the Problems are the Path II

OPENING COMMENTS

The end of the year has always been a period of clean up of inventory.  This year is no different.  We are faced with the same issues past markets have been faced with.  Except, the present situation is in reverse.  The increasing rates have supplanted the falling rates.  which in turn has meant rising mortgage rates; rather than, falling rates that in some area of the world dipped to negative rates.  The problems face in the past were economic and health, lower interest rates and increasing money supply helped save the world economy.  Unfortunately, the excesses that occurred led to problems that are in todays economic environment.  Those problems were over speculative tendencies that lead to over priced assets.  Those assets created problems with housing and the lack of affordable housing.  Other assets such as new business have created Poster Children of our time.  You know them well, we may see others join the list as interest rates slowly creep up in the future.

Silicon valley is slowly seeing unemployment replacing full/excess employment and hiring binges.  Employers have moved out of the State and new business have been slow to develop.  People are laid off and recruiting staff terminated or diminished.

Supply and demand will always create prices.  We are now in an environment in housing that is bordering on buyer's market to seller's market.  Inventory remains light as present home owners find it difficult to give up low interest mortgages and low property taxes to the opposite; unless they are of the many who are seeking "greener pastures". 

The recent issue of November Luxury Home Marketing newsletter has the right content to quote here:

"

Challenging Times in a Market Full of Contradictions There is little doubt the luxury real estate market is facing some interesting challenges that even have experts contradicting each other in their predictions and assumptions. Statistics in many luxury markets still show that they are favorable to sellers – so why are homeowners remaining hesitant to list their homes? For the fourth straight month, the number of new listings entering the market has fallen, with increases in inventory levels mainly attributable to stale listings lingering on. Both sellers and buyers are sitting on the fence, with neither side wanting to jump into this unconventional market unless presented with the right opportunity. The average days on market have increased compared to last year, but relative to pre-pandemic averages, homes that have sold recently are still selling twice as fast. Outside influences, some of which are not typically identified as being impactful on affluent buyers and sellers, are also causing disruptions to their spending habits: such as concerns over a potential recession, interest rate increases, and a volatile stock market. Mortgage companies are offering creative alternatives, but even a slight dip in recent rates isn’t driving buyers to purchase despite statistics from the National Association of Realtors (NAR), the National Association of Home Builders (NAHB), and Realtor.com, showing demand still outweighs supply in many price points, property types, and locations. All indications are that those who need to buy and/or sell are continuing to do so, but for those whose criteria are more based on ‘wanting to buy,’ there is hesitancy as they hope inventory choice will improve and/or prices will become more favorable.

Will Prices Fall?

This is a big question, and yet the jury remains cautious as to what extent prices will fall and which locations, property types, and sizes will be most affected.

Since July 2022, there has been a slight, but continued decline in the median sold price for single family homes dropping from $1,311,000 in July to $1,275,000 in September; however, in October, the median price climbed back up to $1,313,525.

In contrast, in the attached luxury property market, the median sold price increased from $832,375 in July 2022 to $890,500 in September, only to drop to $878,500 in October.

These are not dramatic swings, but they show there is some volatility in the luxury market.

Interestingly, a recent article by Nasdaq1 speaks to an increase in the ultra-wealthy currently investing in luxury real estate.

“As the value of the dollar remains volatile, we’ve seen more new clients looking to park their money in a low-risk, luxury asset whose likelihood of appreciation is higher, forged by historically beautiful surrounding neighborhoods, sprawling acreage and square footage, and newly renovated constructions.”

According to their article and The Trend Report 20222 by Coldwell Banker Global Luxury, they foresee the value of luxury properties will continue to appreciate. Both site the historic gains in this segment of the real estate market and explain that prices will oscillate by month or quarter, but how the appreciation is clearly recognized by investors and homeowners as being a long-term decision.

“Prone to behaving cautiously, the affluent have begun to signal that they are looking for more stable long-term investments to protect their wealth and give them peace of mind.” 

Challenging Times in a Market Full of Contradictions There is little doubt the luxury real estate market is facing some interesting challenges that even have experts contradicting each other in their predictions and assumptions. Statistics in many luxury markets still show that they are favorable to sellers – so why are homeowners remaining hesitant to list their homes? For the fourth straight month, the number of new listings entering the market has fallen, with increases in inventory levels mainly attributable to stale listings lingering on. Both sellers and buyers are sitting on the fence, with neither side wanting to jump into this unconventional market unless presented with the right opportunity. The average days on market have increased compared to last year, but relative to pre-pandemic averages, homes that have sold recently are still selling twice as fast. Outside influences, some of which are not typically identified as being impactful on affluent buyers and sellers, are also causing disruptions to their spending habits: such as concerns over a potential recession, interest rate increases, and a volatile stock market. Mortgage companies are offering creative alternatives, but even a slight dip in recent rates isn’t driving buyers to purchase despite statistics from the National Association of Realtors (NAR), the National Association of Home Builders (NAHB), and Realtor.com, showing demand still outweighs supply in many price points, property types, and locations. All indications are that those who need to buy and/or sell are continuing to do so, but for those whose criteria are more based on ‘wanting to buy,’ there is hesitancy as they hope inventory choice will improve and/or prices will become more favorable.

Will Prices Fall?

This is a big question, and yet the jury remains cautious as to what extent prices will fall and which locations, property types, and sizes will be most affected.

