summer real estate

Back in November I made a bet with a client that the Fed was going to hold interest rates status quo in 2024 with no more than one drop. My client bet there would be three+ moves. 

My bet seemed like the most prudent approach given we still had a recovering economy that was far from healed with talented people concerned daily about losing their jobs. Plus it’s an election year with not great options on either side, but he was listening to the market chatter and thought the Fed would make a move sooner 

I expected that the real estate market would be in a final stage of a market transition with prices staying mostly flat until 2025 when interest rates would be cut. I thought 2025 would be the year rates would come down and home prices would trend upward from the bottom of 2022. 

In December, it appeared I would lose my bet. The Fed announced that they expected a soft landing, full employment and intended to reduce rates by at least 75 basis points in 2024 to support growth.  This caused the stock market to skyrocket and social media was buzzing with talk of the Fed successfully orchestrating a soft landing.  But this was not the case.

Fast forward today and the Fed’s tone has reversed.  Now the conversation is around stubborn inflation and economic growth, so possibly only one rate cut in the cards this year and more apprehension with getting inflation back to their 2% target. 

I’m flabbergasted the Fed is surprised about the status of inflation; it often feels that the Fed chairmen are detached from reality.  But why is this important?  I think this misstep by the Fed (I’m still not clear if intentional to manipulate the equities market) has caused 2024 to artificially jump ahead in time and now we are left wondering if the music stopped without someone having a chair.  Will the market continue to skyrocket as it has the first half of 2024 or will we see a reversal similar to the Fed?

Why is the market up?

Fundamentally, our market is up more often than down.  The down cycles tend to be quarters long, not years, so if you have a reasonable time horizon you can feel confident local real estate is a safe investment.  As an example, just since late 2023 we have seen 15% or greater increases to single family home values in many local communities and price ranges.  Although this increase occurred sooner than expected, we knew the bottom of 2022 was in the rear viewer mirror and so it was only a matter of time before motivated buyers that have been passively scouting open houses would now make purchasing decisions.  But why now?  I think because of the following:

Buyers are anticipating lower interest rates in 2024

We can blame the Fed for setting poor expectations, but potential buyers thought they could get ahead of competition once rates come down by buying early at a higher interest rate with confidence they’d be refinancing before the end of year at a lower rate.  A short-term expense for long term gain.  I think this is the main reason so many buyers have been aggressive during the first half of the year.

Insanely low inventory but still reasonable buyer demand

Early spring is consistently better for sellers than buyers because you have way more motivated buyers than sellers.  Add to that the lack of seller motivation this year because the high interest rates keep them locked into existing low mortgages (the cost of moving is too great).  This creates a perfect storm for buyers competing and sellers reaping the benefits.

Be aware, as we enter the summer season we tend to cool down; buyer fatigue sets in after running full speed for multiple months and enough new sellers come to market during summer break or after seeing recent spring sales in their neighborhood likely exceeding their expectations.  Overall, it appears to be a positive recipe to be a seller.  What sellers forget this time of year is that the buyer fatigue combined with summer travel tends to cause a slower summer with noticeably less motivation and aggressive buyers.

Newly minted millionaires

I mentioned this last quarter, but it is still worth mentioning.  Many local tech companies have seen a huge run up this year creating tons of wealth for their employees, which in turn creates new home buyers.  I think the worst is behind us, especially when you ask people how they are feeling about the overall economy, so people are looking towards wealth creation which I think will continue.

The global buyer

The US economy is still one of the safest places to store money, so it is no surprise money is coming from overseas and safely going into real estate.  This comes in the form of 2nd home purchases, helping children with down payments or investments.

Silicon Valley is back but not all roses without some thorns

Did it ever really go anywhere?  The media seemed to highlight the best of Silicon Valley was in the past, but you know I’ve always been a consistent proponent of our valley.  And I think others are taking note.  The conversation should really be focused on talent that is coming to the valley for our new tech revolution that will change how we live and work.

Generative AI is the game changer 

We are in the infancy stage of this paradigm shift and I think we will see huge wealth creation in our value once it matures and becomes monetized.  I get so excited talking about the technical side to genAI as well as philosophical issues and disputes.  Overall, I am just excited to call Silicon Valley home and be immersed in the changes to come.

Silicon Valley exodus? 

You’ve seen the news about people flocking from California, but I’m seeing Silicon Valley migration.  So many people are coming here for Generative AI and new start-up opportunities.  The political environment and cost of living may not be in a company’s favor, but the people-talent and communities are just too strong to overlook.  Unlike Texas, where Oracle and Tesla are already moving their headquarters out of state after just moving there a few years ago.

Commercial real estate crisis

I am starting to watch this house of cards crumble.  We have a crisis caused by a two-sided issue: the work-from-home paradigm shift has created less need for commercial square footage and many borrowers of commercial debt are currently at low interest rates with their terms coming due and new refinanced rates 3 to 4 times higher.  They have a dilemma of less need for space and likely less cash flow (if they are leasing property that is vacant) and a significantly higher cost of capital.  I would call this a real estate sector crisis with the trillion dollar question – how will the fallout impact other sectors of the overall economy.  I think it is too early to give an accurate assessment since we don’t know exactly how large it will be, but I think it is very important to follow carefully and I’ll keep you updated as it plays out.

Lots of exciting opportunities on the horizon, but I fully expect bumps along the way

Even in the toughest market there are opportunities so I will continue to work closely with my clients, whether selling or buying, to make sensible decisions that best fit their ultimate goals

Our market is so dynamic, so it is critical to watch macro elements, not just neighborhood sales, to have a better sense of where the market is going.  I work closely with my clients whether selling or buying, to understand the factors that impact our market so we can optimize the specific client goal. 

...And I am looking forward to dinner at La Costanera once I win my bet!

Let's connect to talk more about the specifics of your exact situation: