Code to Provide Tenant Protection."  The abuses of Landlords and Property Managers have become so severe that  San Mateo County is looking at Tenant Protection.  Once this passes, other countries will follow.  This takes residential real estate out of the "sure thing" category.  A potential pay day for attorneys.

I have have experience in Car Washes.  This sector, I find, is a great opportunity being driven by rising interest rates and adjustable mortgages that secure those properties.  As I review the Profit and Loss Statement of numerous car washes across the continental United States, I find many owners took advantage of low interest rates to pull money out of their properties.  They are now being faced with increased rates on their adjustable loans as the FED drove up rates 5% in the past year.  This created a loss of income as the mortgage interest rates rose faster than the ability of income from car washes to absorb.  

Generally, car wash investments are a solid option for many investors.  From a fundamental level, they offer low construction costs, short construction timelines; in which, investors can capture cash flow faster and with a lower dollar investment.

The car wash industry globally is growing; $29.3 billion in 2021 with North America accounting for more than 72% of the revenue.  US drivers regularly use professional car washes.  This is based on convenience and car maintenance.  COVID-19 encouraged further growth.  No Touch car washes have earned "Essential Business" designation in a number of markets.  Rideshare services like Uber and Lyft now require professional cleaning of vehicles boosting demand. 

5 ELEMENTS OF AN IDEAL CAR WASH LOCATION:

1. Accessibility: Easily accessible

2.  High Traffic:  High traffic area is a must for flow equals usage.

3.  Few Nearby Competitors:  This is essential as the death of older washes are caused by the emergence of newly constructed car washes with new equipment and better rates.

4. Diverse Climate:  This is a big surprise as cold and snow actually drive washes and create stronger markets.  The old fashion individuals washing their cars will stop during snow and freezing weather; while salt on roads force cars into car washes to maintain the finish of the car.  Desert conditions of blowing dust is another reason washes are in demand...think Arizona, Palm Springs, Southern California.

5. Rideshare Volume: Self explanatory as more sharing more dirt more maintenance.

CAR WASH INVESTMENT TYPES:

1. Full Service, most labor intensive; expensive to operate.

2. In-Bay Automatic, low operating costs; popular option for operators.

3. Express exterior, maximum wash volume; low labor costs

4.  Self-Service, little to no labor costs; may not be profitable year round

5.  Flex-Serve, higher labor costs than fully automatic systems

The most advantageous investment opportunity in Car Washes is the Lender.  The Small Business Association brings the US Government as the guarantor of the loan.  The SBA has set standards for a loan based on Cash Flow.  Based upon past averages, a $2,200,000 purchase price of a car wash with a SBA loan of $2,000,000 leaves the investor with $80,000 after debt service, 40% margin.  The loan is based upon cash flow and not an appraised value of the property as we have here with residential rental properties.

More on the SBA in my next newsletter.

Interested in viewing opportunities in Car Washes email: gary@mckaeproperties.com

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

The Problems are the Path: Bifurcated Market in Silicon Valley

Silicon Valley has always been in my experience a unique real estate market.  A sort of a Camelot where the high walls of technology, money and education kept out the evils of recessions and a financial crisis.  A place were housing prices in the High Tech Community remained stable with only a few exceptions coming from overzealous speculators caught with properties that have rising cost of carry from increasing interest rates and fears of economic slowdown.

Today, or at least since about February/March prices have differed.  The starter home areas of Redwood City, San Carlos and San Mateo have seen demand and multiple offers with over bids.  As you look at the "roll up markets" like Palo Alto, Menlo Park and Los Altos, the prices have remained strong with a few over bids and multiple offers, as compared to the first time buyer markets as previously quoted.

When one looks a the high end luxury markets you begin to see weakness and markets that go from a seller's market to a buyers market.  Those cities are Atherton, Woodside, Portola Valley and Los Altos Hills.

The cause of the bifurcations is clearly the rapid rise in interest, the failures of Silicon Valley Bank and First Republic Bank, work from home virtual employees, the beginning of Artificial Intelligence and Technology layoffs.

Those who have rented through the Pandemic have saved and are tired of renting.  They are ready to buy affordable, in their terms, homes.  That takes them to 1350-2000 square foot homes priced $1.5 to $2.3 million.  The market for those homes is not that available.  The Baby Boomers or present day owners have Golden Handcuffs.  They either have a low interest rate on their mortgage or own the home clear. They also see no reason to sell and create a large capital gain.  When one party passes away the property basis is brought to current market value and a sale will not create a large, if any, capital gain.  The main issue with those homes are they are in need of updating.  This now brings in the "Fix and Flip" contractor/speculator that can buy or offer to buy with no contingencies, all cash, and give the seller the illusion that by not paying any commission to a realtor they are ahead of the game.  Realtors have a difficult time competing; even though, the price an open market sale will create is in most cases better than the Fix and Flip offer.  The commission issue is a hard nut to crack as the seller looks at pay $100,000 or more in commissions and snaps back, "I never made that kind of money when I worked".  

