The Problems are the Path: Year End Profit Opportunities in Real Estate

On a historical basis as the year end approaches there is a tendency to clean the books.  Inventory is marked down, offers are taken and unsold inventory is taken off the market to install once again the following year.

The issues at present are inflation and the inability of the FED to get immediate satisfaction.  Or, at least, immediate satisfaction as the Media seems to want.  The FED on a historic basis takes time to wait to see how the populace reacts, how business reacts, how the investment community reacts.  Now add to the FED's actions the political action of deficit spending.  Spending to support allies at war, spending to support immigration issues both pro and con, spending to fund already in existence budget items.  Finally, we need to look at savings from the Pandemic years.

In the past cycle of rising interest rates, we need to go back to the 70's.  Interest rose for the same reasons they are rising today...inflation.  Unfortunately; the increase in rates did not stop the rise of inflation.  Oil went up dramatically.  We had Vietnam.  We had protesters in the street.  The same commentary of Police Brutality.  Cold War was going on between the Soviet Block, China and the China Block of Asian Countries.

The result was the stock market suffered.  The Bond market suffered.  Investors put their money in CD's and Real Estate.

I don't imagine we will see much difference as we move along the Path with the Problems that are all too common.

Let's look at our current situation.  Mortgage rates are at or are approaching 8%.  Commercial loans are over 10%.  Notice of Defaults are becoming common in Residential Real Estate, and they are more than common in Commercial Real Estate with Foreclosure Notices more common than Default Notices.

The irony is not really an irony, it is a similarity to the 70's Real Estate was strong.  Mortgage rates did not stop buyers.  Some paid the mortgage rates as they are doing now. Sellers are cutting listing prices to the level that supply and demand meet.

From the East Coast to the West Coast listing prices are cut and sale occur.  Some sale at list, some at less than list and some at below list.  But, THEY ARE SELLING!

There is not an area that homes are not in a Seller's Market.  While buyers sit on the sideline waiting for some crisis to occur that will allow them to jump into the market.  The Crisis Does Not Occur.  Buyers step up, pay cash, buy down mortgage rates, take out Variable Loans or simply bite the bullet and go with the current rate.

The greatest opportunity I see is in the smaller commercial properties.  Whether it is an Apartment Building or a Car Wash, the owners made the same mistake.  They took on too much leverage!  Then the rates went up and the leverage of an up roaring market turned into a sideways market.  Properties that were bought under the premise of increasing values faltered.  Too many properties for one investor to manage.  Greed!  "Bulls make money.  Bears make money. Pigs get slaughtered."  An old Wall Street adage.

Residential buyers are well off looking at properties that seller financing is available.  Buyers should look at properties in which price cuts occurred.  Watch out for properties that are being sold and there is a Notice of Default.  Generally, the seller will be more than willing to sell than have the bank foreclose.

Look for other areas that are less expensive.  The new developments are one such opportunity.  Developers are willing to cut prices, give credits for improvements to the standard unit and some will give discounted mortgage rates and pay closing costs.  The other search should be outside an area.  The Sacramento Basin has seen a 3%+ in growth.  The average age is less than national ages, which the young couples see better opportunities for anew life.  In areas outside of major communities the +55 communities continue to grow as the retired see a life with people their age and an active lifestyle.

Seattle is growing since the pandemic and is now past the 2020 numbers.  Sacramento is growing.  Other areas outside of the Bay Area are growing.  WHY?  Housing costs are the reason.  Housing cost in the Bay Area have been hurt by the stress on industrial and business development.  Residential development remains stuck in local governments that maintain a no growth mindset.  General Plans created sometime in the 50's have put local communities in the past in maintaining what was then the reason people moved to their town or community.  

No community represents this archaic mindset more than Woodside.  As a member of the Town Council, Mayor and my start in local government in the Livestock Committee and later the Trails Committee, Woodside represented a Rural/Horse oriented town.  When I arrived with my family in 1985 there were more horses in Woodside than residents.  Every home had a horse corral it seemed.  The weekends found local town trails filled with horses. It was bucolic to listen to the clop, clop clop of horse hooves on Tripp Road during a weekend.  Neighbors would gather and ride the trails to Skyline to have brunch.  The Junior Riders taught youngsters how to ride.  Groups like Vaulting taught girls how to perform acrobatics on horseback.  Town government did all they could to keep Woodside for horses and hindered development.  The result was many large acreages were zoned to a condition that made development impossible.  

It wasn't much different in Portola Valley.  In Portola Valley change came quicker.  In the communities outside ot Woodside and Portola Valley change drove growth.  Growth fed the residential needs of to growth of Silicon Valley.  Growth had its limitations.  The supply of residential tracts of land diminished yearly as large tracts of land, once farm and ranch, became communities.  As the Tech community expanded the demand for housing was created.  Supply was limited and prices went up.

As in all cases when cost of housing exceeds income to support it, movement was expected.

Today we have a Woodside were horses are a rarity, people outnumber horses.  Business such as: farriers and feed companies and veterinarians, have vanished.  Barns and corrals are replaced by tennis courts and pools.  The same is for Portola Valley and all the other, once considered, Horse Communities.  

The lack of the Town governments to change has been the major reason housing costs have exploded in all of California, with the exception of the newly developed communities outside of Sacramento and the Central Valley.  The sale of homes in the Bay Area created a asset rich emigrant who saw the newly developed areas, both within the outside California, as a great value.  Thereby, driving up prices in their adopted city or state; much to the chagrin of the community they adopted.

This trend will not change until we see a major change in non-growth mindsets.  Home prices in those communities will be  resistant to decline; even though, economic hardships occur.  The beneficiaries will be the new communities created from immigration.

To today's home buyer or seller to understand their options they must understand where we were, where we are, and hopefully, where we are going. 1.6 million people left California in the past 2 years.  Where will be your home?

Best Wishes in Your Search.  And Remember

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