Bifurcation in Real Estate: A Market at a Crossroad

Bifurcation in Real Estate: A Market at a Crossroads

Bifurcation: A point at which something divides into two branches or parts.

Real estate is an asset class, and like all asset classes, it has distinct relationships and subdivisions. Each asset class is bifurcated based on type and composition.

In real estate, the two primary bifurcated classes are Commercial and Residential. Historically, the key factor linking these two asset types has been interest rates—which dictate both the cost of housing and the return on housing investments.

The Pre-Pandemic Relationship: Interest Rates as the Link

Prior to 2020, the residential real estate market followed a predictable formula:

• The cost of housing was largely determined by the yield curve, a benchmark created by investment banks to measure risk vs. maturity.
• The risk-free rate of return was set by the Federal Reserve System, influencing mortgage rates.
• Residential home values followed the classic “3L” principle: Location, Location, Location.

Everything functioned as expected—until the pandemic of 2020 disrupted this equilibrium.

Pandemic Shock: The Breaking of the Traditional Relationship

During COVID-19, the Federal Reserve slashed interest rates to near zero. This had two immediate effects:

1. Residential housing prices surged—low mortgage rates made homeownership cheaper, fueling demand and driving up prices.
2. The Commercial market weakened—as remote work became mainstream, many businesses abandoned office spaces, leading to lease cancellations and rising vacancies.

For the first time, the long-standing relationship between Commercial and Residential real estate came under strain.

• Residential buyers took advantage of lower mortgage rates and migrated to more affordable locations while working remotely.
• Commercial landlords struggled as office space demand plummeted. With lease cancellations rising, many property owners faced mortgage defaults.

Commercial vs. Residential: Two Paths in Distress

The structural differences between Commercial and Residential real estate became more apparent:

• Residential Foreclosure Process: A structured, standardized legal process exists for homeowners facing default.
• Commercial Properties & Bankruptcy Protection: Commercial owners, protected under Chapter 11 bankruptcy, often operate under LLC or LLP structures, allowing them to renegotiate loan terms rather than face immediate foreclosure.

This ability to delay liquidation has given commercial investors more flexibility in managing distressed properties—unlike homeowners, who are more exposed to financial hardship.

The Current Market: Stress Signals Emerging

As of early 2025, the bifurcation between Commercial and Residential markets is showing signs of stress:

• Residential Market:

  • Home affordability is under strain due to rising financing costs.
  • Inventory is increasing, leading to gradual price declines.
  • Insurance costs are becoming a major burden, especially for aging baby boomers looking to downsize.

• Commercial Market:

  • Capitalization rates (Cap Rates) are rising as property values adjust downward.
  • Investors are waiting for Cap Rates to hit a favorable level before making acquisitions.
  • Multifamily properties remain attractive, as renters have limited alternatives in the face of high home prices.

Cap Rate Formula:

$$\text{Cap Rate} = \frac{\text{Net Operating Income}}{\text{Property Price}}$$

(Example: $200,000 NOI ÷ $4,000,000 Property Price = 5% Cap Rate)

Multifamily as the Safe Haven

With affordability pressures keeping many renters in place, multifamily properties are the top target for commercial investors. As multifamily demand rises, service-oriented businesses such as retail centers, medical facilities, and pet care services tend to follow.

But this dynamic will shift once residential home prices drop—triggering broader market adjustments.

The Federal Reserve’s Next Move: A Pivotal Moment

Between July and September 2025, the Federal Reserve is expected to make a critical decision on interest rates. If inflation slows, rate cuts will follow, directly impacting:

• Residential Housing: Lower rates will improve affordability, stimulating homebuying activity.
• Commercial Real Estate: As financing costs ease, investors may return to office and retail assets.

Warren Buffett’s Signal: A Cautionary Note

Market cycles often provide early warning signs, and Warren Buffett’s recent strategy is worth noting:

• Buffett has increased his cash position to over 25%, signaling caution.
• He is buying short-term government bonds while reducing equity exposure.

This flight to safety suggests that smart money is bracing for further economic turbulence before committing capital to real estate.

The Takeaway: Navigating the Bifurcation in 2025

The real estate market remains in a delicate balance between residential affordability challenges and commercial market corrections. Savvy investors are waiting for the right entry points, while homeowners face increasing pressures from rising costs.

At Pacific West Advisory Group, we specialize in helping investors navigate these complex market shifts. As we continue to push beyond traditional industry standards, our goal remains to deliver innovative and strategic real estate advisory services.

