Understanding the Market

 Some time ago I stated that the Stock Market and the Real Estate Market are related.  They move together on a longer term basis.  Looking back at that comment had me wondering why we are seeing a strong report on housing price increases nationally and how that relates to our Silicon Valley Market.

To summarise the inconsistencies I can say that we are in a perfect storm situation.  It is not a buyer's market nor a seller's market.  The perfect market where sale prices are stagnant and buyers do not fight with other buyers in over bidding the home of their choice.  Pushing prices too high puts transactions at risk as lenders and appraisers are under pressure from a risk standpoint and homes do not pass.  The seller is now faced with putting the home back on the market and having to deal with a property that must cut prices to sell.

In our present situation we are in a situation where there have been a record number of price cuts on a weekly basis.  Generally speaking for the Silicon Valley cities we follow to get 50 price cuts a week is extraordinary. Some reasons could be the agent does not want to place the home on the market for what the owner wants as a price, but agrees if the owner cuts the price in 30 days without action.  30 days later with no action it is cut to the price the agent wanted.  That situation is bad, it is a sign of weakness.  The better of the strategies should have been price it 10% under the object price and get the multiple offers over to the objective price. 

Let me give you an example of where the market is going over the next year per Zillow:

    Zip Code 94062 which is Woodside and parts of areas Redwood City in proximity in to Woodside the rate of increase is .8% from $2,135,439 to $2,168,312.

    95003 is Aptos on the coast.  1.8% increase from $947,856 to $953,083.

    94301 is Palo Alto.  +.3% from $3,698,486.  Last year the typical value was $3,718,799

    94020 is La Honda. +5.6%  1-year forecast from $821,575 to $875,718

    94027 is Atherton. +.4% from $6,236,092 to $6,388,640.

    95125 is the sought after Willow Glen market in San Jose.  +.75% increase from $1,295,356 to $1,318,068

Do you notice anything?  The out of the area markets are increasing.  La Honda is going to be up 6% and Aptos on the coast up 2%. The areas that were once the hot areas have minimal appreciation.  Buyers are seeking lower price homes away from the crowded urban areas.

I looked at a 10% price cut today in the hot area of Redwood City near San Carlos.  The promotion is the shops and restaurants of San Carlos.  Doubt that will be a draw as Covid has made it impossible to use them.

Do you have an explanation as to why home prices are increasing nationally and we have a stagnant home price situation?  While that is good for buyers and sellers there is something that must be observed and used is: where to in the following years, where to on rentals, where to on new developments?

The "Exchange " section of the weekend Wall Street Journal front page is 'THE SILICON VALLEY EXODUS".  I made mention of this in prior releases.  This time the WSJ has gotten the message.  

1.  96% increase in the number of listings in San Francisco in the first week of August.
2. 11% decline in the median rent for a 0ne-bedroom apartment in San Francisco in July compared to the prior month.
3. 42% of Bay Area Tech workers who said they would move to a less expensive city if their employer as them to work remotely full time.

"There are sign that the exodus is happening.  Silicon Valley the hub of innovation, may never be the same".  While it is too soon to measure the total outflow from the area it is already happening.  Rents are falling for the first time in years. Rents are the function that determine housing prices.  They call it a "cap ratio"  When rental income falls and interest rates remain the same the only offset is lower value of the asset.  Those assets are already under pressure.  Eviction and the shut down has affected more than the lower income wage earners.  It has seeped into the middle income earner as they are faced with the demand of lower rents or leave. the middle income wage earners can afford to leave the lower income have no resources to do so.  They want to work!  They are the same people +100 years ago who created what we have today.  They cannot go onto the streets as landlords have "For Rent" signs out until they get the message.  

The situation can be bleak if the movement is out of the state.  The loss of high income earners will deplete the income base that support our state and local governments.  I believe that is why the values outside the Valley are appreciating.  that is why realtors in Tahoe are saying there is not enough home for sale to meet demand.  Look at the local paper if they have reports of the Virus.  Tahoe and counties like El Dorado have minimal afflections and deaths.  I'd trade a hot summer in El dorado and Cold winter in Tahoe to being DEAD!  Wouldn't you?