Fall 2017 Market Update
After a long, not so sunny summer, I settled down long enough to share my thoughts again on the state of the market. A very interesting bifurcation has formed between high end and entry level homes in the southbay. For those of you who watch the Strand market closely, the "bubble" has clearly deflated. Burst would be a more accurate description. While many of my peers jokingly point the finger (hopefully not the middle one!) my way after my 716 Strand sale in January, I need to remind them that I represented the BUYER and claim no responsibility for the 5 million dollar drop from the prior comp on the 600 block (14mm vs 9.3mm). Both of these were dirt sales and yes, we bought ours for roughly 2/3 of the prior 2 sales.
The Strand market, particularly on the south end of town had simply run way too far, way too fast. A number of Strand properties sat without buyers as sellers had simply gotten over optimistic. We just happened to be there when the first shoe dropped. Since then, a number of price cuts by those who live in reality have resulted in a readjustment of Strand comps. Several sales have taken place since that affirm our transaction was not an anomaly, but a reset. A healthy reset.
Giving credit where credit is due, my well respected friend and fellow agent/developer Rob Friedman made a comment at that time that has come to past. He predicted that the Strand adjustment would work its way to the rest of the Sand Section. High end real estate price corrections start at, well, the high end (that would be the Strand) and work their way back. Once Strand properties could be had for such bargains as 9-11mm for dirt (so cheap I know), what then do we value walk street dirt at? Note: I use lot value as a mode of comparing apples to apples since every home is unique. As Rob and I both agreed, a high end slump ensued and Sand Section inventory has swelled to 60 at the time of this letter as opposed to 35 last years.
So why do I still have frustrated home buyers coming to me with stories of losing out against 10 other offers time and time again on entry level homes? Before I answer that question, I have to interject my standard response, which is quite honestly true....
"...Well I am glad you have chosen me to represent you because as much as you hate bidding wars, you will only have to endure one more!"
Back to the question at hand (sorry Snoop) Why ARE there bidding wars in one segment of the market and sluggish sales in another? There are probably several reasons. First, many doubters are finally realizing that burning rent money and sitting on cash with no return makes no financial sense. Second, banks are lending more freely now as the memory of the crash fades. Loath to say, I have even seen stated income loans making a comeback. Yet another take, demographics are coming into play. With a swell of millennials looking for a first time home and boomers looking to downsize, it only makes sense to see the high end contract while the low(er) end surges.
Since I have made prognosticating my business for the last 30+ years, I may as well keep the trend in-tact. Interest rates will STILL remain low
. At least through the first half of 2018. An unpopular, if not non-existent opinion, I know. However, check my previous blogs. All last year I predicted mortgage rates would remain low despite the federal reserve hiking short term rates. Not only did they barely budge on the upside, the 10-year treasury has been falling precipitously all summer. This will continue to stoke the flames of the condo and entry level home market. There will be more price cutting in the 2.5mm-15mm segment over the next 6 months.
Too much inventory will force sellers to come to terms with this reality. The low end will remain strong, but will taper soon as price points just above add to the inventory.
And for a non-real estate bonus call....equity markets, which I have been feverishly bullish on, will likely see a notable correction soon. This may shake the confidence of some home buyers.
Geopolitical risk, a potential government shutdown looming, and a bull market that has been in place longer than average are being brushed off by investors. This type of complacency generally leads to some sort of shock to the markets. And, well...it's almost October, a notoriously bad month for markets.
I will, as always, end on a positive note. As I have stressed time and again, there may not be such thing as a sure thing (I know, death and taxes), but the next closest thing is beach real estate. They aren't making more of it. If you own it, and you are in it for the long haul, next year doesn't really matter much. Nor does the state of the market now because in 10 years
, 20 years, we will all look back and say, if only I could go back and buy more. Given that, I hope my "state of the market" was worth a muse, as I truly believe it doesn't matter that much what happens in the short run. We are so fortunate to call the South bay our home. Prayers go out to Texas and Florida and Mexico. Be well and have a great Indian Summer, the best time of year!