This year was anything but quiet. 2023 started with a stormy winter that brought us more rain and wind than I have seen in almost 25 years, which I believe delayed our spring real estate market that usually gains momentum in early March. By the end of the first quarter, we experienced the regional bank crisis, which resulted in the collapse of valley favorites Silicon Valley Bank (SVB) and the unnecessary fallout to First Republic Bank (FRB). We witnessed the Feds continued aggressive rate hikes to stem inflation resulting in high short-term treasury rates. This is significant because short term investment money was (and still is) getting higher interest rates than long term treasuries (inverted) and this unusual situation doesn’t last forever (spoiler alert: expect a change sometime in 2024).
Despite higher mortgage rates, we experienced a rebound in prices from the lows of 2022 and an extremely tight inventory environment. As the Russia-Ukraine War continues and the Israeli-Hamas Conflict is hopefully coming to a truce, there will undoubtably be significant costs to bear: both monetarily and humanitarian. The largest tech companies enjoyed a huge rebound from the lows and continue to be fueled by the excitement of Generative AI. One year later, Open AI has started what I think will be out next dot.com economy. Unlike other trends, Generative AI is here to stay and will be significant to the next growth wave of our valley.
Nick’s Thoughts
If you have a few moments, I suggest you read my Winter 2022 Article to compare my predictions to the actual year. You will find the advice given to my clients was timely and accurate. Read below for my advice this year.
As I reflect on the year in real estate, it is very clear we had a better than expected year for Sellers. Local prices started declining around June 2022 when mortgage rates were rising almost daily. That means we are about 1.5 years into our market transition.
This is significant because our valley cycles are shorter than other regions, meaning I am not expecting our market to hover in this uncertain state for much longer and when our market gets traction, it can move fast – watch out! Many of my Sellers who will pay capital gains from their sale this year took the lump sum and are enjoying ~5% short term returns until tax time – I consider this free money! I am hearing the conversation changing from aggressive Fed hikes to possible rate drops next year. I don’t necessarily agree with this, but if we see Fed drops and subsequent mortgage rate drops, it is likely more buyers will get back into the market. If the Fed does drop the rate, it may also be due to a recession or to try to fight off a recession. Either way, for our local real estate purposes, I think lower interest rates will be more beneficial to our valley rather than a national recession. Arguably, I am in the camp that our valley already experienced a recession last year, so we would likely be more insulated during a national recession. Open houses are busy, buyers are still apprehensive, and no doubt, when clarity returns, watch out because we have buyers in our market waiting for the time to buy. What we don’t have is enough sellers wanting to sell, and that’s not a healthy economic combination.
Single family home prices up approximately 10-15% from bottom
This is huge! But it has been driven so much by extremely tight inventory. The number of transactions locally were down almost 50% from two year ago. Even though interest rates are at levels not seen in over a decade, the extremely low supply created a strong market because we did not need much demand to prop it up. I mentioned earlier that open houses are flush with buyers, but these buyers are more into watching and waiting than executing – they are the browsers, so the buyer demand is lower. That’s okay because inventory is so low. If inventory were actually higher in this scenario we would not have seen price increases like we experienced this year.
Buyer Affordability Pressures
Interest rates have tripled in the past few years, so the burden of monthly carrying costs is weighing on buyers today. There’s no way of getting around it. Buyers of course are betting interest rates will come down so they can refinance down the road. What has given some relief to buyers is their stock portfolio rebounding this year. Many who are heavy in their single company stock were relieved when those stocks skyrocketed this year (with help of Generative AI) some over 100%! I’m hearing chatter of mortgage rates decreasing next year, so I think the highest mortgage rates are behind us and now looking to greener pastures. It is interesting to point out that mortgage rates this year have been fairly stable; at the end of 2022 rates were hovering 6-7% and I’m still seeing a similar range.
Upgrade Buyers – Few and Far Between
Many people wanted to upgrade this year, but when they considered the costs of upgrading they either decided to remodel/expand their existing home or wait-out the current market climate. If you are in a home with a 2% interest rate, it’s hard to chew off tripling that rate to 6%. My clients who did upgrade mainly kept their departing home when possible. Now they have a rental (if even just for a few years) that can be sold as their primary home within 3 years of departing or just kept as part of their portfolio with their low fixed interest rate. Watch out when the rates come down and upgrade buyers come back – they are an impactful segment of the market.
2024 Market Prediction
I expect next year to be a lot like 2023: historically low inventory because of higher mortgage rates and reasonable people disagreeing on what will happen in the economy and to real estate. Will we go into a recession, if and how much the Fed cuts rates, what happens to the stock market that is already at near highs, tech companies re-hiring rate?
With so many hot topics, I think it is clear to say there is still uncertainty, however, I think 2024 will be our coming out year. So much can, and likely, will happen to surprise everyone, but fundamentally, I think we are shaping our valley for a long runway cycle in front. My glasses are rose-colored 3-5 years out, so the next 12-18 months are still transitionary and significant events can alter the course of our market. I am confident “Generative AI” is as hot a phrase as “dot.com” was. In early dot.com days every company wanted to change their company name to end in “dot.com” because it instantly made the company more valuable and attractive. I think we are seeing the same with Generative AI. There will be many winners coming out over the coming years, but a lot more losers too. There will be a ton of wealth created in the new economy but I don’t think it will be recognized in 2024. Until then, we will stay alert, make the best decisions possible for you and your family, and be confident we have done the research to make those best decisions.
Why Sell in 2024?
Prices Have Rebounded
This is exciting news! Now that prices are off peak by about 5% or so, those sellers wanting to sell at or near peak prices can revisit that decision. Bear in mind, properly prepared homes that are turnkey for their perspective buyers are selling for the best prices. I saw plenty of homes not sell late this year because the price wasn’t relative to the home condition. I’m anticipating many of those properties will come to the market in the new year, hopefully in better condition.
Opportunity Cost of Not Selling
Just as in 2023, the opportunity cost is quite high in this high interest rate environment and if you believe there is a lot of potential in the equities market, you can make a better ROI there than in real estate over the next few years. You may be sitting on a lot of equity in your home that isn’t working for you most efficiently, so selling and reallocating the money may be best for your financial planning.
Life Happens
Timing may be the driving force behind selling for an array of reasons, such as: death, divorce, job loss, relocation or upgrading. Whatever the reason, there are reasonable reasons to be a seller next year.
Why Buy in 2024?
Lack of Competition
I can’t stress this enough – being a buyer when the market is euphoric is not fun. 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 are 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. They will be 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. Of course it needs to be a deal to get them to jump or a it needs to be a special property that is not easily replaceable.
Stock Market Up = Higher Net Worth
You are likely sitting on a portfolio looking a lot heavier than a year ago, so maybe it’s time to take some gains off the table and diversify into real estate, whether for a home or long-term investing. A long-term strategy in real estate is a great idea, even if in the short-term it seems scary and uncertain. Remember, leveraging in real estate is a way to get the highest return. For example, if you buy a property today with 30% down and live in it for 10 years before selling it, your gain isn’t the purchase price to sale price, but really your down payment amount to the total profit. That is leveraging and you will see a much larger percentage gain.
Takeaway
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 the other 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!
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