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The Problems are the Path: Residential Inventory Building Commercial Real Estate Revival

It will remain to be seen in the upcoming months if the Trump Administration will help the residential housing industry by increasing inventory and improving affordability issues.  The Commercial Real Estate industry appears to rebonding from the depressed levels and excess inventory.

Returning back to the work place will put additional pressure on residential housing.  The potential from higher interest rates for a longer period could put pressure on price and more inventory could accumulate.  That would create some respite in prices and help affordability.

There may be one pressure point for increased sales of the Retired Baby Boomer residentials. INSURANCE, the increases in California insurance is nothing when compared to other states.  The San Jose Mercury News recently had an article on insurance increases in all 50 States.  California has lower percentage increase than Florida and Texas, and lower than most other states, except a few.  Will a retired Baby Boomer sell and move to another state for lower insurance prices, simply due to lower home prices?  

What about the first time home buyer, where do they move?  The best answer lies in the profits of builders.  This is the sector of housing that develops new housing projects.  All one has to do is open the weekend San Jose Mercury News and the section with Housing Developments from south of San Jose to the east up to and including Reno.  Projects are for sale. Projects with incentives for buyers as mortgage rate buydowns. price cuts, improvement packages.  While builder's profits are increasing, so is there inventory of homes for sale. Price cuts and special terms create sales.  This draws buyers from areas where prices a high and inventory is low.

That is not enough to increase inventory enough to get affordability into the picture.  Affordability will only happen with economic benefits.  So we are now looking at the Trump Administration to create a viable economy with the ability to make housing affordable.  The major factor in affordability is NOT PRICE!  The Major Factor in Affordability is the COST OF MONEY.....INTEREST RATES!  If Trump is able to lower interest rates it will not make any difference if the price of the home is $1.5 million or $2 million, $700,000 or $800,000.  What will make the difference is how much a month the buyer pays for the mortgage, property tax and insurance. 

If there is Motivation in the California State Legislature it will be in the Rental Market of Residential Housing.  At present there are many rules on how a landlord may treat a renter.  Unfortunately, there are many landlords who are ignorant of the laws and their ignorance creates violations.  What is lacking here is equal representation of a renter to a buyer in the disclosure process.  At present a landlord, agent or management company can tell the renter the house is ready to move in, while the buyer of a residential structure must be shown documented forms that the property IS READY TO MOVE INTO!

I believe if the rental market of residential homes is regulated like the sale of residential homes there will be an inventory of substandard homes in the housing market. Landlords reluctant to follow Full Disclosure Laws may take an option of selling the residential property and exchange the proceeds to commercial income property that is not residential through a 1031 tax free exchange.

When the State of California overhauls the rental market with the same standards of the residential full disclosure sale market the housing inventory for sale will increase.

Back to Interest Rates, the FED met January 28 and 29 on interest rates.  No change with the note that inflation remains high.  This is an indication we will see the present level of interest remaining the same for at least the next 3 months, in my opinion. The forecast is for two cuts in 2025 looks to be accurate.  Consumer confidence has declined in past two months which may put pressure on the FED to lower rates.  Then we have President Trump.

President Trump made it Very Clear at his Zoom Call in Davos Switzerland interest rates are too high and must come down on a world wide level.  The cuts in Federal Employment by him will have some affects on economic numbers.  The Census has already announced a slow down in manufacturing.  The Recent Report has some figures that do not bode well for the economy.  Manufacturing is down and so is economic activity. The recent sell off in the stock market will have the FED taking a steady attitude on interest rates.  

The Year Curve, or the rates on government bonds from short term to long term rates have a steady increased in rates from one year maturity onward.  That to me, that means rates will come down with in the year and be less than the 10 year bond yield.  The Ten-year bond is the maker of mortgage rates and credit card rates.  The rates are seen on www.CMBC.com, on the Bond Tab.

As I observe real estate prices I begin to notice that properties are longer on the market, price cuts are becoming more common and sales are less that list.  Rent prices are seeing the same in price cuts.  The actual rent is not covered by either MLS listings or sources like Zillow.  With all the cuts, activity is still very active.  Sales may take longer, sale prices maybe less than a year ago; but residential homes are selling!  What I see as being a precursor of lower asking prices is that if I take the cost of owning a home in Mortgage payments and compare it to a similar property for rent.  The rental is the same or more than ownership cost. 

Lower cost of living in residential housing will result in the FED lowering interest rates.  Helping affordability.

