The Problems are the Path: Bifurcated Market in Silicon Valley

Silicon Valley has always been in my experience a unique real estate market.  A sort of a Camelot where the high walls of technology, money and education kept out the evils of recessions and a financial crisis.  A place were housing prices in the High Tech Community remained stable with only a few exceptions coming from overzealous speculators caught with properties that have rising cost of carry from increasing interest rates and fears of economic slowdown.

Today, or at least since about February/March prices have differed.  The starter home areas of Redwood City, San Carlos and San Mateo have seen demand and multiple offers with over bids.  As you look at the "roll up markets" like Palo Alto, Menlo Park and Los Altos, the prices have remained strong with a few over bids and multiple offers, as compared to the first time buyer markets as previously quoted.

When one looks a the high end luxury markets you begin to see weakness and markets that go from a seller's market to a buyers market.  Those cities are Atherton, Woodside, Portola Valley and Los Altos Hills.

The cause of the bifurcations is clearly the rapid rise in interest, the failures of Silicon Valley Bank and First Republic Bank, work from home virtual employees, the beginning of Artificial Intelligence and Technology layoffs.

Those who have rented through the Pandemic have saved and are tired of renting.  They are ready to buy affordable, in their terms, homes.  That takes them to 1350-2000 square foot homes priced $1.5 to $2.3 million.  The market for those homes is not that available.  The Baby Boomers or present day owners have Golden Handcuffs.  They either have a low interest rate on their mortgage or own the home clear. They also see no reason to sell and create a large capital gain.  When one party passes away the property basis is brought to current market value and a sale will not create a large, if any, capital gain.  The main issue with those homes are they are in need of updating.  This now brings in the "Fix and Flip" contractor/speculator that can buy or offer to buy with no contingencies, all cash, and give the seller the illusion that by not paying any commission to a realtor they are ahead of the game.  Realtors have a difficult time competing; even though, the price an open market sale will create is in most cases better than the Fix and Flip offer.  The commission issue is a hard nut to crack as the seller looks at pay $100,000 or more in commissions and snaps back, "I never made that kind of money when I worked".  

The situation creates the bifurcated market or at least one arm of it.  The starter homes are fully updated homes that become highly desirable to first time buyers.  

The other end is the demand side and supply side slide.  As many technology workers now look at whether they will have a job or whether they will move to greener pastures the tendency is to hold or do nothing.  When supply comes on is goes, but not as fast.

The Luxury end has prices at nose bleeding levels that only a very small percentage of the population can afford.  They too must think about the economic situation.  Prices in this area are weak and have come down by 10%-20% or more without a "dead cat bounce".

Media research created a statistic of 4 out of 10 Californians want to leave the State.  Starting anew in your retirement years is a tough one to consider as probable.  Especially when thinking of out of state movement.  For my experience those buyers who state, crime, homelessness, drugs and in some situations the political environment El Dorado and Placer County are a target move.

I manage and train a group of new agents who are in their new career as a realtor.  Some are retired looking for a second career.  Others are virtual employees who want a side gig to supplement their income.  Others are or want to be full time agents that need a second job to carry them over until they can create a steady income in real estate.   Where are their new clients buying?  Placerville, Roseville, Granite Bay, El Dorado Hills, Loomis, Elk Grove and select parts of Sacramento. Two Agents are using the new home projects in Elk Grove for income buyers.

The markets in the above stated areas are in a Buyer's Market.  There have been numerous price cuts.  Builders went overboard to accommodate the influx of Bay Area immigration.  They now have excess inventory to sell at great discounts.

What does the real estate market portend for the near future?  Interest rates will increase on a gradual basis until the end of the year per Jerome Powell, Chairman of the Federal Reserve Committee.  Rising interest rates will have a number of effects.  1. employment and wage growth will decline. 2. The economy will move toward  a recession.   Wells Fargo forecast is a recession in late December and 1st quarter 2024.  3. With both wage growth stopping, employment declining and a recession.  The plan is for inflation to decline.  DON'T COUNT ON IT!    During the Carter and Ford administrations we had Stagflation.  A stagnant economy with inflation.  It took Paul Volker to raise interest rates to 14.5% to break inflation and create rising unemployment when he lowered rates.  

What happens to real estate prices.  My opinion is that the high prices of the Bay Area will finally break.  Rents will come down.  Foreclosures in the commercial real estate market will be the main subject as which large structures in San Francisco goes back to the lender as owner and or developers hand in the keys as rental rolls collapse further.

Commercial markets with good cash flow will be in demand.  Landlords will find competition from newly constructed multi-family and apartment structures too hard to fight and they will sell out to speculators of Fix and Flip to do remodel and sell to those still willing to live in the area.

On the Fix and Flip Remodels for sale in the after market.....Buyer Beware...Caveat Emptor.  Remember when you walk into a newly remodeled home of the 1950-60's vintage, you are walking into a great facelift.  Underneath it is still a 60-70 year old home.  By code, generally, when there is improvements that go beyond a % by the various town codes the home must be brought to current code.  That is the Uniform Building Code recently adapted by the City or Town of a code that is updated annually.  First thing to look for is to look up.  Is there a sprinkler system?  NO?  Now you need to do some research with the local planning department on permits and the % of work completed that required the house to be brought up to current codes.  Those codes are tough.  They will require a sprinkler system, plumbing, electrical, steps, railings and much more.  The worst thing you want to do is to get emotionally involved.  There is always another bus or elevator coming.  The last thing you want is to have my experience on our first house in Woodside.  We were required to update all plumbing.  We tore out the old pipes and put in new pipes.  The electrical went from old to new wiring.  A new electrical panel was installed.  All we were doing was replacing the old aluminum windows.  

Don't expect your agent to do the work.  The agent cannot take the responsibility of due diligence.  Legally he is not responsible for your work to review the disclosures and do your due diligence.

This is an excellent You Tube video on what to watch for: Kevin.

Another item to be aware of is you are not buying a property constructed by a national firm. It is an LLC or a Corporation that was established solely for the purchase remodel and sale of the property you are looking at.  Once the property sells and money is distributed the LLC and or Corporation is a empty  shell.  There is not a 10-year warranty as on  project of homes you see advertised in the paper.  The roof fails, the short circuit starts a fire, the toilet overflows or is rotted and falls onto the floor below.  Check with your insurance company.  The agent can't help you.  You signed the disclosures.    

As before, call or write for any question you may have and think of me of your "in the know real estate agent".