I tell my clients that if you talk to a real estate professional who tells you the market today is hot, they are either misinformed or lying. The market is soft. My analysis shows that the market started slowing in June 2018, and that makes for over 6 quarters of a slowing trend.
During that time, we have seen a correction of 10-15 percent from peak pricing, with some neighborhoods experiencing an even greater discount. In addition to the current discounted pricing, there is a clear lack of urgency to buy a home today.
By no means should this be overly concerning to you; we are coming off a hyper-growth market, which is never sustainable. It just means that the days of buyers purchasing a property out of fear have gone on hiatus, so we are left with prospective purchasers making more calculated decisions based on family needs, financial circumstances and overall market sentiment.
I am often asked, “what is causing the market slowdown?” There are about a dozen solid reasons – from tariffs to global and domestic tensions, affordability to fizzled IPO events.
Fact #1: The Market is Down
From the boarders of San Mateo all the way south to San Jose, I have seen ALL neighborhood markets impacted by the market cycle. We reached peak pricing around May 2018 and since then I’ve watched the market slow across communities and have yet to see an obvious rebound. Currently we are about 6 quarters into this correction with an uncertain 2020 on the horizon. Whether looking at real estate or equities, there seems to be cautious optimism.
Fact #2: Interest Rates are Ridiculously Low
I have never seen interest rates so low. There are banks offering fixed rate 30 year loans under 3% and adjustable rates under 2%. Not everyone qualifies for these rates, but the fact that they can offer such aggressive rates is very appealing since it dramatically impacts the monthly home expenses. For example, if your loan amount is $2M your monthly interest payment is about $1,800 less than a year ago. The lower mortgage cost, plus lower purchase price, is a combination worth analyzing.
Fact #3: Lots of Uncertainty
It seems like Wall Street is cautiously going to work each morning just waiting for the other shoe to drop. I say there is cautious optimism because Wall Street wants the market to go up, but at the same time they realize there is lots of uncertainty that can change it in a second. What happens to China’s negotiations on tariffs? What happens to Hong Kong? What happens in the EU? Iran? Presidential election? Impeachment? Tweets? IPOs? Tax code changes? The list goes on, but it is clear there are lots of reasons to feel anxious about the market and global economy. No expert can tell you what 2020 will look like, but I believe there are ways to move forward despite the uncertainty.
How Much Longer?
I wish I could tell you exactly when prices will rebound, but no one really knows. What I can tell you is that real estate doesn’t usually rebound instantly. It is like turning a cruise ship around – it takes a while.
During the transition period there are more sporadic sales as emotion picks up and buyers want to “jump in before it’s too late.” What makes real estate so unique verses other assets like buying stocks, is that each home is unique and is a very scarce asset. The natural light, neighborhood setting, condition, and even the home’s smell are just a few of the subjective variables that impact a person’s decision to buy and can impact interest in a home. At the bottom of the market, you may not find the variables that best fit your wants and needs. I am cautiously optimistic about 2020 and with 6 quarters into the market transition, I am feeling good that we are well past peak. Of course, no one knows how long it will last, but I feel better knowing it is clear we are not at a peak.
Why Should you Sell Now?
If you are thinking about selling, you have likely noticed homes in your neighborhood haven’t been selling for as high as they used to, but you want to know how to get that 2018 pricing. This is a tough conversation I have with sellers, but fundamentally I highlight how getting peak price with an emotional-premium is not today’s market.
A few years ago, if we did the proper preparation and really made the home shine, you would be overrun with offers. Doing the same strategy today is still important, but you’re not seeing the irrational exuberance of buyers. What is important is it helps get your home sold for top dollar today, whereas neighbor homes that don’t prepare properly either don’t sell as strong or you’ll be seeing price reductions very soon.
Whether you sell today, next month or next year, really depends on your circumstances. I believe real estate fundamentally moves in seasonal cycles, so you may try to plan according to when most buyers are in a buying-decision mode. If you are holding out for the early 2018 pricing, you will likely be waiting quite a while, because the natural flow of the market cycle has several flat quarters before a sustainable rebound. So, your decision on when to sell should not focus as much on grabbing the peak price, but rather timing for buyers to get the best price possible given the circumstances of the market. There is risk going into 2020 with lots of uncertainty, but by no means it is a foregone conclusion that 2020 continues to decline. Maybe that’s the year we flatten and start transitioning back, but since no one can give you a guarantee, I think it is most prudent to plan according to your own financial plan and needs.
Why Should you Buy Now?
No one knows when the market will pivot, so it is a gamble to sit on the fence too long. I look at the market holistically and make decisions based on many factors. I will say that I am more bullish on the market than a year ago because I know pricing is off. Personally, we have purchased several properties in this down market and I believe now is a good time to do this. I feel confident I’m not buying in a peak market and my competition on homes is much less emotional, which means I don’t see as many irrational sale prices. That is a far better combination than being in a market where you don’t know how long it will go up. It is clear we are not at the top. However, you can wait for the bottom – this is an obvious option, but the only true way to identify the bottom is to see it go up again…and then you’ve missed it. I remember the stock market crash in 2008 and stories of investors that timed it right and got out before the crash. That’s great for them, but many missed the market run-up because they were hesitant to get back into the market; they sat on the fence and watched a huge run-up that followed. It’s not just about timing the market, but rather understanding risk and making calculated decisions.
For example, I can argue that during market corrections, the most desirable locations typically adjust +/- 20% from peak. If one agrees prices are off over 10%, then we are already well into the adjustment period. It may be time to start looking for opportunities since you’re not competing with as many emotional buyers. By no means should you just jump in and buy for the sake of buying, but I do think it is a good idea to be in search-mode because if they right property comes up, you should definitely consider it.