Updated 01/08/25 This newsletter is updated as the economy and situations change.
1) Real estate activity and sales are up over the past two months.
Since mid-November real estate activity as soared compared with the previous months and years, however,
housing prices have moved down slightly over the past few months as interest rates have gone up a little. Many
sales have happened at below the asking price and very few above the asking price. I thought interest rates
would go down closer to the election but in fact they went up.
2) It’s a good time to buy.
Buy while you still have some negotiating ability due to slightly higher interest rates. Then refinance when rates
are down.
3) Homes are taking an average of 2 to 3 months to sell.
This gives you time to inspect the home and negotiate the price.
4) Less expensive housing is holding value while more expensive housing is dropping in value.
This is happening because population growth or decline affects real estate prices and we’re now at
a time where the Bay Area population is declining. For the last several years now nearly a million people per
year have moved out of California to other regions in the country. Most have been retired middle to upper
income people with the intent of avoiding California State income tax while others simply followed their
employers as many large firms have moved away from California due to expensive taxes and regulations while
others, mostly retailers, have simply closed their doors due to a lack of shoplifting laws, forcing employees to
seek work elsewhere.
Coincidentally, almost as many people from other southern countries have migrated to California keeping the
overall population almost even.
A scenario that’s being created is, not only is the population declining slightly but medium and upper
income populations are leaving California and being replaced by lower and no income populations. A small
exception to this rule is the minuscule percentage of immigrants with high tech skills moving to Silicon Valley to
work on AI. This will keep a high demand for rental property but a lower demand for more expensive single-
family homes. I have already seen this with a lower demand for, and larger price drops in upscale housing.
Other factors to watch out for:
The general perception of profit or loss effects home sales more than most would think. If everyone believes home prices are coming down they will wait to buy. I remember a time in 2007, when a single-family home could be purchased for as little as $85,000 in some areas and people said, “I’m going to wait because I think they’re coming down even more.” I’ve also seen those same exact homes sell for near $500,000 because people thought they would be $600,000 the following year. When perception meets reality, perception always wins. Interest rates – Most people buy homes based on the monthly payment not the actual cash purchase price so the higher or lower interest rates are, the higher or lower the payments are, and thus fewer or more people are willing or able to pay for a home. Typical mortgage rates are now up from the low sixes to the sevens. I’m estimating rates may continue to rise for at least a a few months to year and then level off and decline gradually.
The economy/employment – The AI industry that is starting to hit Silicon Valley might spread out through the bay area as the .com boom did 25 years ago. If the economy is robust or weak it makes house payments more or less affordable. In addition to that it tends to make people more optimistic or pessimistic which strongly influences their decision to buy or not.
Inflation – Inflation is almost as certain as death and taxes, and has always been tied to government debt. If you’re curious, where inflation is headed, the following link is a live feed of most every significant government debt in real time. https://www.usdebtclock.org/
Supply and demand and reading the supply and demand ratio in housing– This is most easily viewed by what is referred to as months of inventory. That’s the number of homes actively listed on MLS, for sale today in any given area, (the supply), compared to the number of homes that have sold and closed escrow over the past 30 days in that same area, (the demand). The lower this number, the more likely prices will go up and the higher the number is the more likely prices will come down. This can also be viewed by how long the average home takes to sell in a given city. My near three decade experience has shown me that at or below one month of inventory prices go up 10 to 20% a year. At or below two months inventory they still go up but more conservatively, typically under 10%. Three months of inventory is about the breakeven point where if homes go up in price it is only enough to parallel inflation. At four months of inventory there is a slight decline in prices at least relevant to inflation. The worst I’ve seen is the 2005 through 2009 recession. There were so many homes for sale, from 8 months of inventory to 27 months of inventory, depending on the city, that home prices dropped between 25% and 80% in value over a two-year period.
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 I see no indication that housing prices will skyrocket in the next few years. So, 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 Yes, especially if you’re buying a home you plan to stay in for long-term. 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. While rates are up you get a discount on the purchase price and when rates go down, and I believe they will be going down, you then lock in a great long term loan. In the long term you win both ways.
Some economists think housing prices will decline due to a small recession and 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.
Q What about property flipping?
A If you are thinking of flipping a home, it’s a mildly risky time to buy!
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 multi-unit 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). Some believe we are headed for a slowdown (recession). 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 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 28+ 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 oversee what you want to do with regards to real estate investing and I’ll help protect your interest.
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