It is called Asset Dis-inflation

Asset Dis-Inflation

The FED has publicly stated that interest raises are being done to stop inflation.  If you paid close attention to FED Chairman Powell's last remarks, he stated he wants to lower "home prices" for all Americans.  

Elon Musk stated in one of his posts that his view was the FED was looking at asset dis-inflation.  That to me also mean Stocks, Bonds, Investment vehicles of all color and types, and Real Estate

What we have seen so far is that Real Estate prices are dropping across the United States; irrespective of location.  Luxury Home Sales Plunge Across the U.S. per a Wall Street Journal article dated September 23, 2022.  Locally the Luxury Market is defined by Atherton, Woodside and Portola Valley.  Prices in those markets come down by 7 digits in some cases.  One Woodside home was originally listed at $110 million with several price cuts it is now at $48 million.  Days on the Market are increasing and Sales Price to List Price have come down to a discount to list of 5%.

Of course stock market values have declined 20% plus.  Some of the high tech stocks have declined 60%.  At the same time Oil stocks are up over 20%.  

All adding up to the FED's real goal of bring down asset prices in stocks, bonds, real estate and other assets.

So how does that relate to home prices in Silicon Valley?  

High end Luxury Homes will continue to see pressure.  Sellers who are executives of High Tech Companies that have relocated will sell with a company relocation benefit program.  They know that they have the company buying their homes, that is the put.  

Added to the Luxury Relocation and Liquidation there are the "Fix and Flippers" who find themselves with inventory and no buyers.  Foreclosures are happening, but there is no discussion of that in the Media.  Personally I have been called upon to give "Broker Price Opinions" for properties foreclosed or in pre-foreclosure.  The horror stories of Financial ruin are written in the valuations.  

For the seller, ask yourself a question,"would I buy my house for what I am thinking of asking to sell it for". If No, sign the papers and move on.  One or two more interest rate increases will hit the real estate market hard!  For those who say yes, then stay and wait out the storm. They all pass.  

How about the buyer?  There is no better time to buy than in a weak market.  As I suggested in the prior paragraph to sellers who would buy their house in today's market, you have the ability to wait out the storm with a home at a discounted price.  As interest rates move back down you can refinance.  My suggestion to buyers is offer 10% less than the list price. The buyer now have a property that will survive, mentally, from another decline from interest rate increases.  

There will be opportunity in two areas.  

1. Fix and Flip properties that are forced sales.  

2. The other is the developers who have inventory to liquidate.  Every Saturday and Sunday the San Jose Mercury News has a real estate section that details all the developers from Tahoe to the Coast and from Napa south to Gilroy.  These developers are offering discounts to sell homes.  You will need your realtor to negotiate this, so don't forget about me!  10-year builder warranty goes with them and some developers will pay closing costs and even offer a loan.  

For the investor, the same opportunities are available. I believe the developers are the best area to focus on due to the 10-year builder warranty.  You cannot trust what is under the Fix & Flip house.  Paint and putty will hide a lot of sins my father use to say.  Electrical, plumbing, foundations can all be hidden until after close of escrow.  In foreclosures the sales are all "AS IS". The buyer needs to fully research.  Sometimes the cost of research will lead to a canceled offer.  There is no way to recapture the cost.  

WHY SILICON VALLEY?  High Tech is always hit when interest rates rise.  Is is called the "risk off trade" as the risk free rate of return is moving up and offers a safe no risk place to park funds.  1 and 2 year T-Bonds are now at 4.03 & 4.27% respectively with 90-day T-Bills at 3.27%.  High tech cannot compete for funds or investors. Neither can Venture Capital deals.  According  to 

Layoffs.fyi Tracker 648 startups w/ layoffs ∙ 81693 employees laid off ∙  in 2022

OUCH!  

The Wall Street Journal announced that many of the pension plans that invested in Venture Funds will have to take a 25% haircut.  Another OUCH!

So with layoffs in high tech where are the employment numbers coming from with such good results? It is all those businesses that had lay offs during the Pandemic while work at home High Tech prospered. People are going back to work from Pandemic layoffs to cure the bottlenecks in the supply chain that are really causing inflation.

The BIG NEWS that is not being publicized locally is Pacific Coast Oil once known as Standard Oil of California, now known as Chevron has sold their corporate headquarter in San Ramon and moving the bulk of their corporate employees to Houston Texas; while it still maintains its corporate headquarters in California.  PER WALL STREET JOURNAL September 29, 2022.

 

Large corporations moving from California and staff relocations is not positive for maintain housing prices or rentals in our Bay Area.  Oracle, Schwab, HP and Chevron moves after being founded here in 1879!  Add to it the slow down in Facebook, Google and Apple.  

We may be surprised one day with the FED announcing they are done with rising interest rates.  For those who hung onto their portfolios they will see some regain in valuations.  For those who bought a home they will see lower interest rates and demand increasing. 

What will cause to FED to Stop Raising Rates?

The last week the markets entered an unusual perilous phase of asset volatility.  

Surging volatility in what is supposed to be the safest assets, fixed income instruments.  The FED could disrupt the financial system's plumbing.  

This would force the FED to prop up the markets by halting the rise in interest rates and halt the quantitative tightening program ahead of schedule.

The other worry is the the whipsawing markets will expose weak hands among asset managers, hedge funds and other players who have over-leveraged unwise risk positions.  Margin calls and forced liquidations would force the FED's hand as it has done so many times in the past.

Buyers are in an opportunistic environment. 

This is why I recommend to buyers to buy now and forget about lower prices.  You may just wake up one morning and find the house you wanted is gone and others are back on the market at higher prices.

WHEN WILL THIS HAPPEN?  If I knew would I be writing these letters?

I see foreclosures occurring, I see margin calls on stocks.  I see liquidations.  The only thing missing is the media catching on.  When they do, buy, buy, buy.  They are always late to the party.