Since July 2022, there has been a slight, but continued decline in the median sold price for single family homes dropping from $1,311,000 in July to $1,275,000 in September; however, in October, the median price climbed back up to $1,313,525.

In contrast, in the attached luxury property market, the median sold price increased from $832,375 in July 2022 to $890,500 in September, only to drop to $878,500 in October.

These are not dramatic swings, but they show there is some volatility in the luxury market.

Interestingly, a recent article by Nasdaq1 speaks to an increase in the ultra-wealthy currently investing in luxury real estate.

“As the value of the dollar remains volatile, we’ve seen more new clients looking to park their money in a low-risk, luxury asset whose likelihood of appreciation is higher, forged by historically beautiful surrounding neighborhoods, sprawling acreage and square footage, and newly renovated constructions.”

According to their article and The Trend Report 20222 by Coldwell Banker Global Luxury, they foresee the value of luxury properties will continue to appreciate. Both site the historic gains in this segment of the real estate market and explain that prices will oscillate by month or quarter, but how the appreciation is clearly recognized by investors and homeowners as being a long-term decision.

“Prone to behaving cautiously, the affluent have begun to signal that they are looking for more stable long-term investments to protect their wealth and give them peace of mind.”

Shift in Mindset

The Trend Report also sheds light on why affluent homeowners have shifted from their fearless and ‘FOMO’ buying of last year to taking a more considered approach.

“Between rising economic uncertainty, stock and crypto market volatility, climate change, and two years of living through an unprecedented health crisis, wealthy buyers have begun turning toward opportunities that give them long-term financial security and quality of life.

Real estate generally offers reliability and stability for those investors who are able to play the long game: hold onto their asset when the market trends down and wait until prices start to rise again.”

Equally, with interest rates more than double compared to 2020, 2021, and the first quarter of 2022, many homeowners recognize that selling their home to purchase another would be an expensive replacement unless they need to sell.

This has led to many sellers deciding not to put their homes on the market, which, when combined with buyers taking more time to make their decisions, has ultimately resulted in the slowing down of the market.

Demand vs. Supply

It is supply rather than demand that is creating the bigger conundrum in the market today. Buyers are still eager to buy, albeit at a slower pace, but there is simply a lack of new inventory entering the market.

Inventory levels may have increased compared to last year, but without new inventory, the return to pre-pandemic levels is unlikely, adding a further complication for buyers as current levels are unlikely to create the downward pressure on home prices they anticipate.

According to Nasdaq, there has never been more liquidity on the buyers’ side for quality homes, but until sellers’ price expectations start to align with buyers’ perception of value, we will continue to see this contradiction in the market.

Not All Markets Are Equal

After two years of affluent buyers heading away from urban centers, there has been a significant return to traditional centers of luxury in 2022, and old favorites across North America, such as New York, Boston, Chicago, Toronto, and Vancouver, are seeing the benefits of this demand.

While prices decreased during the pandemic for the smaller city footprints, they subsequently became comparatively more affordable against the escalating values seen in rural destinations, emerging markets, and resort markets.

Much like the ownership of luxury real estate, these metropolises have once again been recognized by the affluent as locations that will hold their value over the long term – seen equally by domestic and returning foreign investors as safe investment havens.

In contrast, markets that benefited from the demand frenzy of 2020 and 2021 and the subsequent influx of buyers may see the greatest cooling off during the last part of 2022. Indeed, compared to 2021, the velocity of sales has already dropped significantly in many, and expectations are that demand and prices will settle into a more mature rhythm in 2023.

Luxury Market Still Offers Opportunity

While there is much debate about how things will play out over the next six months, like all markets, there is always an opportunity for those who are ready. There are niches in every market: whether moving to a location that affords a better cost of living, recognizing luxury pockets or property types that are next in the demand cycle, or simply biding one’s time in anticipation of finding a property that is below market value.

But more importantly, according to a survey conducted by Coldwell Banker Global Luxury for their Trend Report, it seems that luxury real estate remains an important asset for the affluent.

“Regardless of an affluent buyer’s financial profile, there is still significant confidence in the luxury real estate market. According to our survey, nearly 90% of respondents believe in the stability of owning property. Even if some buyers have dropped out of the real estate game due to fatigue, frustration, or even hesitation this year, they may be primed to return as inventory levels improve.”"

MY COMMENTS CONTINUED

The FED will move forward with rising rates.  Home prices and assets will be affected.  Affordability is the focus of the FED, in my opinion.  The inflation rate we have experienced is most commonly affected in housing costs.  That is in Rents and Home Prices. 

I feel that the next market that will see price pressure in the Rental Market.  The Foreclosure Moratorium has put some almost 2 years of inventory on the market.  Looking at the condition of the properties to the price landlords are asking is a condition of lack of rationality.  As one landlord tells me, the only renters he has applying are transients from other countries that bring numerous families together to afford rentals.  They pay cash, but leave the property a mess!

The most recent issue of the Wall Street Journal front page dealt with investors backing out of the purchasing of single family homes for the rental market.  Down 30% from last year they are faced with a fall off in demand and political reasons over price hikes that will limited rental increase.

Watch prices through the end of the year, the low inventories at the beginning of the year and the inventory increases in Mid February to tell us more of the direction to answer the QUESTION..."HOW'S THE MARKET?"

Happy Thanksgiving, now run off the excesses!