The Commercial Real Estate Market is seeing light at the end of the tunnel.  Investors who once shunned the beleaguered U.S. Property Market are coming back!  U.S. Office-Building Sales increased 20% from 2023 to $63.6 Billion.  With a large cash reserve the investors are expected to see sales activity to accelerate in 2025.  Norges Bank Investment Management, the Norwegian Sovereign Wealth Fund,  purchased last year 50.1% of eight properties in Boston, San Francisco and Washington D.C. at a value of $1.9 Billion.  Last year it also purchased an office Building on Sand Hill Road in Menlo Park, CA.  Venture Capital haven for Silicon Valley bodes well for the outlook in Silicon valley for new business startups and employee growth.

New York City is seeing a bigger growth in office building purchases exhibiting the tunnel maybe be getting behind the Commercial Property Market.

Led by a bevy of big-ticket tech deals, office leasing volume in Silicon Valley has soared to 2.4 million square feet in the fourth quarter, the first time the quarterly total has topped 2 million square feet since Q2 2019.

A leasing surge of more than 4 million square feet in the second half of 2024 pushed the full-year deal; volume over 5.5 million square feet in Silicon Valley, setting the stage for a potentially robust office recovery in 2025.

The overall office availability rate in Silicon Valley dropped by 160 basis points, or 1.6%, to 25.9% in the fourth quarter, down from 27.6% in Q3 2024.  Available sublease space in Silicon Valley totaled 6.6 million square feet at the end of 2024.  A drop of 25% from 8.8 million square feet available at the end of 2023. 

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

The Problems Are The Path: 2025 Starts the Year Off With Carry Over from 2024

 HAPPY NEW YEAR!

The year starts out with the California Legislature passing additional laws in the Rental Marketplace.  

AB 2493 – Tightens Rules for Application Fee Screening
This new law authorizes a landlord or their agent to charge an application screening fee only if the landlord or their agent, at the time the application screening fee is collected, offers an application screening process, as specified. This bill would also prohibit a landlord or their agent from charging an applicant an application screening fee when they know or should have known that no rental unit is available at that time or will be available within a reasonable period of time.

AB 2347 – Alters Rules for Eviction
This law extends the time in which a defendant, in a summary proceeding for obtaining possession of real property, must file a response from 5 to 10 days, excluding specified days, after the complaint is served on the defendant.

AB 2801 – Changes in Security Deposit Rules
This law limits claims against the tenant or the security for materials or supplies and for work performed by a contractor, the landlord, or the landlord’s employee to the amount necessary to restore the premises back to the condition it was in at the inception of the tenancy, exclusive of ordinary wear and tear. It also prohibits a landlord from requiring a tenant to pay for, or asserting a claim against the tenant or the security for, professional carpet cleaning or other professional cleaning services, unless reasonably necessary to return the premises to the condition that it was in at the inception of the tenancy, exclusive of ordinary wear and tear.

The law also prohibits the landlord from using the security deposit for deductions for repairs or cleanings that are not identified in the required itemized statement of conditions, if an initial inspection is conducted and, at the time of inspection, the premises do not contain tenant possessions that prevent the landlord from identifying repairs or cleanings due to the presence of those possessions.

This law requires, for tenancies that begin on or after July 1, 2025, a landlord to take photographs of the unit immediately before, or at the inception of, the tenancy. The bill would also require, beginning April 1, 2025, the landlord to take photographs of the unit within a reasonable time after possession of the unit is returned to the landlord, but prior to any repairs or cleanings for which the landlord will make deduction from or claim against the security deposit, as described, and within a reasonable time after such repairs or cleanings are completed. The law additionally requires the landlord to provide, as described, these photographs along with and at the same time the itemized statement is sent, along with a written explanation of the cost of the allowable repairs or cleanings. The law prohibits the landlord from making a claim against the tenant or the security if the landlord, in bad faith, fails to comply with these itemized statement requirements.

SB 611 – Elimination of Fee to Tenant for Serving a Notice of Eviction
This law prohibits a landlord or its agent from charging a tenant a fee for serving, posting, or otherwise delivering any notice.

This is wonderful protection for Renters...BUT....who is there to enforce them?  Landlaord live in a neither world of the past.  Caveat Emptor or Buyer Beware was eliminated in the Legistation of the mid 80s the a full disclosure on the sale and purchase of residential 1-4 units.  Not so in rentals.  Landlords and their agents can still rent under the comment "It's ready to be occupied'".   No termite inspection, no home inspection, no notification of work done or permitted work is disclosed.  Landlords are not even licensed witht he State Department of Real Estate.  So while the the Legislature passes laws.  Landlord are not obligated to comply.  It is left up the the Renter to file complaints hire attorneys.  If the law is broker in a residential sale, the same department has the ability to work with buyers thorough the complaint process of the DRE.

