Price Trends News Letter
Updated 01/07/21 This newsletter is updated as the economy and situations change.
How to know if home prices will go up or down: The gold standard to speculate on tomorrow’s home prices is the supply and demand ratio. This is the number of homes listed on MLS for sale (called inventory or supply) versus the number of homes that have sold and closed escrow over the past 30 days (called monthly sales or demand). Currently in Bay Area suburbian cities, the number of homes listed for sale is less than how many homes sold over the past 30 days. When demand is greater than supply, prices go up. The following scenario has always happened and will likely continue.
If # of homes listed for sale on MLS ≤ 2 months of sales, home prices rise beyond inflation.
If # of homes listed for sale on MLS = 3-4 months of sales, home prices stay with inflation.
If # of homes listed for sale on MLS > 4 months of sales, home prices will decline.
From 2000 to 2005 # of homes listed for sale on MLS was = around 1 month of sales. Prices rose between 10% and 20% annually. From 2006 to 2008 # of homes listed for sale on MLS was = between 4 months and 27 months of of sales, depending on the city. Prices then fell from 20% to 80% from their peak in June 2005 when there was an average of under 1 month of inventory. Today, in most Bay Area suburbs there is under 1 month of inventory. That’s why prices are going up quickly in spite of high unemployment and the high # of business closures.
The combination of lowering the mortgage interest rates and working from home lure inner city dwellers, many of whom were renters, to purchase a home in the suburbs. Nicer homes have gone up in price more than less expensive starter homes.
Banks have continued to tighten credit regulations and even started charging an extra 1/2 point fee on home loans in certain counties. Some banks are considering policy that require a minimum of 20% down and a 700 or higher FICO score on non-FHA loans.
2021? Predictions are not guaranteed but…
If you’re looking to sell, sales are easy and prices are high. Over-bidding is the current norm. If you’re looking to buy, you can lock in the lowest rate ever. Sales should stay strong and suburban prices should continue to escalate for at least a little while. Interest rates are promised to stay low until inflation hits 3% or unemployment drops significantly. By mid or late 2021 home sales and prices might level off or soften unless the Federal Reserve softens credit guidelines or the federal or state government offer tax credits to bolsters home sales.
2022? Predictions are not guaranteed but…
The number of homes listed for sale will increase mostly from economic hardship and partially from sales from Baby Boomers. As this same economic hardship will hamper potential home buyers, this combination will likely swing the supply and demand ratio from a seller’s market to a buyers market unless any of the following factors come into play.
*Population growth or decline Just as an exodus of people will drop home prices, an influx of people will raise prices. A large insurgence of people will create a greater housing shortage, further raising rents and raising existing property values. It’s all supply and demand.
*Inflation. The government keeps borrowing money. 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. This means there’s more dollars but the same number of homes. This will likely cause long term home price inflation. To watch our debt grow in real time, go to this website. https://www.usdebtclock.org/
Run-away inflation is lethal 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 make very small monthly payments by today’s standards.
*Government assistance or hindrance or interference Any addition or removal of tax benefits to buying, owning or selling real estate can greatly help or hurt the housing market. If tax write-offs for home ownership went away home prices would drop 20% but additional tax benefits would raise home prices.
*The Federal Reserve’s tightening or loosening of credit guidelines From 2000 to 2005 credit guidelines continually dropped. Many believe too far as near all you needed to qualify for a home loan is be alive. That along with continuingly lower interest rates surged home prices from 2000 to 2005. Then, the FED’s exit strategy to the refi-boom, the abrupt halt of interest rates being continuously lowered, brought about the housing crash of 2007. It actually worked well for a while. Maybe they learned from their mistakes and can do it better next time.
The Federal government is positioning itself to start purchasing defaulted real estate, probability by 2022. I’m unsure how this will affect future prices. The Federal Reserve will continue to loan money to the US government, trillions at a time, while many taxpayers who will be burdened with paying this debt backare out of work . To watch our debt grow in real time, go to this website. https://www.usdebtclock.org/
Questions & Answers
Q Is now a good time to sell?
A Yes, but only if you plan on selling anyway. Prices are currently at or near the highest they’ve ever been and homes are selling quickly. Selling now eliminates the risk of the market turning down before you sell. A bird in the hand is worth two in the bush. Home prices could continue rising through the first half of 2021 and possibly longer but there’s no guarantee of that.
Q Is this a good time to buy?
A It could be. Interest rates and monthly payments are low and home prices are rising. A caveat is many economists believe there is a recession coming which would cause house prices to decline over the next few years. Some say inflation will cause home prices to rise. All say interest rates will inevitably rise. If you are thinking of flipping it’s a risky time to buy but if you plan on staying in your home long term, it’s always a good time to buy.
Q Should I fix my home up before I sell it?
A Yes. 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 will benefit a sale. Cosmetic work is still considered the best investment when selling a home. Beauty always sells. Time is crucial as the market can change quickly. A remodel project that takes too long could cause you to miss this great seller’s market. It is an unknown but procrastinating is a risk.
Q With COVID restrictions, can you show your home?
A Yes. Open houses aren’t allowed but following sound guidelines, showings are allowed. Considering current prices, this has not been a hindrance.
Q What about Multi–Unit properties?
A They are still in demand, however, there is currently a temporary moratorium on evictions for nonpayment of rent for certain COVID reasons. This is making buyers a little leery at the moment. A 1031 buyer is your safest bet.
Because multi-unit income producing properties are valued on their profitability or CAP rate (click here to see how it’s calculated), the new lower interest rates have made these buildings more profitable therefore their prices should go up when / if the eviction moratoriums ends. But if vacancies increase due to unemployment, prices could stay stagnant or even decline. However, if due to unemployment, people are forced to sell their homes they may end up as tenants just like 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.
Interestingly, the new rent control laws will cause landlords to continuously raise rents the maximum percentage annually because they will never be allowed to catch up in later years. It sounds counter productive to keeping rents low but it’s true. Although rent control prevents landlords from increasing rents in large increments, slow but steady wins the race every time. Proof is the fact that every city that has had rent control for a long period of time, currently have the highest rents. Landlords must now raise their rents every year by the maximum amount or their property will permanently decline in value forever.
Disclaimer with regards to future predictions: Although this is compiled from my 25 years’ industry experience, it is only my honest opinion. Its accuracy can’t be guaranteed and should not be relied upon when making financial decisions.
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