The Problems are the Path: Clearing in the Road

The problems we have seen in the real estate market started with the aggressive push in values due to cheap money by the FED and the expansion Money Supply of over $9 Trillion to the FED's Balance Sheet.  Today the FED's Balance Sheet is $8.58 Trillion.  FED rates have went from below 1% to 5.25-5.75.  That relates to Morgage rates of less than 3% to a high of 7.3% in 9 months!  Or; $2,500 per month Interest Only mortgage on $1 million to $6,083 per month.  A rather large jump in a period from roughly March 2022 to November 2022.  

In my past commentaries of early 2022, I had forecasted a decline in the average price of homes in the Bay Area which occurred. What did also occur was a decline across the US in home values.  The largest declines where in areas where the "work from home gang" went to live.  San Francisco saw the biggest drop in home values in the Bay area and Rents.  

I was amazed on how well the Santa Clara valley, aka  Silicon Valley, held up and more surprised in the areas that stood firm against price declines.

The supply demand curve from ECON 101 would have indicated that a rise in interest rates would correlate to demand to decrease homes; along with,  price decrease.  Not so in all cities in the Santa Clara Valley.  Of course the outer areas of California that benefited from migration out of SF and surrounding Bay Area Cities, and areas out of the State of California had some substantial declines as the desire to move was negated by costs and job security.

It was my belief, if you are constant reader, is to remember the FED was not really after inflation per se, but after Asset Inflation.  Asset Inflation in terms of Stocks, Bonds, Commodities and Esoteric Investments outside the realm of the Securities Exchange Commission or the Federal Reserve oversight.  The result of the rise in rates was to correct the Risk Free Rate of Return when investors consider investing.  When investors then look at investing they look at what if I did noting.  What would i get in T-Bills and Bonds? Today using the Bond Curve, the yield on 1 month Bills are 4.56%, 3 month are 4.66%, 6 month are 4.88%, 1 year are 4.86, 2 year are 4.45%, 10 year 3.63% and 30 year are 3.67.  What is that yield curve telling you about the bond market's forecast on inflation and interest rates?  To me it is saying that the FED will raise rates  for most of this year.  Thereafter the FED will let the rates alone. within 2 years rates will be lower and 10 years plus no inflation and possibly rate cuts.

Blood letting in high tech growth names have been shattering.  From any of the FAANG stocks to other Techies, they all went to declines have been in high double digits. We started out the year with Media forecasts of lower home prices of 10% or more and negative forecasts on Tech names.  What happened?  The tech stock rallied.  Home prices did not decline measurably in Santa Clara Valley.  The Bond market is forecasting what is reasonable for rates which should be a good indication of mortgages.  Tech stocks were, in my opinion, Short Cover Rallies. That rally maybe short lived as President Biden plans to attack Silicon Valley that has a universal support of a divided Congress.  This is music to the ears of Investment Bankers as they envision Mergers, Take Overs, Spin Offs and restructuring.  The Asset Managers that will be in vogue will be Risk Arbitrage.  For better information on that subject look up Risk Arbitrage on Google and seek out Ivan Boesky's, Risk Arbitrage, a book I contributed to.  Ivan was very clever.  Inside information made him the darling of Wall Street and time in a Federal Prison.

In home prices:

• Rates down: since November, 30-year-mortgage rates fell from 7.3% to 5.99%, lowering the typical U.S.  mortgage payment by $260 per month.
• Sales are up: from November to December, pending home sales increased 2.5%, the first month-over-month increase since May.
• Competition is stronger: in January, 37% of newly listed homes had accepted an offer within two weeks of their debut, faster than at any point since last July.

Supply/Demand has given me a reason for the stability of prices in our area.  78%, per US Census, home ownership in the U.S. is in Baby Boomers.  Baby Boomers are not selling!  They will not pay higher property taxes to downsize or move.  They will not pay high Capital Gains Taxes on sales.  They will wait until they die, or at least one of the spouses die.  At that point there will be a step up in valuations to current market appraisals.  Sales will then create "0" Capital Gains taxes.  What is left is property taxes.  At death proceeds go to heirs and no property taxes.  The end result is home buyers will still be faced with low inventory.  Inventory will increase only subject to Baby Boomer death rates.  Compared to their parents Baby Boomers are in better health.  They have better health care.  They diet and are aware of what they eat and the conditions that are detrimental to their health.

There is one measurement of real estate health that is difficult to follow.   It is the Fix & Flip market.  This is a very difficult market to trace and measure.  F&F buyers directly solicit the Baby Boomer+ market with no commissions, no disclosures, immediate cash payment, no repairs, and move in a time schedule that fits both our calendars and no Real Estae Brokers or Agents.  With that the homes that come on the market on the MLS are once they are repaired and updated.  There is no prior sale in MLS records.  The only method to find out the history is to search County Title Records to discover sales and change of ownership.  This is the most interesting part.  The sale are well below list.  The repairs are noted in the improvements for tax basis and the ownership is not in individual name but LLC or Cooperate entities.  Sales are Cash and there are no mortgages.  As long as this market remains strong Bay Area Real Estate will remain strong.

Buyers will find there is less competition, there will be less over bids, seller's are more realistic in sales prices than the "Pie in the Sky" attitude that dominated in the prior years.  Sellers still have a slight advance  from the sales of homes in and around list price as inventory will remain low!