Landlords, protect yourself from legal disputes – 5 renter complaints to never delay dealing with

Now here is where I go into the lack of inventory.  46% of the homes in California are rentals.  Of the 54% that are owner occupants, 87% are with mortgages of less than 6% mortgage rates.  Logic tells me, "Why would I sell my home and then refinance a new home at 7% rates and pay a higher property tax on the new home?

Insurance!  Daily I receive pleas for help with home insurance needs.  From insurance companies doubling or tripling insurance to new conditions that require upgrades to renew old policies with higher premiums.  This will be the issue that makes home owners begin to wonder about staying in California.  As beautiful as it is. The cost of insurance has gotten to be a burden on the Baby Boomers who have retired on a fixed income.  The recent fire in LA will only increase the exit of insurance companies and the increases in premiums.  Pressure will be felt more dramatically on the rental market as landlords will find it hard to pass on premiums to renters.  The shift out of residential income properties will aim toward the NNN or Triple Net marketplace where the commercial renter pays taxes, utilities and maintenance.  A good Deal for investors as they receive a cash flow net and maintain property that has a scheduled increase in rents.

That leads me back to rental homes.  If the rental market were cleaned up and the same full disclosure rules are applied, then we may see less evictions and more rentals being sold due the reluctance of the owners to follow the Full Disclosure Law that applies to 1-4 unit sale in the residential market.  

The indications are clear that the rental market is in store for change.  8 States, including California has started actions against the use of AI to calculate Rents. 

“Every day, millions of Californians worry about keeping a roof over their head and RealPage has directly made it more difficult to do so,” said California Attorney General Rob Bonta in a written statement. 

There is one source where renters are moving to that is getting good marks, TikTok, https://sfstandard.com/2024/01/31/tiktok-san-francisco-apartment-rentals-real-estate/. Check it out

Sooner or later someone in Sacramento will look at the disclosure inconsistency.  Then the landlords who treated the tenants like russian Serfs will face retribution.  Unfortunately it is the minority who will make the honest tenant interested investor who will suffer with added costs.  Or they too will sell and put their proceeds out of the state or into commercial properties that are on the bargain market.

Commercial Real Estate is seeing some changes nationally.  In New York City the largest Office Rental Owner is SL Green.  Business is so brisk they plan on adding to their portfolio of office rentals by year end 2025.

In Silicon Valley Commercial vacancy rates remain high at 20%.  There is a change in the numbers that have recently been published in the San Jose Mercury News.  At least 8 tech companies with AI have taken new offices.  A positive move for a market that was once under intense pressure.  As the commercial market begins to change and the return to the office begins to gather force.  It will be seen in housing demand. Leasing Boom Propels Commercial Market

Residential housing in Silicon Valley is never an issue to forget and wait to buy.  The cost of housing will always be high, but the benefits of living in Silicon Valley far outdistance the cost of living. Proposition 13 is one of the greatest benefits to residential owners.  The ability to lock in property taxes without the fear that increase property taxes will force owners to sell is great.  Of the Counties of California Two Counties are at the top of the list benefiting from the lock in of Prop 13.  The SF Chronicle recently had an article on it.  Read it here: https://www.sfchronicle.com/projects/2025/prop-13-subsidy-california/

2025 will see a diverse market in real estate.  The Luxury Market will continue to see demand irrespective of prices.  All fed by the TECH Stock rally.  The starter home market will continue to see demand while prices forecasted by Zillow for the next year will be off 2% or so.  Any weakness in price will be taken up by the quality of life and the beauty of living in Silicon Valley with Silicon Valley's Diverse Population, Highly Educated Population, Educational Opportunities, Medical Superiority, Climate and Social Activities.  Forecasts 2025 Housing Market

Over the next 2 years we will see interest rates as dictated by the FED go down to 3% level, from the present 4.25% level. That will mean mortgage rates will go down with it. Buy now and refinance in 2-3 years will be a benefit in having a permanent home.  It will benefit investors as their commercial property bought with a net return to them of 6.5-7% will increase in value from the decline in cap rates and the comparative analysis on the new rates available. Not bad for a No Brains decision.