The situation creates the bifurcated market or at least one arm of it.  The starter homes are fully updated homes that become highly desirable to first time buyers.  

The other end is the demand side and supply side slide.  As many technology workers now look at whether they will have a job or whether they will move to greener pastures the tendency is to hold or do nothing.  When supply comes on is goes, but not as fast.

The Luxury end has prices at nose bleeding levels that only a very small percentage of the population can afford.  They too must think about the economic situation.  Prices in this area are weak and have come down by 10%-20% or more without a "dead cat bounce".

Media research created a statistic of 4 out of 10 Californians want to leave the State.  Starting anew in your retirement years is a tough one to consider as probable.  Especially when thinking of out of state movement.  For my experience those buyers who state, crime, homelessness, drugs and in some situations the political environment El Dorado and Placer County are a target move.

I manage and train a group of new agents who are in their new career as a realtor.  Some are retired looking for a second career.  Others are virtual employees who want a side gig to supplement their income.  Others are or want to be full time agents that need a second job to carry them over until they can create a steady income in real estate.   Where are their new clients buying?  Placerville, Roseville, Granite Bay, El Dorado Hills, Loomis, Elk Grove and select parts of Sacramento. Two Agents are using the new home projects in Elk Grove for income buyers.

The markets in the above stated areas are in a Buyer's Market.  There have been numerous price cuts.  Builders went overboard to accommodate the influx of Bay Area immigration.  They now have excess inventory to sell at great discounts.

What does the real estate market portend for the near future?  Interest rates will increase on a gradual basis until the end of the year per Jerome Powell, Chairman of the Federal Reserve Committee.  Rising interest rates will have a number of effects.  1. employment and wage growth will decline. 2. The economy will move toward  a recession.   Wells Fargo forecast is a recession in late December and 1st quarter 2024.  3. With both wage growth stopping, employment declining and a recession.  The plan is for inflation to decline.  DON'T COUNT ON IT!    During the Carter and Ford administrations we had Stagflation.  A stagnant economy with inflation.  It took Paul Volker to raise interest rates to 14.5% to break inflation and create rising unemployment when he lowered rates.  

What happens to real estate prices.  My opinion is that the high prices of the Bay Area will finally break.  Rents will come down.  Foreclosures in the commercial real estate market will be the main subject as which large structures in San Francisco goes back to the lender as owner and or developers hand in the keys as rental rolls collapse further.

Commercial markets with good cash flow will be in demand.  Landlords will find competition from newly constructed multi-family and apartment structures too hard to fight and they will sell out to speculators of Fix and Flip to do remodel and sell to those still willing to live in the area.

On the Fix and Flip Remodels for sale in the after market.....Buyer Beware...Caveat Emptor.  Remember when you walk into a newly remodeled home of the 1950-60's vintage, you are walking into a great facelift.  Underneath it is still a 60-70 year old home.  By code, generally, when there is improvements that go beyond a % by the various town codes the home must be brought to current code.  That is the Uniform Building Code recently adapted by the City or Town of a code that is updated annually.  First thing to look for is to look up.  Is there a sprinkler system?  NO?  Now you need to do some research with the local planning department on permits and the % of work completed that required the house to be brought up to current codes.  Those codes are tough.  They will require a sprinkler system, plumbing, electrical, steps, railings and much more.  The worst thing you want to do is to get emotionally involved.  There is always another bus or elevator coming.  The last thing you want is to have my experience on our first house in Woodside.  We were required to update all plumbing.  We tore out the old pipes and put in new pipes.  The electrical went from old to new wiring.  A new electrical panel was installed.  All we were doing was replacing the old aluminum windows.  

Don't expect your agent to do the work.  The agent cannot take the responsibility of due diligence.  Legally he is not responsible for your work to review the disclosures and do your due diligence.

This is an excellent You Tube video on what to watch for: Kevin.

Another item to be aware of is you are not buying a property constructed by a national firm. It is an LLC or a Corporation that was established solely for the purchase remodel and sale of the property you are looking at.  Once the property sells and money is distributed the LLC and or Corporation is a empty  shell.  There is not a 10-year warranty as on  project of homes you see advertised in the paper.  The roof fails, the short circuit starts a fire, the toilet overflows or is rotted and falls onto the floor below.  Check with your insurance company.  The agent can't help you.  You signed the disclosures.    

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

The Problems are the Path: Opportunities Adjustment

 One of the greatest difficulties for any investor or real estate buyer is to realise the adjustments that occur during a market cycle.  This past month; in fact, the past several months, we have seen home prices increase from the levels of December 2022 and January 2023.  The adjustments are difficult to see.  The easiest method most people have is to look at what a house sold for, the amount over list, and if possible where there multiple offers.  When the novice looks at those number the most likely outcome is for the assumption of the revival of a bull market or an increasing trend upward in home prices.  In stock broker and trader term this bounce up from a sharp decline in prices a "Dead Cat Bounce".

