I am sure you would agree it has been quite the year, especially in the past six months. As recently as the past few weeks we witnessed an Enron-like collapse at the likes of Madoff via FTX, a theater-worthy drama movie 280 characters at a time (Twitter) and the return of Bob Iger to the helm of Disney to get the company back on course. We are running out of popcorn at home!
I reflect on 2022 and begin to write this, part of my process is to re-read my previous article editions and I am earnestly proud of the advice I provided to my clients, both Sellers and Buyers, whether in person or through my newsletters, which was extremely timely. If you have a few extra moments, give them a re-read because they read as a playbook for the year before things happened. What I’m trying to say is that my crystal ball capabilities are working well! I try very hard to provide my clients with sound advice and relevant information about what I see in the market today and what to expect in the coming quarter(s) and look forward to continually being a value-add to my clients.
We saw the shift from FAANG stocks (remember that acronym?) and into growth stocks as the market shifted away from free money at the hands of a zero-interest rate environment. Wall Street’s love affair with tech and Silicon Valley is gone for now, and they have reallocated portfolios to growth companies at least through 2023. Non-profitable tech companies and those not paying dividends also were affected, even though they were beloved not too long ago – ah, how peer pressure influences even Wall Street.
I’m excited coming into 2023. Not in a way where I’m trying to will myself into feeling hopeful about a tumultuous year ahead. I’m optimistic about the opportunities that present themselves in this stage of a market cycle. There will be fear and apprehension but there will also be TONS of opportunities for my clients, both selling and buying. I know what you’re thinking… “How can there be opportunities both selling and buying in this market?” Good question, let’s talk about it.
We had a crazy year of inflation, but I think the worst is behind us. High inflation will be with us for several years, but I do not think it is a runaway train anymore, as it was earlier this year. Global supply chain issues are being resolved albeit slower than many want. Overall sentiment, a key component to inflation, is in acceptance mode and I think the Fed will start tapering with a .5-point bump to the rate soon (then .25-point bumps will continue). Mortgage rates shot up this year faster than anyone expected, and most borrowers are seeing them hovering 6-7% at this time, which is over twice the rate a year ago, but I’m not expecting as steep of a bump in 2023. I’m not concerned with double-digit mortgage rates but it is important to remember a slower economy is what the Fed wanted at any cost, so even though I disagreed with the Fed’s previous position of temporary inflation, they are working feverishly to get it under control now. You will continue to hear experts highlight diversification to any portfolio and investment strategy which may or may not have previously been in your repertoire.
Most importantly, remember that what you hear in the media is mostly based on older data and not as up-to-date as what you’ll get here. I’m surprised that many sources are currently talking about a nationwide price drop coming as if it hasn’t already happened; the experts literally are not aware that most regions have already seen price declines and for many in the nation I think prices will continue to decline with the shear affordability pressure from higher interest rates. Buyers have been feeling the pressure and aren’t interested at peak prices, but I think many Sellers have been trying to hold out as if the market will pivot quickly. I foresee that in 2023 they will be more motivated to sell. Here’s why.
Real Estate Facts
Single family home prices decreased 10-20% this year
Depending on your neighborhood you have experienced price drops ranging from 10-20% this year, mainly since May. Remember, I look at like-for-like properties when discussing values verses aggregate averages/medians, since I think it is a much more accurate indicator of value. I have not found any neighborhood immune to price drops and some greater than others. In a declining market it is natural for people to wonder, “are we are that bottom yet?” and that question typically drives decisions.
Whether selling or buying, you will be asking yourself that question at least a few times through the process, so I think it is paramount to have a good handle on the overall market climate both at the micro and macro level.
The market does not stay down forever
This is important because if you sit on the sidelines too long analyzing the options and are unable to make a decision you can miss your best opportunities. This is not specific to buyers or sellers because there are opportunities on both sides – not just a winner and loser. Understanding your long-term strategy is what should guide your decision process.
Why Sell in 2023?