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

The Problems Are the Path: Interest Rates and Future Targets

The FED target for interest rates in two years is 3-3.25%.  There was some upset investors after the last FED meeting that took the Stock Averages down precipitously.  The expectations were there would be a series of interest rates cuts in 2025, that the FED determined would not occur.  Well, what does it matter?  Think about you are traveling  from your home to Lake Tahoe, or from Sacramento to Menlo Park or Menlo Park to Sacramento.  The trip from the Bay Area or visa versa will take 3 hours, give or take 15 minutes.  You can go on via Hwy 5, or 80, or 680, or 580 or some combination of all of them.  But when it comes to arrival you will be there at about the same time.  So why is there the big hullabaloo over how many rate cuts we get in 2025.  You could start out from Sacramento get onto 5 and then there is an accident.  Or you could do the same on 80, another tie up.  Take the cut off onto 680 from 80 and another tie up.  You could stay on 80 all the way to the Bay Bridge and find another jam.   Or, you are lucky and no jams and smooth traveling any you are there in less than 3 hours.  The result is whichever route you take you will arrive at about the same time another driver takes with the different route.  So, why the upset of 2 or 3 cuts in 2025 or one?  It only means that there will be other cuts in 2026 to get to the 3-3.25 rate when we are at the 4.25-4.5% rate now!

One thing I do see is the optimism for the Silicon Valley is high.  Home Prices are rising!  People are returning back to work in offices.  Commercial Properties are picking up.  Job numbers are improving in Silicon Valley.  Sooner or later prices will increase in San Francisco and prices of the communities that once drew work from home works will drop.  It has been 4 years since the Pandemic drove people out of the Bay Area.  I watch home prices in the Sacramento Valley and eastern Sierra Hills communities.  New projects are dominant.  From Elk Grove to El Dorado Hills to Placerville land is cheap and available.  Builders are covering the area.  The problem with the new developments is the cost of utilities and the availability of Doctors.  More people move in the practice is full for the senior medical physician or dentist and new ones are hard to find unless you are willing to drive a distance that becomes longer as more people move.

Sooner or later the return occurs.  We are seeing that now.  the new email to the "work from home" employee is: come to work or you are fired! 

Build and they will come has always been a well observed axiom in real estate.  Except how long will it take for them to come?  Then once you come how long will it take to acclimate and will you stay or return from whence you came?

The great investment opportunity I see is that the Commercial projects are centering around a new level...7% Cap Rates.  The FED say 3-3.25% in two years from the present 4.45%-4.5% Cap Rates will come down.  That makes the properties bought at 7% appreciate solely from the change in Cap Rates.  A Layup in my view for investors in Commercial Properties!

Happy New Year, just some food for thought as I observe the coming of 2025.

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

The Problems are the Path: 2025 Lower Mortgages and Higher Property Values

 Shortly after Trump's election the Census came out with one of their Employment Reports.  My wife, Cindy, once worked for the U.S. Census as a field worker for the reports on employment.  She thought it would be interesting to see how Silicon Valley worked.  The report I am referring to did not deal with the Silicon Valley employees. It dealt with labor force calculations in the best way to describe it, immigrant population employment.   Generally recognised out of the report were laborers in the service industry and agricultural industry.  It was a well known acknowledgement in the footnote, I recall, as that many were most likely non-citizens here on temporary status.  Back in time when I graduated from Wisconsin I did volunteer work for the TB Association searching for positive skin tests for TB on non-citizens who crossed at Brownsville Texas to work in the fields in the harvesting and canning industries.  The Census is stuck on the political mindset that our border crossing immigrants are really emigrants and they will be returning to the mother countries.  A good thought for apolitical group?

When I looked at the numbers and thought, "what if Trump sent them all home, and temporary workers were really temporary worker of the long ago past?"  Good thought.  Employment number would not look that good was my next thought.  The next thought was, "what would the FED do". Not too simple, lower interest rates to pick up economy and get natural US citizens to work.  In order to do that those industries would need to raise hourly wages from the poor immigrants who were paid below grade wages due to their questionable status.  Economics would need to address technology to improve efficiency in the industry improving net profitability to offset higher wages?  Then there is increased demand due to a growing economy and higher incomes willing to pay for increased costs.  

The next thought is "what would that mean inflation"?  Not necessary! Why because inflation is a function of a basket of costs.  The greatest part of that basket is HOUSING!  No immigrant workers renting more rentals or sales when rents decline to a point it is better to sell, do a 1031 exchange to a commercial property.