The market place we see is dominated by borrowing costs, rising interest rates, bank failures and bank lending criteria.  As banks are saddled with bonds with low coupons that eventually must be sold at a lost. Credit card loans, car loans and in general consumer loans come into question during a period of rising interest rates and a recession.  

So far, the employment market has continued to witness net demand and net increase in employment while the technology industry is seeing a net loss.  The pressure will continue for the FED to raise interest rates to stop employment to stop inflation.  That seem a bits on an Anachronism.  Beef prices are up as there are less cattle,  Oil prices are up due to OPEC decision to lower production.  I find it hard to believe how interest rates will increase production of either one of those commodities.  

Now is the time to look carefully at the residential market to determine how buyers and sellers should plan their decisions.  Below is a chart we will need to review.

Housing Inventory Snapshot May 28, 2023   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 $1,922,905 +1.58% $1,850,190 -0.90% 50 / 17 4 / 3 474 4 Luxury Single Family $6,738,211 +3.12% $4,750,412 -1.13% 95 / 21 8 / -11 149 -4 Condo/Townhome $835,602 -7.89% $875,970 -1.93% 41 / 20 3 / 2 192 4 Luxury Condo/Townhome $1,671,791 -9.57% $1,722,213 -3.57% 53 / 17 -3 / -5 63 4 San Mateo County, CA Single Family $2,769,312 +3.22% $2,236,001 +11.11% 57 / 18 0 / -2 295 32 Luxury Single Family $12,685,313 +7.52% $8,160,000 -19.82% 80 / 15 4 / -20 88 16 Condo/Townhome $811,087 +6.45% $863,995 +9.17% 112 / 29 -3 / 2 103 15 Luxury Condo/Townhome $1,832,608 +1.97% $1,777,211 +2.58% 47 / 18 14 / -31 31 4 Santa Cruz County, CA Single Family $1,371,541 +0.20% $1,312,014 +0.68% 63 / 28 1 / -11 164 24 Luxury Single Family $3,958,942 +2.66% $3,821,000 +16.67% 56 / 66 -27 / 21 48 7 Condo/Townhome $769,149 +0.29% $697,949 -16.75% 40 / 40 10 / 19 26 4 Monterey County, CA Single Family $1,422,558 -1.89% $1,116,436 -1.79% 58 / 36 -7 / 6 196 33 Luxury Single Family $7,991,852 -8.24% $5,283,000 +23.41% 116 / 23 1 / -1 62 10 Condo/Townhome $824,099 +6.76% $563,329 -14.36% 47 / 15 -5 / -10 19 -3 Contra Costa County, CA Single Family $992,351 -4.06% $957,186 -3.82% 39 / 25 -8 / -1 461 71 Luxury Single Family $3,323,831 -2.07% $2,752,274 +1.90% 45 / 18 -5 / -6 152 24 Condo/Townhome $517,738 -4.27% $542,502 +5.36% 44 / 23 2 / 1 144 12 Luxury Condo/Townhome $1,161,467 -10.30% $1,149,296 +0.87% 38 / 20 -2 / -13 48 5 Alameda County, CA Single Family $1,015,707 -0.40% $1,128,559 +2.31% 37 / 21 -3 / 1 399 10 Luxury Single Family $3,505,450 +6.42% $2,307,973 +2.52% 50 / 15 5 / -1 132 7 Condo/Townhome $618,547 -0.95% $617,927 -4.71% 39 / 29 -5 / 9 183 16 Luxury Condo/Townhome $1,163,005 -4.42% $1,151,585 -0.49% 27 / 14 -10 / -7 61 8

As you review the chart look at the average price of list versus the average price of sale.  The two counties we are most interested in is San Mateo and Santa Clara.  As you look at those prices the listing price is up and the sale price is down.  In some cases the sale price is up on a 30-day trend.  This indicates that a price cut occurred during the 30-day period,  The price cut may have been not enough and the sale price is down.  The sale price is up on a 30-day trend which indicates the price cut was severe and buyers over bind the market.  San Mateo stands out as the most desired county for the non-luxury market buyer.  

These reports are narrow in view as they only look at the 30-day trend.  The real trend is the year to year trend, that is compared to the shorter trend.  The best place to find that report is on Zillow.  On average the year on year trend is down 10-20%, while the shorter term is up 1.3% to 3%.  This is what would be called a dead cat bounce. A slight increase in prices after a large drop.  As an example 94062 the Woodside and Emerald Hills and Menlo Country Club area of Redwood City, the average price today is $2,475,570.  One year ago the average price was $2,693,953.  The one year forecasted value is +.7%.   There are 69 homes for sale and 19 have sold.  Not too impressive, but certainly opportunistic with buyers and sellers at even terms.  In Granite Bay, one of the move to area of the exit from Silicon Valley, the typical home value is $1.087,327 and the year ago typical value was $1,167,931 with a forecasted increase in the future year of 1.3%.

