I’ve been telling my wife that we are banking stories and experiences that we will one day share with our future grandchildren – “2020; the year of craziness!” I find comfort knowing the whole world is in it together, so it makes for a unique bond that I hope propels the world into the future.
That being said, we are experiencing one of the most uncertain periods in our lifetime and maneuvering through it is no easy task. Just meeting day-to-day obligations is taxing enough, so trying to plan for your financial future can seem overwhelming.
My goal is to help my clients process the various scenarios and options and create a plan that best fits their needs. Real estate in the COVID-19 environment presents challenges to both buyers and sellers, but the real elephant in the room is uncertainty. Uncertainty is driving our decisions, or causing hesitation, depending on each individual’s perspective. Nothing we can do will alleviate the uncertainty, so how can we move forward?
Since we are in unchartered territory across practically every business and experience globally, I think it’s never been more important to be critical of yourself and the options in front of you. Know thyself – that famous saying that never really seemed as relevant to real estate as it does now. We are in a time when understanding yourself first will make it easier to make better decisions for your future.
Coming out of a slower 2019, early 2020 was anything but slow. Buyers were aggressively bidding up properties priced off the low points of 2019 and until March, there were no signs of a clear slowing. Then came COVID-19 to the masses. The market basically halted in March and didn’t really start opening back up until early May. Since then, the market movement has clearly changed why people are moving and to what types of communities.
Why people are moving:
From San Francisco to the Peninsula & Valley:
It’s not surprising that when all of the restaurants, parks, museums, and basically every public amenity is closed and you are stuck in an apartment with no outdoor private yard space, you’d want to get out for more elbow room. What is even more telling are some of the current top asks from clients: yard space, pools and home offices. Up until quarantine, my clients coming from urban settings didn’t generally prioritize features like yards and square footage. They had meals at the office and spent free time in the community meeting friends for drinks at restaurants or having play dates at parks. With all that off the table, we are seeing a clear pivot to yards, pools and home offices. We have adapted to the quarantine environment and work from home (WFH) culture, but what will be telling is if these habits stick even post-quarantine (whenever that may be!).
Searching for a Better Lifestyle:
When we are stuck indoors while working remotely, it makes sense that you’d want a nicer living environment, and even better if you have family close by to help take care of your children. I’m hearing the conversation change from how great the valley is to how it’s not worth the cost of living here. This is impactful because I think we may be experiencing the beginning of a paradigm shift in the valley. Don’t fret, this happens during a market cycle. I clearly remember it in the dot.com day, but that migration was more forced because of the mass job loss and I think this migration may be more self-driven because of the WFH option and subsequent lifestyle choice. This is very clear right now in the rental market – I’m hearing from many renters that they are not renewing and looking to move out of area, many moving closer to their family for more support, but ultimately for larger homes at a lower cost. I haven’t heard much from homeowners yet, but I think this shift is just starting and will continue to pick up energy through the year. That being said, I have seen this before and it’s part of the cycle, so I’m not worried about our valley; let’s enjoy the lighter traffic even after people are back in the office until the next wave of talent moves into our great communities to create exciting new technologies and innovation.
I would say current buyers are much more focused and deliberate. You have to be if you’re looking in this environment – it’s not the most enjoyable process walking through homes with masks, not touching things and being limited to very tight showing windows. So those buyers active in the market are more focused, but at the same time more discriminating to homes – but for good reason, they can be. Buyers want turnkey – just move the furniture in. It’s never easy to manage a remodel project, but even more difficult while you’re trying to juggle the WFH reality. I am an advocate for my clients and help through the remodeling process, but it still takes my client’s time to pick out products and make final decisions. Today, buyers would much rather move in and start enjoying their quarantine compound on day one.
Homes Are Selling
The good news is homes are selling. Many homes are actually selling stronger than expected relative to the current economic climate, but not at peak pricing. There are a few factors that should be highlighted with regards to sales activity:
Low Inventory + Buyer Demand = Solid Market
Low Inventory: We typically experience low inventory in summer months, but this has been an exceptionally slow summer for inventory. It is not as easy to move during quarantine, so many sellers are in a holding pattern waiting for more clarity. The low inventory, mixed with the extremely low interest rates, have made it more difficult for buyers to find good properties.
Buyer Demand: There is strong buyer demand, especially when comparing to inventory levels, so even though buyers are more discriminating and cautious on what they buy, there is still ample demand to absorb current inventory levels. It is also difficult for early-stage buyers to educate themselves with the market because there are no open houses to casually view to understand wants and needs.
Slower Rental Market
“At least we don’t have rentals in San Francisco,” is what I keep telling myself because we have it easy right now compared to San Francisco, which is experiencing double-digit year over year price drops and many local experts think the worst in the San Francisco rental market is yet to come. Our local rental market has slowed both in prices and demand, but nothing like San Francisco. Prospective tenants have lost the urgency to rent a home today and are looking to negotiate on terms. Pre-quarantine, I typically had houses rented to the next tenant even before existing tenant moved out. Now, it’s almost a certainty to have vacancy between tenants.
The main factors impacting the rental market today are:
Virtual Offices – since even the new hires at local companies are working remotely, there is no need to quickly find a home before starting the new job; they can live out of state for now instead of being close to the office, so we are not currently getting the inflow of new renters to the area.
Flight from the Valley – many renters are tired of high rent prices without having any community amenities, so they are leaving the area for better lifestyle.
Choices – renters have choices today, both with more available homes to choose and the ability to negotiate terms because many homes are taking longer to rent.
Condo Price Decline
I’ve been seeing the condo market, specifically the developments with shared hallways and sparce open space, on a downward price trend. As you know, when I look at price trends, I don’t look at average data but rather like-for-like properties. For example, take the development in Mountain View at 1031 Crestview Drive. This development is just off El Camino close to all the action, but similar condos that were selling in 2019 for $975,000, are currently trading around $850,000. That’s a 13% decrease in real value. There isn’t as much demand for apartment-style condos especially in the current climate. Additionally, last year condos were selling in a week and now are taking 2-4 weeks to sell, even at the lower prices. To most of the country, 2-4 weeks is very fast to sell a property, but it feels like an eternity in the valley.
Where Do We Go From Here?
I think we will continue to see uncertainty into 2021 with continual migration out of the valley, so we need to plan our strategy accordingly. Will the current WFH culture and migration become a paradigm shift in our area, or will it be a temporary time that we look back and reflect. I think there will be some features of virtual offices that are here to stay – I think we are adapting how we work and live, but ultimately I think people are excited to get together again to collaborate, laugh or to just gossip a bit. So now we need to figure out how to invest our available capital. There is an opportunity cost to making any financial decision, meaning if you deploy all of our available funds on a property, for example, you won’t have funds to invest in equities or properties if the market adjusts again.
I think it is important to understand the opportunity costs of your decisions so that we can make the most sensible decisions for your ultimate goals. It may be time to dollar-cost-average into the market, whether equities or real estate. You may have noticed that I’m not just a Realtor that pitches real estate, but rather think it’s important to have a diversified portfolio and having a mix of equities and real estate is a prudent position. I don’t think it’s time to be frozen and not do anything, but rather understand the options, understand the risks, and understand your ultimate goals. Knowing thyself is important in strategizing the best plan for you and with so much uncertainty on the horizon, it’s never been more important to understand your options and timing before making such an important financial commitment.