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Housing Price Trends

Updated 02/23/24  This newsletter is updated as the economy and situations change.

Welcome to the new year. Housing prices continue to inch up slightly this past year mostly in Contra Costa and Alameda counties but not so much in Solano County. There are more homes for sale in most Bay Area cities, as compared to the last few years.  Homes are also taking longer to sell versus the past few years. Although prices have not completely come back to their peak of the early spring 2021 when interest rates started to rise, they are reasonably close to their peak within five or 10% depending on the city and the quality of the home.  As interest rates have come down about a small amount over the last few months and are expected to come down another 1/2 or 1% this year, prices should holdfast and maybe even go up a tiny bit. Because supply and demand always rules, if the amount of available inventory continues to grow it will inevitably lower housing prices.

Factors that affect housing price changes:

#1, Supply and demand. This ratio 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, upwards of 27 months of inventory, in some cities, depending on the city, home prices dropped between 25% and 80% in value.

Things that effect this supply and demand are: Population growth or decline, interest rates, the economy/employment, the general perception of future financial gain or loss by deciding to buy or sell a home and over the long haul, inflation.  Inflation has always been tied to government debt so if you’re curious the following link is a live feed of most every significant government debt in real time.  https://www.usdebtclock.org/

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. 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. 

Interest rates affect the cost of a home with regard to monthly payments.  With lower payments, most are willing to pay more for a home.

High or low employment effect both confidence to buy and payment affordability of a home purchase.

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 2006, when a single-family homes 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.

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  Though housing prices are down a little from their peak and future prices are uncertain, 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.  If rates are down you lock in a great long term loan.  In the long term you win either way.

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 very risky time to buy! 

Q  Should I fix my home up before I sell it?

 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 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 oversee what you want to do with regards to real estate investing and I’ll help protect your interest.

If reproduced, please include: Compliments of and credits to NewStandardRealty.com   (707) 332-8301

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