So where does that go?  I see the commodities market futures pricing interest rates and Banks and Economist pricing in the economy.  Interest rates for 2025 down to 3.25%, Mortgage rates at 6% and housing prices up 4% across the U.S.

Next part of my evaluation is what will cause interest rates to drop.  I know the FED is an artificial factor in interest rates. They only affect the short term.  Mortgage rates are the long term.  What would cause Mortgage rates to drop?  The Ten Year Government Bond would need to drop.  The Ten Year Bond prices all consumer lending rates. DOGE, Department of Government Efficiency, will cause the lowering of interest rates as the Government will need less to borrow from DOGE cost cutting.  The reduction in the cost of running government means the balance of payments go from deficits to surplus.  Not difficult.  It went that way during the Clinton Administration.  In fact the Treasury stopped borrowing in 30-year Maturities.  

Interest rates are a factor of Supply and Demand.  If the Treasury stops borrowing the cost of borrowing declines.  This ends supply. Demand will not change as banks, foreign sources, retirement  funds, investors need Treasuries for their investment portfolios.  Demand increases, price increases and yields on existing bonds decline.

Interest rates on US bonds in the World Market Comparative, now go to or below European Government Bonds.  Who ever would ever believe the greatest country in the world would have to pay more than the poorest and or less efficient, and prone to governing upheavals?  As of December 15, 2024 per CNBC the 10-year U.S. bond is 4.395%, the 10-year German Bund is 2.262%, the Japanese 10-year is 1.0472%.  France is below, 3.04%, and has gone through 4 Prime Ministers, THIS YEAR, Italy is below, 3.39%, and I can't recall how many governments have fallen. Then too is our ernst ally, England, 4.4%, can't get itself together whether they are part of Europe or Still Rule the Waves?  France is socialist and work 25.6 hours a week or less, with benefits that include a 5 weeks paid holiday a year, plus 11 additional holidays off.  

Where does that leave California.  The Golden West will prosper.  David Sach the AI and Crypto Tsar is from Silicon Valley.  AI is from Silicon Valley.  Do I need to go on?  The State is changing per the last election from Blue to Purple and San Francisco from my observation was 25% for Trump when it was in sub 7% level in 2016.  The coast is turning RED and our Governor is looking for a place to land...politically that is.  I cannot see home prices in Silicon Valley not go up and go up further than the 4% national forecast.  The movement out of the state will see a movement back when jobs and income rise with opportunities.  Silicon Valley is spreading out to Santa Cruz where rents and homes prices match Redwood City to Half Moon Bay where the same has occurred.  Down to Gilroy over to Los Gatos....need I write more?

Real Estate is bought based upon what one pays a month, not the price.  Oh, I know there are those that haggle over price when the the cost of owning declines.  They are the losers!  Let's take a $1,500,000 Starter Home somewhere in the Silicon Valley.  At a 7% mortgage the annual interest rate paid, no consideration of principal payments with 20% down is $7000 per month or $84,000 per year.  When one looks at a 6% mortgage it is $5000 per month or $60,000 per year.  Then one must consider taxes going down under Trump and the Possibility of the SALT exemption on property taxes rising from $10,000 the benefit to buy is huge!  Property taxes on a $1,500,000 house is $18,750, at 1.25% rate.  The limit of a $10,000 deduction leave the owners with a $8,750 extra cost of housing or $729.19 additional cost of housing.  Our California Republican legislators want it to double to $20,000 some want it eliminated.  Eliminate it and Trump and successors are in for a long ride on a Perfect Red Wave....oh how I loved to surf those waves when I lived in Hawaii!

So, my dear residential reader, buy now look to refinance at lower rates and forget what the cost of the purchase is and think about what you pay monthly.  As long as I have owned a home the cost to buy was never below the proceeds of a sale.  The trend is your friend.  

Let me take that one more step for the Commercial Buyer., or real estate investor  I have one prospect who has thought price is the the way you buy commercial property.  Over the past year, he tells me, he has paid over $220,000 in expenses keeping empty properties!  In the meanwhile, had he bought even at a lower cap rates of 6% or 6.5% and sold those empty properties he would have not lost cash flow.  GO FIGURE THAT RATIONALE?

An additional thought is the rental real estate market.  The State has passed in 2024,  I believe, 11-12 laws limiting or penalizing landlords.  HABITABILITY rules.  Gone are the landlords who rationalize spending to improve heating or plumbing a roof leak or faulty appliances.  Again, I recall the story of a LA landlord who forced a renter out so the landlord could make improvements and take the rents to market.  The renter found the right attorney and sued...award to renter was $250,000!  Rental properties will slowly flow onto the market for resident buyers.  Thus making inventory expand and price decline as those home need updating.

