The Problems are the Path: Year End Comments

The last 2 months of the year are, or were, normally tied to "clean up" work.  Inventory was thin.  The properties that remained on inventory were usually: left overs from the year that have not sold, properties added due to moving or estate sales, and like in prior years from notice of defaults and foreclosure notice.  Buyers were generally on their hunt to find price weakness and reason for the reason WHY these properties have lingered on the market.  The general answer to WHY were they were OVER PRICED from the start.  Either they were overpriced due to condition or comparatives.  

From 2020 forward we have had a dramatic change to the Supply/Demand ratio.  The Pandemic took supply from the marketplace.  Whether that the supply was housing, restaurants, workers entertainment and travel.  Everyone was hunkered down in their homes fearful of the infection from others fearing all the horror stories of death.  A Present Day Black Plague was circulating the world. 

The Federal Reserve stepped in as the People in the White Hats to save the World and Humanity by lowering interest rates, buying long term bonds all to create historically low rates in the hopes of saving the world economy.

Their action had a two-fold effect.  It fed Speculation and eventual Inflation as as supply could not meet demand when the Pandemic was declared beaten.  

The risk of Speculation can be seen in the Commercial Real Estate market where improper leverage was taken and unrealistic growth was found.  Unrealistic when workers went to the "work from home" status.  The result was and is large commercial projects are being sold for a fraction of the cost of purchase or construction.  Those that are hanging on are doing so with the cooperation of lenders not wanting to take another return to the past Banking Crisis.

So, where does that take us today in the 11th Month?  Inventory in residential homes are still in short supply.  Commercial properties are still feeling the impact of high interest rates that occured to stop the supply side inflation.  It appears on a daily basis there are more small commercial properties being advertised for sale.  Small malls find in hard to get an empty site filled due to a closing of a business.  Banks are closing locations; as are, large pharmacies, large bargain centers.  All are feeling the recessionary effect of high interest rates and finding competition in the form of online competition.

COMMERCIAL PROPERTIES:  The correction in the Interest Rate Curve has had a major effect on the terms of purchase.  As short term rates declined and the FED is longer buying bonds, but liquidates their balance sheet and allows them to mature, long term interest rates move up.....NOT DOWN!  Investors seek higher Cap Rates for their investment. Where once 4,5,6% rates where acceptable.  It is now 7,8% Cap Rates are made in offers.  The credit of the property does not have much effect as even those with high credits are shunned as the fear they too may close a property in a cost cutting program.  

RESIDENTIAL PROPERTIES:  The day of low mortgage rates is behind us.  Something, if we remember, as in gas at pump lower than a $1 a gallon!  Therein lies the first problem with inventory.  Many homes have extremely low mortgage rates.  Rates are  1/2 of today's mortgage rates.  Then sellers must look at the cost of a new home and the capital gains and the property taxes that are going to dramatically rise from their present day property taxes on sale and purchase.  That is for those sellers who remain in California and are not qualified to transfer their present property tax to their new home in a reciprocal county.  

So where does that lead us as buyers or sellers?  

The State of California is a bifurcated state.  Silicon Valley with its Technology Engine keeps churning out businesses and technology improvements to keep jobs strong.  The money to invest in the new business keep growing and investing.  Along with that growth, property values will not depreciate over time.  There may some blips, but history tells us they are only opportunistic blips for buyers and then moving up. There is the normal loss of population to other states of some 300-400 thousand net a year.  (A minor impact). Those immigrants will create the opportunity to purchase at a discount as they must move.

Once the view of outside of Silicon Valley is made, the areas within the state that saw growth from the"Work from Home" movement find the movement has stopped.  Stopped and inventory of homes for sale are growing.  Price cuts in these areas are the norm, and sales are less than the price cuts.  There the long term outlook is not asset appreciation but the quality of life.

To those who are moving the price of the move is not solely benefiting in Quality of life and cost and savings, it is the frustration in finding a new medical professional, dentist, accountant, cleaner, grocery, and most importantly....new friends.  The adjustment process is not an overnight process. It will take years to develop new friendships.  Frustrating months to find a barber, hairdresser, dentist or doctor.  

So my Dear Reader, Where do you fit?

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