We are all experiencing the same thing for the first time in our lives. A complete, global economic shutdown.
There is no play book for how to navigate the market during these times, or for the right or wrong decisions to make, but keep reading for my thoughts on economic cycles, consumer sentiment and several scenarios to consider.
Coming into 2020 there were a few key points to highlight:
1) The economy was already looking shaky with many experts talking about a recession.
2) Household debt was at an all-time high.
3) Bubble IPO’s were increasing uncertainty about overall company valuations.
The first few months in our local real estate market started off hot; coming off a slow Q4 with soft prices, even in the best areas, much of that value (about 5-10%) was put right back into properties by February. I even had agents calling me about properties I sold in Q4 who had buyers that wanted to pay a higher price than just a few months prior. That euphoric attitude is common early in the year, but all of that changed by mid-March. Real estate, like many other sectors, came to a virtual standstill. We even had a few days where the county was not recording sale transactions – imagine a moving truck loaded with your furniture just sitting, unable to unload and you, the new owner, are stuck in a hotel because the transaction couldn’t close. In addition, many purchase contracts fell apart due to the pandemic uncertainty. We all entered a stage of survival; one that I think we are just now starting to come out of. During survival mode everyone’s focus was on family health, both physical and mental. Even though the economy is slowly opening back up, there is still great uncertainty and many questions about this post-pandemic world. The next stage will include lots of hindsight-conversations and a realization that the economy does not just start up on a switch, even if Wall Street makes it look that way. The realities of Main Street are very different, and I think it will take many months to play out.
The US economy is heavily driven by small businesses. They are the key to our consumer economy success, and I think we have a serious problem in front of us. Most small businesses run on tight profit margins, so a decrease to income over a long period of time is devastating. Their losses that have accumulated during the shutdown are one thing, but the fact that coming out of quarantine the economy will not be running at 100% may make it unfeasible for them to even open their doors again.
I’m sure you’re hearing about local restaurants that have shutdown: Nick’s CafО in Los Gatos, Joya in Palo Alto, the entire Specialty’s CafО & Bakery chain, to name a few. I mention this because they are staple restaurants in our area and it sets the stage for what our recover may look like, both at a macro level as well as specific to real estate. I just simply do not see how we get a V-shaped recovery. The shear amount of money it would take to stabilize and restart the economy to 100% just isn’t possible, even with the massive government stimulation.
Coming out of this cycle we will be in a new economy run (like so many economic cycles before us) which will offer new challenges and opportunities, but before we get there I think we will have some more economic pain on Main Street over the coming quarter I think you will hear more conversation on these three points:
Consumer debt – the amassed debt through quarantine (whether through deferred rent/mortgage payments, putting costs on credit cards, depleting savings accounts) is going to be a significant issue to a large percentage of the economy, not to mention income will likely be lower for many employees for the foreseeable future. Prior to COVID-19, US household debt was already at an all-time high, so I’m anxious to see the post-pandemic numbers.
Job insecurity – companies will be tightening their belts and fewer employees will have a bigger work load; this is part of our economic cycle – companies leveraging efficiencies through processes and technology. People will be more hesitant to make long-term planning decisions until there is more clarity on their job security. There will be those companies that are the exception, which will continue hiring through this transition, but I think you’ll hear more about job insecurity than hiring sprees.
Migration – this is the time when we see a re-calibration of space. I have seen this cycle multiple times --- families will relocate out of the area (and even California) for a lifestyle change because companies will embrace the work remote trend. Silicon Valley will still be a center for those who want to make an impact though and I think this migration will make room for the next generation of industry. I am personally excited to see what the next game-changing companies look like.
I think the COVID-19 shutdown catapulted the economic transition about 5 year ahead of schedule; new norms and habits such as comfortable WFH behavior, data-sharing, online shopping/delivery, commerce via technology verses face-to-face interaction. Not that everything we’ve experienced the past few months will stick, but it has been a global case study that would have never happened if not for the COVID-19 quarantine.
What to Expect in Real Estate
When the market is accelerating buyers have less uncertainty and are more motivated to make quick decision before prices increase. I don’t see that today. When the market is flat or has ups and downs, buyers look for reasons not to buy because of the unknown – for example: Will my job be here in 6 months? How will my income look? What’s the depth of slowdown (price drop)? Will my wants and needs change in the near future? These are reasonable questions that must be discussed before making a sensible decision, but that doesn’t mean it’s not a good purchase time. During this period you see more emotions in the negotiations: both for sellers and buyers, so I find it very important to get a deep understanding of all parties in order to put the best deal and terms in front of my client.
If you buy now you need to like the home you purchase because prices will likely be teetering in a similar place for a while. This means that you’re unlikely to see the home you just bought worth significantly more in the near future. If you like your home, you'll be happy enjoying it and will look back into the next cycle very happy you have that home. You will increase your lifestyle and happiness. If you are not increasing your lifestyle and happiness, why would you buy that home? The current market position doesn’t scare me because I think there are values available in the market and long term it’s a win. By no means does that indicate everything is a good purchase (you should understand your particular wants and needs and evaluate if they are realistic), but if it’s a fit, I’d consider buying it today. I have seen the real estate cycle play out multiple times and I can tell you when the market is near bottom, you won’t necessarily find the house you want – why would a seller sell a quality property in a down market? So be mindful of what you’re looking for and the timing that makes most sense.
What I’m Telling My Clients:
Consider selling now or you may need to wait a while because I don't think the market will get better before it gets worse for sellers (buyer demand, price, etc). Coming out of quarantine there is solid demand from buyers that have been waiting. Given that demand plus lack of quality inventory, it should be better for sellers in the immediate (not sure how long the current supply/demand lasts). Fortunately, we have a chronic issue of inventory, so it doesn’t take much demand to absorb available homes. However, we are currently running under average on new inventory, which means there may be a delayed surge of homes for sale once sellers are comfortable putting their homes on the market. I think we will see a point in time when inventory increases and exceeds demand, which will not benefit sellers, but in the past it isn’t a chronic situation and will go back to our typical market of more demand than supply. If you don't want to sell now, you may want to wait until 2021 to see a clearer picture on trajectory.
Buy if you find the right fit for you. Rates are low, but they are unlikely to go up soon. The problem with waiting until the bottom is you may not find what you like at that time. You're not buying a widget, you're buying a home which like it or not, is a very emotional journey. Be in the market keeping up with inventory, trends, etc, but don't feel the urgency to buy unless it makes sense for you. In the short term your value may fluctuate but buying a home should be a 7+ year decision, and at that point I am confident prices will be looking good. I also think buying with less competition is to your advantage because you'll find more motivated sellers. But, not every home will have a motivated seller, so less competition will increase your chance of finding that motivated seller.
I think the investment dilemma that will continue this year will not be if you should invest, but what you should invest in. Those of you with capital ready to deploy are sitting on the sidelines looking for opportunities and the pressure of so many options makes it difficult to make a decision. I think that’s a natural instinct, so I am happy to have those conversations with you to discuss what’s the best fit. Spoiler alert: buying real estate isn’t always the best investment for you, but through our conversations and analysis I hope to help you on that investment-strategy journey.
Stay healthy, stay well, and enjoy summer!
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