Updated 10/09/23 This newsletter is updated as the economy and situations change.
Housing prices have inched up slightly this past year even though here is more available inventory for sale,(homes for sale), as compared to the last few years. Prices have not completely come back to their peak of the early spring 2021 when interest rates were at their lowest. Escalating interest rates caused housing payments to rise near 30% (PITI) since early spring 2021. If interest rates continue to rise housing prices will drop a bit more. A bigger factor to keep an eye on is population growth or decline in the Bay Area affecting supply and demand, hence pricing. So far the population hasn’t changed much in California. There is a large influx of immigrants and a large exodus of retired baby boomers which seems to be balancing California’s population at a net zero. The average person immigrating into California may have difficulty affording or qualifying to purchase available homes. This could affect pricing. Time will tell.
In conclusion: There are more homes available for sale and… *Homes are taking a little longer to sell, selling for less than their peak in early 2921 and the days of bidding wars have passed. Buyers are having enough time to shop carefully and inspect the properties. Though there still isn’t an abundance of homes for sale the numbers of available homes for sale is growing.
*Nicer homes are selling quicker, but homes with issues are taking longer to sell and are being discounted a little more.
The supply and demand ratio, sometimes called, “months of inventory”, is changing. That’s the number of homes actively listed on MLS for sale today (the supply) compared to the number of homes that have sold and closed escrow over the past 30 days (the demand).
For the past few years we have averaged about three weeks of inventory. (Less than one month of inventory). In late spring we gradually switched to about five weeks inventory or more than one month inventory. It may not sound like much but it’s actually about a 50% jump in available homes for sale compared to what’s selling.
I have found the following scenario has always happened and will likely continue.
If # of homes in any given city, currently listed for sale on MLS ≤ the number of homes that sold over the past 1 month, (1month of inventory) then home prices rise much faster then current inflation.
If # of homes in any given city, currently listed for sale on MLS ≤ the number of homes that sold over the past 2 months, (2 months of inventory) then home prices rise slightly faster then current inflation.
If # of homes in any given city, currently listed for sale on MLS = the number of homes that sold over the past 3 months, (3 months of inventory) then home prices stay roughly with inflation.
If # of homes in any given city, currently listed for sale on MLS ≥ the number of homes that sold over the last 4 months, (4 months of inventory) then home prices will decline compared to current inflation.
It’s like musical chairs. With 10 people and 9 chairs, the demand for a chair is high and people fight for a chair but with 9 people and 10 chairs there is no urgency to get a chair.
Population growth or decline is the long term gold standard for housing demand and pricing. Just as an influx of people will raise prices by creating excess demand on existing housing, an exodus of people will drop home prices by providing a dwindling demand on existing housing. It’s all supply and demand.
*Inflation causes most everything to cost more, including homes. Inflation parallels government borrowing. Lately, the government is borrowing money by the trillions. Some people refer to this as printing money because it adds to the amount of dollars in the world but does not add to the amount of tangible goods. To watch our debt grow in real time, go to this website. https://www.usdebtclock.org It will shock you!
High inflation is bad because it makes your money near worthless but moderate inflation is good. If you own real estate and are leveraged with a mortgage, a percentage of your house will be paid off by inflation. Example: If you buy a $500,000 house with $100,000 down and owe $400,000 you essentially own 20% of your home and the bank owns 80%. If your house doubles in value to $1,000,000 you would still only owe $400,000 which would then only be 40% of the value of your home. You then effectively own 60% of your home and your bank owns only 40%. Inflation paid off 40% of your home for you. That’s real profit. AND… If in years to come, because the dollar is worth less, each dollar you owe should be easier to earn, making your balance easier to pay off! That’s a double win. Example: people who bought their homes 15 or 20 years ago have a small monthly mortgage payment by today’s standards.
Questions & Answers
Q Is now a good time to sell?
A Housing prices are down a little from their peak and might continue to drop a little more. In my opinion if you plan to sell in the next few years sell now because selling now eliminates the risk of the market turning down even if just a little before you sell. A bird in the hand is worth two in the bush.
Something to remember: if prices are high when you sell, your replacement property will be expensive. If prices are low when you sell, your replacement property will be cheap. Knowing this removes a lot of the perceived risk of buying or selling at less than the perfect time.
Q Is this a good time to buy?
A It could be if you’re buying a home you really like and plan to stay in it long-term, but… the rush is over so take your time and find the perfect home. I love this saying, “You marry the house but you date the interest rate.” It’s a slang meaning you will be in the house for a very long time but rates go up and down. If rates are up you get a discount on the purchase price and when rates go down you refinance. You still have the better price you bought the home at. Some economists think housing prices will decline even more over the next few years. Some say inflation will cause home prices to rise even more. I believe though there could be a small recession in the near future there’s always inflation which inevitably drives prices up over the long haul. If you are thinking of flipping it’s a very risky time to buy but if you plan on staying in your home long term, 10+ years, it’s always a good time to buy even if rates are up. Take advantage of the discounted price and refi when rates drop.
Q Should I fix my home up before I sell it?
A Generally yes because most homebuyers today are afraid of projects. Today the typical buyer is a young, well-educated, well-paid professional with little interest in working on a home. They prefer it “Move-in Ready”, but improvements can cost more than they benefit a sale. Cosmetic work is still considered the best investment when selling a home. Beauty always sells.
Q Is now a good time to buy a multiunit income property?
A Yes! Just be sure the real CAP rate as reflected in the seller’s tax schedule E is greater than the current mortgage rates you will pay for that property. OR Have a rental property professional such as myself oversee the transaction. (Alex Schauffert – 707 332 8301) Because multi-unit income producing properties are valued on their profitability or CAP rate (click here to see how it’s calculated). Most economists believe we are headed for a slowdown. If this causes homeowners to disproportionally sell their homes they will likely end up as tenants. That will add to the demand of rental property just as it happened in the 2007 recession. Then home prices dropped but rents went up. Add to that inflation, and multi-unit properties can be the investment of the century.
Disclaimer with regards to future predictions: Although this is compiled from my 27+ years’ industry experience, it is my best opinion. Its accuracy can’t be guaranteed and should not be entirely relied upon when making financial decisions. If you are not already in contract with a license California real estate broker, let me take a peek at what you want to do with regards to real estate investing and I’ll help protect your interest.
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