Updated 05/07/2025 This newsletter is updated as the economy and situations change.
Housing prices have mostly remained flat this past year. Many sales have happened concluded below the asking price and very few above the asking price. There are more homes for sale and they are taking longer to sell.
Homes are taking an average of 2 to 3 months to sell. This is up from several years ago when they took 2 to 3 weeks to sell.
I believe prices will start to decline as the number of homes for sale increases. There is roughly as many homes for sale and Solano County as it takes to sell and three months. That is called three months of inventory. By or before it reaches four months of inventory prices will start to decline. Although I don’t believe anywhere near as severe, this is the same scenario I saw in April 2005, three months before the last recession began.
Things that will affect home prices now are:
Population growth or decline – Were now at a time where the Bay Area population is declining slightly. More people than housing creates a housing shortage and drives home prices up. More housing than people creates a housing abundance and drives home prices down. It’s like the childhood game musical chairs. With 9 chairs and 10 people, everyone fights for a chair, but if there’s 10 chairs and 9 people, there is no urgency.
Interest rates – Most people buy homes based on the monthly payment not the actual cash purchase price so the lower interest rates are, the lower the payments are, and the more people are willing to pay for a home. Mortgage rates seem to be stuck in the mid 6% range give or take a little. Although likely to come down to future in near future holds little promise for any significant improvement.
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. I hope I’m wrong but I don’t hold high hopes for the AI industry creating many jobs quite the opposite I think AI will fulfill its own needs more than people will.
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/
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.
The general perception of profit or loss effects home sales more than most think possible. 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.
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 year or two. 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 timing the perfect market to buy or sell.
Q Is this a good time to buy?
A Yes, if you’re buying a home you plan to stay in for long-term. Though prices may come down over the next year or two due to a minor decline in population if you saw a minor savings in a few years it would be more than offset by the fact he would be paying down your mortgage instead of your landlord’s mortgage over those same few years. If you think rates will be coming down in a few years, it’s better to refinance when that happens versus waiting for it to happen. 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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