2024 was a tale of two cities: navigating a tech recession with ongoing layoffs and fears of obsolescence in the evolving AI economy, juxtaposed against significant valuation growth in companies and asset classes. Companies were thinning out from the glut of over-hiring during the pandemic and it was unclear when the cutting would stop, but it seemed optimism was coming back and companies were pivoting with new technology to prepare for the new economy on the horizon (it feels like that year is 2025.) The Federal Reserve’s battle with stubborn inflation, which hovered around 3% for much of the year, brought it down to approximately 2.5% by year-end. This included two rate cuts (0.5 and 0.25) in 2024 and more signaled in 2025. The new year will inevitably have uncertainty especially around politics – and who knows, maybe Elon Musk will have a cabinet position in the new administration.
Mortgage rates began to decline following almost two years of minimal movement, but then pivoted after the Fed 0.5% drop due to an increase in the bond market, though I’m still bullish mortgage rates will decline in the new year unless we see a spike in inflation (possibly from a tariffs battle). In July I had clients getting mortgage rates as low as 4.875% coming off the average 6% rate most of the year, but that was short lived. Today we are still in the 6% range.
Despite higher interest rates, the local real estate market showed resilience, with a 10% price increase in the last quarter following the Fed’s initial 0.5% September rate cut. Urgency is growing as buyers aim to act before broader market participation heats up. I think this is signaling to everyone that the worst is behind us and you need to get off the fence before everyone else does. Not to say it is a race, but it seems urgency has filled the room in multiple markets (but not all of them) and prices started to spike because people feel the worst is behind us. The sentiment is that they want to get a home before many prospective buyers get into the market, especially with such a limited supply of homes.
A big theme this year was the return to office (RTO) movement for most companies. The days of working from home in perpetuity are over and companies were able to leverage the layoffs to entice their employees back to the office or risk not having a job. The theory that you can be more productive working from home seems to be debunked as several years of data shows productivity for the majority is better in an office environment. This has brought back our commute traffic and more demand for homes closer to work. However, I still see a crisis in the commercial real estate sector with an abundance of vacant commercial spaces and many companies, though back to office, are working with smaller square footage.
Nick’s Thoughts
If you have a few moments, I suggest you read my Winter 2023 Newsletter 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, there definitely were opportunities for both buyers and sellers due to the diverse nature of our local properties and neighborhoods. Our local market is heavily impacted by the tech sector and is home to a global audience as well as having so many micro neighborhoods and property types offering a mix of opportunities. It is clear our prices bottomed in 2022, which means we are about 2 years into our new cycle and there is less fear of buying at the top of market.
I think the market low is behind us and I expect a healthy growth pattern in the coming years, but there will inevitably be some bumps along the way. I am also a proponent that there is more than one investment that makes sense and you won’t get lost in the dust if you don’t buy real estate; there are tons of other investments that could appreciate more such as investing in companies, funds, equities, or even yourself. Real estate is one of many good investments, though I eat my own dog food and have multiple properties in our family portfolio because it is what I know and love. I want my clients to buy and sell real estate when it makes the most sense for them. Whether for personal, family or financial reasons, I’m ready to help my clients when the time is right. I often have clients tell me they missed the market by not previously buying, but just like buying into a company stock – you may not buy at the bottom, but if it is a good company and the value is right, there is still long-term upside potential and it’s worth getting in.
Single family home prices up approximately 20-25% from bottom
This is huge! But it has been driven so much by extremely tight inventory. The number of transactions locally are down almost 50% from three years ago. Even though the higher interest rates have impacted affordability, 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 but I am seeing that pick up even as I write this newsletter. I would say the last three months has been a clear pivot.
In 2024, we were in a high-rate, low-inventory quadrant. For 2025, I foresee a lower-rate, low-inventory scenario, likely leading to further price appreciation. But of course your Nvidia stock or Bitcoin could appreciate more, so how you allocate your funds is a financial question to consider.
Buyer Affordability Pressures
Over the past few years, interest rates have tripled and prices have increased at least 20%, so the burden of monthly carrying costs is weighing on buyers. 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. Portfolio growth has enabled many buyers to afford the monthly expenses while allowing them to diversify some of their holdings. I can only imagine Sacramento is excited at the additional tax revenue generated from the huge wealth creation in 2024. It is interesting to point out that mortgage rates were stable most of the year and are still relatively similar to the end of 2022 – that’s two years of fairly flat mortgage interest rates.
Upgrade Buyers – Almost Non-Existent
This year, many people in our area wanted to upgrade, 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% just to be in a new space. My clients who did purchase a new house kept their departing houses when at all 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 in order to capitalize on their tax-free profit 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 and their departing homes make up the starter home portion of any town’s market.
2025 Market Prediction: Good for sellers / tough for buyers:
I’m seeing some key markers in the new year including a stronger job market, high consumer confidence, lower interest rates and continued tight inventory. This will be good for sellers, but not for buyers. Things can get emotional fast – such as making offers to buy homes you don’t even want because you are scared you will be priced out of a neighborhood, or making an offer at a price you know won’t appraise but felt desperate to get a home.
I think 2025 will provide more clarity and valley sentiment will be more positive (notwithstanding the political climate). 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 2-4 years out and I expect a lot of positive energy filling the valley. 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 because practically every company currently says they are using AI in their business… history repeating itself. 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 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 2025?
Prices Have Rebounded
This is exciting news! Some neighborhoods are now selling at all time high prices, 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 prospective buyers are selling for the best prices because buyers have the funds, but not the time or desire to make the upgrades. I have seen several homes not sell late this year because the price didn’t reflect to the home condition. Many of those properties will likely come back to the market in the new year, hopefully in better condition.
Opportunity Cost of Not Selling
The opportunity cost is quite high in this 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 2025?
The Market Is Heating Up
I can’t stress this enough – being a buyer when the market is euphoric is not fun. The competing buyer pool is getting stronger and once it really pivots (likely with a significant interest rate drop) you will not enjoy being a buyer. There are still a lot of people interested in buying and once they have clarity in the market, they will likely jump in with both feet and make offers on properties. I think the volume of inventory will be similar to 2024, which is a bummer for buyers because it was already so tight. Understanding the compromises that you are willing to make and still get a home you want is key to success in the new year.
Stock Market Up = Higher Net Worth
You are likely sitting on a portfolio looking a lot stronger 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 a contrarian or not in a decision, I like to consider the other side of the coin and understand multiple perspectives before making a decision. I think it’s clear the bottom is behind us and if you believe the valley is a desirable place to live, then it will continue to appreciate over time. No matter when you bought (70’s, 80’s, 90’s etc) it seemed expensive relative to your income, but over time, our communities continue to be a destination for people from around the world because of weather, schools, diversity, education, jobs and more, and will continue to be a destination for people around the world in the future. Take time to understand your options and be confident in making your decision. I will continue to be an advocate for my clients, and can help you understand all your options, so pick up the phone or email me and let’s get started!
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