Real Estate: Bubble, Bubble, Toil and Trouble 

It appears the media has become fixated over bubbles, is it their literature training as journalists and the witches of Shakespeare that have been part of their hidden psyche that allows this to become part of their daily commentary?   Or is the old human conditioned response of fighting the last war?  The French did so and put up a massive fortification after World War One on their border with Germany, only to have the Germans sweep around the fortification in their lighting attack for World War Two.  So much for fighting the last war.

It is not hard to be pulled in the fear factor when the BUBBLE word is mentioned the memory of the Crisis of 2009 is too soon to forget.  Whether it is real estate or the stock market, bubbles are becoming a boring repetitious journalistic attempt to sell their wares.

Let me outline to you why I do not think a bubble is here in real estate.  that is not to say, that prices can soften and stall or move back slightly in the once “HOT” areas.

SUPPLY:  The supply side of any price movement can be influenced by internal factors.  The internal factors that first come to mind is the available inventory of sale able homes.  the key word here is “sale able”.    6.4 million US homeowners still have underwater mortgages. That is 13% of all residential properties.  If we take that by state in proximity to California that is 32.2% in Nevada, 22.5% in Arizona.  California has 13% with another 2.4% near negative equity. That number is distorted.  If you click on the link and look outside our Bay Area you will find Santa Cruz County in the 35-45% range along with the central valley.

That negative equity means there is no incentive to sell a home, just to go without equity money to buy or lease a new home.  Lending has not improved to lessen interest rates if there is no equity to re-finance a property.

Next on the available supply comes those homes which were foreclosed on and are now owned as rentals.  Two buyers came in the foreclosure market.  Individuals and institutional.  institutional were private equity funds, Family Offices and large real estate investors.  The later group being the largest holders.  There is no incentive for those investors to sell.  Rents keep going up.

While apartment buildings are being built, such as in Redwood City.  They are being gobbled up by block rentals by Facebook and Google.  Investors a moving into the older home market searching for fixer upper homes to tear down, rebuild to create a future home for sale, flip, or a rental home.

DEMAND:  Demand is not universal across all homes for sale.  Demand is a function of employment growth and affordability.  Google, FaceBook and Apple are all increasing their labor forces.  Those increases are at the entry level were affordability is the key.  When an analysis of the home prices is made, it is the median price home that is seeing the largest increase in price.  That sector is being fed by markets were the age bracket of sellers are long term retired or aged and those who cannot escape the negative equity cost of carry.

Once you move out of the median price level, you will find homes on the market for months and years.  In Woodside, 245 Lindenbrook on the market since October 2013 with 4 price cuts from $12,500,000 to $7,950,000.  389 Moore Road for sale since September 2013 $6,888,888.  (no Chinese buyer could be enticed with this lucky number).  25 Oakhill Drive since August 2012.  Portola Valley has two: 138 Bolivar at $6,488,000 for 170 days and 5 Oak Forest Court at $3,995,000 for 143 days.  Atherton has its share of lengthy listings: 151 Laurel Street at $11,388,000 since July 14, 2014, 52 Atherton Avenue at $23,995,000 has been on the market since January 2015, 68 Adam Way for $12,950,000 has been on since January 2015 but on and off since October 2010.  Menlo Park has 1000 Middle Avenue at $1,998,000 for 106 days.  Palo Alto is a hot market, it too has lengthy listings.  4194 Oak Hill Avenue at $11,988,888 has been on the market since March 2014. 2991 Alexis Drive at $5,999,988 has ben on 145 Days.

Now with all those properties as examples and the Lucky Chinese Number of 8, wouldn’t you think the properties would “fly off the market” with either those rich Chinese Buyers that are supposedly being bused around our area or by frantic buyers that signify a bubble????

PRICE:  Bubbles have the distinction of escalating prices across all sectors until a final blow off.  Just from the cuts in prices we have seen and the days on the market can justify a question of the BUBBLE talk by the media.

What I do think is happening is a snap back in home prices from the most depressed levels in the most vulnerable areas, the median income levels; not the high end homes.

What is driving the market place is from my last commentary on demographics.  The employment level and expansion of FaceBook, Google and Apple bring in entry level buyers and renters which in turn drive up prices, stimulate construction of rental properties.  That will continue until the price of the entry level price homes hit a saturation level and potential buyers stop!  is that a “pop” of a bubble or is a normal prices of market prices?

Prices move to a level and homes are taken out of the underwater class.  Some of those former under water will go up for sale; but I think others will be re-financed.  Inventory will begin to accumulate in the entry level area until price cuts come back to bring prices to a level buyers will return.  This is not a bubble but a normal market process of pricing.

OUTLOOK:  I expect median home prices to continue to increase.  That increase will not be from the low end homes but from higher priced homes that sell as employment brings in managerial staff and starter home buyers move up.  Just consider the leverage of a home in the above examples selling and the leverage an expensive homes has on an average or median price home index.

Timing is everything.  As we move through the summer and our normal dull period and we move into the last shot of the year from mid September to late October, home prices and sales will take on a more important meaning.  Will prices soften?  Will inventory accumulate.  I believe buyers should take advantage of prices today.  I don’t expect the step up level to the $1.5 to $2 million level to be at risk.  Find a property that has been on the market for longer than the norm and negotiate.  For sellers, don’t get greedy and out of line with the market.  No one is running out with multiple offers of the $2 million level no matter what the media indicates.

     ~Nino M. Gaetano~