The Problems are the Path: Interest Rates a Useless Strategy?

There was a time in my past newsletters/commentaries I believed the rise in interest rates would dampen real estate prices and cause the affordability index to move in favor of buyers, which we had.  I then went to look at "Asset Inflation" to put down speculation and lower asset prices of Stocks, Bonds, Real Estate and Esoteric Assets, which we had.  

The rise in interest rates have had an impact, but far from what the FED expected, and many economic analysts expected.  The main reason, in my opinion, is that the Money Supply has not contracted.  Some +$9 trillion was pumped into the economy from 2020 to 2022.  Of that only a small percentage has been spent.  Goldman Sachs has stated that 65% of those saving will be expended by the end of 2023.  

What we have is a little below $9 Trillion in the FED's balance sheet.  The FED has not contracted Money Supply as they raised interest rates.  There could be some political reasons as higher interest rates bear down heavily on Technology Stocks and investments.  The technology bulls eye is a target that has united both sides of the political spectrum.  You be the judge.

If this is a political action without contraction of Money Supply, then why should there be a pressure on Home Prices?  From the Fidelity reports I have added to the past commentaries it is very clear increasing rates are not affecting the demand for low to mid value properties.  From East Palo Alto to Menlo Park, Los Altos, Redwood City, San Carlos and other SF Peninsula cites the demand for housing has not abated.  They are all in a strong seller's market.  

If there is something to be garnered from that observation is the examination of condition of the house for sale and the concurrent price action that follow.  Location, Location, Location are always the main driving force of real estate.  The next is Condition, Condition, Condition.  This last "3 C's" is what makes home sales distinguished from the first "3 C's".  

Buyer's have a unique ability to distinguish from what is for sale to what they want.  What they want is a "Move in condition home". Not a fixer upper, not a contractor's special. It is my observation buyers want a disclosure package that is clean of any future work needed; along with, a matching  interior and exterior.

With the "Condition" quotient  the buyer's have distinguished what they will pay.  Now here comes the key element.  Their cash reserves are in liquid, safe investments that have no risk of capital and return a handsome rate of return that pays increasingly larger amounts of interest as the FED increases interest rates.

The result is the multiple offers and over bids for those properties with "condition, condition, condition" and "location, location, location".  For those properties that are over priced with missing parts to the two "3 C's" there are price cuts, no offers and under bids.  

On a daily basis I watch the 7-day results of Atherton, Menlo Park, Los Altos, Palo Alto, Redwood City, San Carlos, South San Francisco, Woodside and Portola Valley.  I see very little change in the daily new listings, but do note that those properties that go pending and sold have the two "3 C's" and those that do not, linger and have price cuts!

I also have Zillow, Realtor.com send me results of "move to locations" of the California/SF and Bay Area Exodus.  Those areas show a distinct drop in home prices, more new  homes for sale by developers, and greater number of homes for sale with longer duration of Days on the Market.

We may be in a market in which there is the "Willing buyer and the Willing Seller' meeting more evenly, than the past of "make me an offer I can't refuse" 

That could be the reason that Fix and Flippers, contractors and investors are able to pick up homes and turn them around into move into condition homes and turn a handsome profit.

It also could be a reason the rental prices are dropping and the new level of buyers come from this frustrated market made by reason of abusive landlords and the realization of renters that they are not building equity.

Outlook For 2023:

From my experience in Listings, Buyers and Broker Price Opinions I see: 

1.    Demand and interest rates moving in reciprocal condition.  As interest rates on 30-year mortgages approach 7%, Real Estate sales decline.  As interest rates on 30-year mortgage approach 6% the Location and Condition houses move quickly.

2.  I do not see any drastic movements in average home prices unless there is a surprise of increases in listing inventory.  I expect a return of listings in the next few months from those properties that were taken off the market in December.  Once moved the inventory should remain light.

3.  The "Black Swan" is the FED's action on inflation control.  The FED may see a move to reducing Money Supply.  That occurred in the mid to late 70's.  It drove down Stock and Bond values and the seekers of store of value, income and appreciation went to real estate.

Again as always, if you have any question and or need assistance; do not hesitate to call, email or text me.

Gary