There is also an indicator of affordability.  Look at the Counties to the east, south and west.  As affordability puts pressure on home buyers.  The attitude of not staying in place permeates the country.  That not staying in place puts pressure on supply and demand.  

There is only one sector that can create supply.  That is the fix and flip market.  That market is impossible to analyze statistically.  The reason is, the sales are all off market between owners and investors.  It is hard to determine what the potential supply that will hit the market and when.  What I do see from rentals is that homes that once were on the market and failed to sell are turned into rentals.  A good deal for renters as those homes are new homes without the issues of years of renters and wear and tear.  The first time buyer has a difficult time with those sellers.  Cash offers are meaningless, limited supply keep prices up.  It is only those homes that were purchase late in the cycle as in last year summer have a difficult time breaking even after repairs.  They either turn into rental are are sold for a loss.  To those homes that investors fail to realise the trend is over, the only choice is to refinance to hold over until prices improve.  To those the prices never improve.  To keep myself out of trouble with my fellow realtors, one needs to look at the history and you will notice the price cuts upon price cuts and the "behind the curve".

The Commercial market is in one of the worst cases I have seen in over 40 years from the investment banking side of real estate to present day.  Banks are backing away from any loans to property owners, private capital is staying away from everything from Office Buildings to apartments to shopping centers.  Even the loans for cash flow vehicles as recession proof medical centers are being denied credit.  The issue the lender is preparing for is for the "keys" to be handled to them.  Attempting to recoup loss from the owners is most difficult as they ownership is hidden behind a myriad of Limited Liability Companies and Partnerships that make "Deep Pockets" hidden.

This may not seem optimistic, but it is!  The problems are the path and the opportunities that are created must be the best chance of creating future value.

LATE NEWS.........

I had planned to put this out a week ago.  I decided to wait until the budget got cleared up.  The ability to borrow without a top until 2025 is not good.  This past week the Wall Street Journal had an article on the effect of Treasury Bill borrowing planned at the next auction as a result of the Budget Bill. 

$1 Trillion is planned to be sold by the US.  That will take $1 Trillion out of Money Supply.  No money for investing, no money for mortgages and no or less money for all cash offers.  The reduction of Money Supply has a levered affect on the economy over rising interest rates.  Take money out of money supply and the rise in interest rates is "slamming on the brakes of the economy".  "A Recession is Inevitable"!

Money Supply had expanded to some $9 trillion as of the Pandemic.  The expansion was seen in the Federal Reserve Balance sheet from the FED's buying of bonds and mortgages in the after market.  The time since the pandemic, the FED's portfolio has declined due to the maturation of bonds and mortgages.  The sale of Treasury Bonds and the maturity of the FED's Balance sheet is a net effect.  It just takes assets and turns them into debt.  VERY BAD!

The Treasury Department selling of treasuries takes the game one further.  The savings that were created by the FED's expansion of Money Supply from the Bond and Mortgage purchases proceeds were kept in savings accounts, purchase of stocks and bonds and real estate.  Now we have layoffs in technology, recession warnings.  That gives those with cash holdings a tendency to be reluctant to get aggressive. 

When a Treasury Bill is sold at auction with a 4 or 5% rate, it is far safer to buy the bills than buy stocks.  Buy a new home or hold cash in bills?  Money is banks are questionable with SVB and First Republic.  Chase and Bank America are giving dirt low interest on savings and they have limits of $250,000.  So if you have more in savings it is better to put it in Treasury Bills fully guaranteed by US Government with no state tax.  

Interest rates will not decline soon, there may be a hold off, but that is a toss of a coin.  Rates will go up.  The forecast of Wells Fargo is a recession in late 2023 and for certain in early 2024.  

This will all add up to opportunities for Real Estate buyers.  Foreclosures will build up further.  

For home buyers holding off is not a wise option.  It is far better to buy a home with a +6% mortgage than when prices decline and a new mortgage is 8%.  Just do the math yourself.  Calculate the interest rate paid for a year at 6.5% and then take 20% off the price of the home and calculate the interest paid for the year at 8.5%.  On a $2,200,000 purchase at 6.5% and a purchase at 20% less with a 8.5% mortgage you will pay over $6000 more per year in interest.

To sellers that proof is already being seen in sales.  Conventional mortgage buyers will see banks unwilling to give loans on the 20% down of list price.  The only over bids and multi offers are coming from all cash buyers who see better security for their savings is Real Estate than money in a bank or the stock market.  

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