Opportunity Cost of Not Selling
You may not want to sell because prices are off-peak, but don’t forget about the opportunity cost of what you would alternatively do with your home sale proceeds. Whether you buy another home (also at a lower price), invest the money in alternate investment tools or take the money to Vegas, there is a cost to not selling. The best long-term use of your home equity may be something completely different than keeping it tied up in your existing home and that’s a very real decision to be considered.
Timing may be the driving force behind selling for an array of reasons, but it’s a legitimate reason and one that drives home movement. Real estate is a long-term wealth-creator, but not the only one. I think it is important to step back and consider best alternatives for you.
The Market Hit Its Peak?
I don’t agree with this reason to sell. Yes, we hit a peak, but I am very bullish on long-term growth to our valley, and we will see other peaks as we experience future market cycles. I also think we will continue to have our chronic inventory shortage until we figure out our water issue, which I don’t see happening any time soon, if ever. You should sell because it makes sense for you and your family, not because you fear a collapse to Silicon Valley real estate values.
Why Buy in 2023?
Your Competition is Scared
Be a contrarian. Buy now because your competition is scared, and that strengthens your negotiating position. I am seeing clients get 20% discounts from peak on great properties and that’s exciting! Not to mention the competition is much more reasonable so we aren’t negotiating against insanity. For example, when the market gets hot, I literally hear agents tell their clients the offer price should be an equation of number of “indicated” offers times a multiplier --- that makes no sense. This arbitrary negotiating style falsely drives prices and isn’t grounded in anything substantial. Fortunately, I’m not seeing that logic at all right now. Today I’m seeing buyers making offers based on comparable data in relation to the home condition, neighborhood factors, etc. and even hedging to some degree.
Lack of Competition
The competing buyer pool may be soft right now, but that can change quickly. I’m telling my buyers to be careful because I’m seeing a strong showing of buyers at new open house listings even if they aren’t converting to offers on the property. That tells me there is still a lot of people interested in buying and once they have clarity in the market they will likely jump in and make offers on properties – the new competition. There is a window of time where you can get in without competing as much. However, if a property lists today lower than recent sales, there are still a lot of smart people out there looking for deals that aren’t scared to make offers. But of course, it needs to be a deal to get them to jump or a special property that is not easily replaceable.
Lower Purchase Prices
Yes, it will cost you more to own your house because of higher interest rates, but long term you will have a lower purchase price (less money to ultimately pay back) and you lock in your property tax base rate that will stay with the property. I am suggesting my buyers currently go with ARM (adjustable-rate mortgage) products for 7-10 years because I am confident we will be in a lower interest rate environment during that time. You also may sell your home during that window as well, so many homeowners do not benefit from a 30-year fixed rate mortgage.
Real Estate Unknowns
The depth of layoffs
It is unclear how deep layoffs will go, but I think we will continue to see large-scale layoffs into 2023. In the dot.com crash we saw a mass exodus of talent due to job loss but given our new reality of remote work I am anxious to see if that work dynamic enables people to find new jobs without having to relocate. That would be a significant change from dot.com and maintain stability to housing despite job losses. I will also be watching how layoffs impact H1 and other immigration visas for people as a factor to home stability.
When will the market shift?
When will the tech bleeding stop? If only we knew, but what gets me most excited is knowing the companies that will power our valley for years to come are likely already in the works and I can’t wait to see new ideas take hold. The next 12-18 months will likely be a grind for many, but by hunkering down and working hard we will get to the other side. Stay informed, stay positive, stay excited. When the market shifts it will likely bring real estate with it early in the process; that’s why I like to be ahead of it as a buyer, but if selling I want to be informed to make the prudent decisions for diversification and long-term strategy.
You can’t time the bottom and it’s a fool’s game to try, but you can watch for signs of market shifts and make very sound decisions accordingly. Being a contrarian (doing the opposite) usually comes to my mind --- whether I am contrarian or not in a decision, I like to consider that side of the coin and understand multiple perspectives before making a decision. Values will not stay down forever, and buyer demand can shift quickly, so you want to be ready. I have seen it happen before, so don’t be on the sidelines so long you miss the opportunity that is best for you. Take time to understand your options and be confident in making your decision. I will continue to be an advocate for my clients, so pick up the phone or email me and let’s get started!