Just watch the declining numbers of hispanics on the street looking for pick up jobs to indicate where rentals will go!

GET SMART! BUY NOW!

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

Happy Thanksgiving...or is it?

 It does not seem so long ago that Wall Street, the Euphemism for the place were all savy investment decisions are made, was forecasting consecutive declines in interest rates from the (FED) Federal Reserve Board.  The FED would cut interest rates at every meeting.  Surprise!  The FED comments are that the economy is going too nicely along with inflation at a 2.1-2.3% on an annual basis for us to do so.  

Inflation rate may be well and good for the Nation at 2.3% annually, but we here, in California, we have some issues.  While gas prices at the pump have moderated a bit, the taxes that our Governor and Legislators put on gas keep the State of California as the highest in the Nation.  Add to that we have to contend with housing prices the highest in the Nation!

Next with all the push on the quality of the air and the carbon issues, the ability to convert to all electric has some road blocks.  The major roadblock is PGE ability to provide electricity.  As I look at the Nextdoor Neighbor site for parts of Silicon Valley there seems to be a regular outage somewheres in SV.  Poor Redwood City seems to be hit on a weekly basis.  Buying Gas Generators for power are hotter than pancakes, as the old saying goes.  Neighbors complain about the noise, the lack of power and the COLD in the house as furnaces are out.  Well that is for Silicon Valley.

Once one goes to the next Valley of our population, Sacramento Valley, solar panels are more common than EV vehicles.  

California Food prices are not really abating, or at least that is what my wife tells me.  Retired friends complain about medical costs and the cost of food.

Next we go to Savings Rates.  From 2020 to present the savings rate in the Nation is 2.3%.  That is down from 13.3% prior to the Pandemic in 2020 and during the Pandemic when savings skyrocketed to 38%.  

The Stock Market is cheering for the Trump Administration and getting a bit ahead of itself as the new president has not even been inaugurated.  His Cabinet and Staff have yet to be confirmed.  A bit like declaring a winner of a race before the bell to start has not even rung and the contestants are still in the locker room!

Housing prices continue to remain strong in sales, while the forecasts from Zillow are forecasting 2-3% declines in the next year.  New home sales are slowing down and existing homes sales see more price cuts and sales below list than that of a booming housing market.  

Mortgage rate hover around 7% and whenever this is a dip in rates below 7%, the Housing Industry shouts hooray!!.  A bit like a person coming out of a comma and the staff is already getting out clothes to discharge and getting the wheelchair ready!

With savings depleted the ability to afford home improvement lacks support in interest rates; even though, the equity in the home can support a Home Equity Loan, the borrower cannot afford the payments and the ability to take one out.

Where does that lead home buyers and sellers?  A Mexican Standoff?  Sooner or later prices need to adjust downward.  Sooner or later the migration to affordable parts of the state will continue.  I look at this as once living and working in New York City.  Great for a single person.  Not so great for a family.  The result is living outside the city and commuting.  That is similar to other big cities like Chicago.  Or even my home Town of Milwaukee Wisconsin.  

On the commute issue, I watch home prices on the East Coast.  North Carolina is up 3% and rising.  That seems to be the same for Tennessee too!  Florida and Texas have home prices declining and Arizona is up.

Rents too are adjusting downward.  Last year rents moved quickly and landlords were quick to raise rents and rent their homes and ignore work to make home habitable.  "Don't like it Move."  That creates other problems as lawyers and tenants revolt and lawsuits with State supported legislation force landlords to comply or pay heavy awards by Superior Courts and settlements by landords or their insurance companies.   

The commercial Real Estate Market is still reeling from the Pandemic.  Large Commercial Properties slowly go into default and foreclosure.  While it is not a newspaper item they are there.  Cap Rates that dictate buyers' and sellers' willingness to meet in agreement are slowing rising much to the chagrin of sellers and celebration of buyers.

The rotation of Commercial Properties in trouble have graduated downward from large properties to national companies, like CVS and Walgreen, even Starbucks is closing stores and buyers for their once sought after lease investments are finding it hard to get a buyer to take a risk for fear the store will close and they stopped getting rental income.

Throughout it all we should be happy and give thanks. Give thanks we are not in the Ukraine, the Left Bank in Israel, or Lebanon.   Give thanks we have a home or a roof over our heads, not a tent under a freeway bridge.  Give thanks we are not in a Cancer Ward, give thanks our children are healthy.

