The spring market is knocking on the door, but not many people are answering. Even though the market is clearly stronger for sellers than a year ago, there is still an unusual shortage of homes for sale. This is setting the stage for a tough year for buyers if this continues.
For those of you that have followed my newsletters over the years, you know that I've always said that inventory is a chronic problem – and a constant reality – in our area. It's not the cause of the market ups and downs but I believe right now we are suffering from a severe inventory shortage…even more than we're used to seeing, and this will cause a problem.
Why Such Low Inventory?
Due to soaring interest rates, our market has seen a 30-35% drop in transactions. Homeowners, typically upgrading and joining the seller pool, are now holding back. This has drastically impacted the starter-home market since we don’t see the upgrade-buyer. Our inventory is limited to homes being transitioned due to life necessities such as death, divorce, or relocation.
This impacts all price ranges as the lack of upgrading creates strain across the spectrum. For instance, a buyer in Blossom Valley can't move up to Cambrian Park, preventing the Cambrian Park seller from upgrading to a larger home in Campbell, and so forth. The domino effect permeates all price levels, starting from the bottom and extending upward.
Given the situation, it's rational; what would entice a homeowner with a 2.5% 30-year fixed interest rate to upgrade? The incentive would need to be substantial, considering more than doubling of their current interest rate. Instead, many homeowners opt for expansion projects or await a market shift before upgrading.
I do not think we will return to normal transaction levels until mortgage rates drop into the 4’s, which isn’t likely until 2025. Until then, we should all expect a very tight market and lots of hyper-motivated buyers.
What could slow our market?
There are numerous potential scenarios that could jolt our market, yet I am less confident in their likelihood. If one or more of these events indeed surprises the buyer pool, we might observe some cooling. Otherwise, brace yourself for the ride ahead!
Global tensions – so much to unpack here, but I am hopeful calmer heads prevail and we do not see continued escalations in the many conflicts currently underway.
Stock market decline – the market seems impenetrable right now, but it wouldn’t take much for a sell-off or market pivot.
Unemployment – Generative AI is reshaping employment and corporate strategy, yet the true impact on jobs remains elusive. Reports suggest some companies are resorting to local layoffs with plans to rehire overseas, showcasing the beginning of potential shifts in the employment landscape.
Domestic instability – it is an election year, so anything is possible! I was happy to see the Fed cool down their talk about rate drops and it seemed Wall Street got ahead of themselves. I’m expecting status quo domestically, but a few surprises could really upend our market.
What will continue to drive our market?
Strong dollar – the US dollar is enjoying some very good times, not to mention the overall US economy is stronger than many global competitors, so liquidity is moving overseas to the US for safety and opportunity.
Newly minted millionaires – the stock market has experienced a substantial surge over the past 18 months, resulting in a considerable influx of newfound wealth. It's highly likely that a significant portion of this group will invest in real estate, whether for portfolio diversification or due to considerations such as starting a family.
Life – you can’t sit on the sidelines indefinitely. Life happens, whether needing more space for extended family or it’s time to live near the children’s school.
Silicon Valley is a great place to live! Whatever the ultimate reason, we live in an amazing place, so if nothing else, the weather, people and culture will drive our market (it always does).
How do I know the market is stronger than last year? Well, this year has consistently surprised me with higher record sale prices than the entire year of 2023. Despite higher interest rates, the most motivated buyers seem undeterred, suggesting an anticipation of forthcoming interest rate declines.
Who is Selling?
You may wonder why anyone would sell in this market. Fair question, but there are many reasonable reasons to be a seller:
Those experiencing life changes – divorce, relocation, a death in the family.
Empty Nesters – done with the big house, ready for low maintenance.
People Relocating – tired of California taxes or a job relocation.
Opportunistic sellers – I’m having more of this conversation because of the high interest rates. There may be an alternative investment tool that will be significantly better for your financial strategy.
Strategic emotion optimizers - those who want to capitalize on the emotional premiums buyers can pay for homes while there are so many buyers and so little inventory.
Who is Buying?
It’s a tough time to be a buyer, but at some point it’s time to jump in the deep end (hopefully prepared).
Buyers who think prices may be higher next year – inventory is tight, if you don’t buy now you are scared you may be priced out of the market later.
Those experiencing life changes – just like sellers, there can be life circumstances necessitating a home purchase.
Nvidia employees – or any of the other companies that have enjoyed a sizeable run-up. Time to take some chips off the table to buy a tangible asset like a home.
FOMO buyers – the fear of missing out. You see your colleagues out house hunting – what do they know that you don’t?
Strategic Insights: Navigating the Current Market Landscape
I think the worst is behind us. Whether the worst of unemployment, inflation, interest rate hikes, uncertainty, I think greener pastures are ahead (albeit, we will inevitably hit bumpy roads along the way). Fundamentally, I think there are many good investments out there including being a homeowner.
If you are thinking about buying in the next few years, I’d consider it sooner than later because when interest rates do come down, I think you will have a lot of people enter the market as buyers. Even as inventory picks up, I am concerned it won’t be enough to absorb the demand. If you decide to wait and keep your money invested in other tools, you may do well too, so don’t be overly concerned if the market is up when you finally jump in.
Delaying a sale is also reasonable if you have a plan, don’t just wait for the sake of waiting because you may be missing out on better investment opportunities. For example, I spoke to multiple clients this week about selling properties that are currently rented. They recognized the ROI was not as high as other current investment tools and knowing they had a sale horizon over the next few years, it makes more sense to sell now and reallocate those funds.
Tailoring solutions for my clients is not a one-size-fits-all endeavor. What truly excites me about my job is crafting unique, customized solutions for each individual. Drawing on my experience and collaborating with professionals like financial planners, accountants, and estate lawyers, while closely understanding my clients' ultimate goals, we formulate the most effective strategies. Together, we not only devise plans but execute them with precision.
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