I had spinal meningitis when I was young.  I was told I would not survive.  I am here.  I came home partially deaf.  Angry? yes.....then I saw a worker who was in a wheelchair crippled the day before his wedding in a car accident 30 years ago. I was thankful......So Should We Be Thankful...GOD BLESS!

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

The Problems are the Path: Year End Comments

The last 2 months of the year are, or were, normally tied to "clean up" work.  Inventory was thin.  The properties that remained on inventory were usually: left overs from the year that have not sold, properties added due to moving or estate sales, and like in prior years from notice of defaults and foreclosure notice.  Buyers were generally on their hunt to find price weakness and reason for the reason WHY these properties have lingered on the market.  The general answer to WHY were they were OVER PRICED from the start.  Either they were overpriced due to condition or comparatives.  

From 2020 forward we have had a dramatic change to the Supply/Demand ratio.  The Pandemic took supply from the marketplace.  Whether that the supply was housing, restaurants, workers entertainment and travel.  Everyone was hunkered down in their homes fearful of the infection from others fearing all the horror stories of death.  A Present Day Black Plague was circulating the world. 

The Federal Reserve stepped in as the People in the White Hats to save the World and Humanity by lowering interest rates, buying long term bonds all to create historically low rates in the hopes of saving the world economy.

Their action had a two-fold effect.  It fed Speculation and eventual Inflation as as supply could not meet demand when the Pandemic was declared beaten.  

The risk of Speculation can be seen in the Commercial Real Estate market where improper leverage was taken and unrealistic growth was found.  Unrealistic when workers went to the "work from home" status.  The result was and is large commercial projects are being sold for a fraction of the cost of purchase or construction.  Those that are hanging on are doing so with the cooperation of lenders not wanting to take another return to the past Banking Crisis.

So, where does that take us today in the 11th Month?  Inventory in residential homes are still in short supply.  Commercial properties are still feeling the impact of high interest rates that occured to stop the supply side inflation.  It appears on a daily basis there are more small commercial properties being advertised for sale.  Small malls find in hard to get an empty site filled due to a closing of a business.  Banks are closing locations; as are, large pharmacies, large bargain centers.  All are feeling the recessionary effect of high interest rates and finding competition in the form of online competition.

COMMERCIAL PROPERTIES:  The correction in the Interest Rate Curve has had a major effect on the terms of purchase.  As short term rates declined and the FED is longer buying bonds, but liquidates their balance sheet and allows them to mature, long term interest rates move up.....NOT DOWN!  Investors seek higher Cap Rates for their investment. Where once 4,5,6% rates where acceptable.  It is now 7,8% Cap Rates are made in offers.  The credit of the property does not have much effect as even those with high credits are shunned as the fear they too may close a property in a cost cutting program.  

RESIDENTIAL PROPERTIES:  The day of low mortgage rates is behind us.  Something, if we remember, as in gas at pump lower than a $1 a gallon!  Therein lies the first problem with inventory.  Many homes have extremely low mortgage rates.  Rates are  1/2 of today's mortgage rates.  Then sellers must look at the cost of a new home and the capital gains and the property taxes that are going to dramatically rise from their present day property taxes on sale and purchase.  That is for those sellers who remain in California and are not qualified to transfer their present property tax to their new home in a reciprocal county.  

So where does that lead us as buyers or sellers?  

The State of California is a bifurcated state.  Silicon Valley with its Technology Engine keeps churning out businesses and technology improvements to keep jobs strong.  The money to invest in the new business keep growing and investing.  Along with that growth, property values will not depreciate over time.  There may some blips, but history tells us they are only opportunistic blips for buyers and then moving up. There is the normal loss of population to other states of some 300-400 thousand net a year.  (A minor impact). Those immigrants will create the opportunity to purchase at a discount as they must move.

Once the view of outside of Silicon Valley is made, the areas within the state that saw growth from the"Work from Home" movement find the movement has stopped.  Stopped and inventory of homes for sale are growing.  Price cuts in these areas are the norm, and sales are less than the price cuts.  There the long term outlook is not asset appreciation but the quality of life.

To those who are moving the price of the move is not solely benefiting in Quality of life and cost and savings, it is the frustration in finding a new medical professional, dentist, accountant, cleaner, grocery, and most importantly....new friends.  The adjustment process is not an overnight process. It will take years to develop new friendships.  Frustrating months to find a barber, hairdresser, dentist or doctor.  

So my Dear Reader, Where do you fit?

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