1. Homes Are Still Selling:  People are still putting their homes on the market even though the MLS has banned open houses and broker tours.  There was a home that was put on the market in Redwood Shores for $2M this week and it sold in 3 days!

2. Off Market Listings:  There are several homes listed as Coming Soon on both the Compass.com site as well as the Top Agent Network.  I expect that when Shelter In Place is lifted, we will see a lot more inventory come on the market.

3. Offers Over Asking:  A few of my colleagues reported that a few of their buyers got into contract this week.  They reported that sellers are still expecting offer prices over the list price and that buyers are willing to pay over asking for the right home even though they aren’t in a multiple offer situation.

4. Legal Penalties for Showing Homes: A colleague told me an agent showed a vacant home in San Carlos this past weekend to a few of their clients.  The neighbor saw 4 people congregating by the front door and called the police.  The agent was fined $600 and received some sort of court order.

In terms of moving forward, while I don’t have a crystal ball, I personally believe that the market will slow down dramatically while Shelter In Place is in effect but it won’t come to a stand-still.

With people not making travel plans right now and with interest rates still historically low, I think the brisk Spring market will get pushed into the Summer which is historically a slower time of the year.

In terms of how a recession could affect our local real estate market, I will say that I’ve been through 3 significant recessions as an adult and homeowner.  I worked in tech during the dot-com boom/bust as well as during the aftermath of 9/11.  I  became a realtor shortly before the 2008 – 2012 “Worst Recession since the Great Depression”.  During those times I not only survived, but I always thrived afterward.

Our local real estate market has always come back higher than the last peak before the recession as you will see in the charts below.  It just takes time and as I’ve always said, real estate is a long-term play.

We are going through a very scary and unprecedented time right now.  It will be difficult.  However, as my mom, who survived the Blitzkreig in London during WWII plus many other global crises after that, always reassured me during tough times, “This too shall pass”.

It’s just not easy going through it.

Again, if there’s anything I can do to help, please feel free to reach out.

Please stay safe and well!  ~Caroline

Market Cycles in Bay Area Real Estate

This article was written before the coronavirus – in fact, the first version was written over 10 years ago by our chief market analyst to help place the 2008 crash into context. We realize there are much more important things than real estate right now, but since some of our clients are trying to make decisions about buying and selling, we will continue to try to provide useful information on market trends and conditions. At this point, we cannot know how the current crisis will play out. 

This first chart is a very simplified, smoothed out look at Bay Area market cycles for higher-price-tier homes using data from the S&P CoreLogic Case-Shiller Home Price Index. It is a very approximate overview of hundreds of different neighborhood markets – whose trends up and down were broadly similar, but whose details, such as specific appreciation percentages, varied. 

The following chart uses the median house sales price trends of 5 Bay Area counties to illustrate a simple fact: The entire Bay Area generally follows the same broad trend lines in market cycles. Of course, there are differences by location, property type and price segment, but overall cycles are very similar. (We picked 5 counties as samples, because adding them all over-clutters the chart.)

This chart uses yet another market-value tracking algorithm looking at the 2 biggest, multi-county “metro areas” in the Bay Area. Since they reflect multiple counties of highly varying values, the prices themselves don’t really reflect the prices of any specific market. The reason for the bigger drop post-2008 in the SF metro area is that portions of its 5-county area were more deeply impacted by the subprime lending crisis than the counties comprising the San Jose metro area.

Financial-market cycles have been around for hundreds of years, from the 1600’s Dutch tulip mania through our recent speculative frenzy in crypto-currencies. Each market cycle has different characteristics in underlying causes and effects and how it ultimately plays out in its specifics. Still, there are fundamental similarities in all of them, providing more context as to how the market works over time.

Human beings have always been worried about (or terrified of) the future, and we have constantly attempted to predict what it holds. However, whether using priests, oracles, astrologers, economists, analysts or media pundits, we show no aptitude as a species for having the ability to do so with any accuracy. In 2012, a Nobel-Prize-winning economist, famous for housing market analysis, said that the U.S. real estate market might not recover “in our lifetimes.” In hindsight, we now know that the recovery had already begun in some markets such as San Francisco. In 2015, during a period of financial market fluctuations and a slowdown in our local high-tech boom, a well-respected Bay Area economist predicted that there would soon be “blood in the streets of San Francisco.” Within cycle phases, there are often shorter-term periods of economic, ecological and political volatility which then pass. In 2016-2018, housing and stock markets soared higher and the high-tech boom strengthened again.

Our smartest experts can’t get it right, much less the thousands of glib, confident forecasts by utterly unqualified individuals reported on in the media every month. We can’t even remember the mistakes of the recent past – one reason why we don’t seem to be able to escape the curse of recurring cycles – much less foretell what’s going to happen tomorrow. Which leads to the next point.

It is extremely difficult to predict when different parts of a cycle will begin or end. There is no rule regarding how long the different parts of a market cycle will last. Boom times, even periods of “irrational exuberance,” can go on much longer than expected, or get second winds, with huge jumps in values. On the other hand, negative shocks can appear with startling suddenness out of nowhere, often triggered by unexpected economic, political or even ecological events that hammer confidence, adversely affect a wide variety of market dominos, and then balloon into periods of decline and stagnation. These negative adjustments can be in the nature of a bubble popping, the slow deflation of a punctured tire, or some combination of the two.

Going back many decades, all the major Bay Area recessions have been tied to national or international economic crises. Considering the fundamental strengths of the local economy, absent a major natural disaster, it is unlikely that a major downturn would occur due simply to local issues. However, local issues can exacerbate a cycle: The 1989 earthquake intensified the effects of the national recession in the early 1990’s; our greater exposure to dotcom businesses produced a spike up and down with the NASDAQ bubble & 2000-2001 crash; and our current high-tech boom poured fuel on our up-cycle during the current recovery.

All bubbles are ultimately based on irrational exuberance, runaway greed, criminal behavior, or all three mashed up together. Whether exemplified by junk bonds, stock market hysteria, gorging on debt, a corporate Ponzi-scheme mentality, an abandonment of reasonable risk assessment, and/or incomprehensible and dishonest financial engineering, the bubble is relentlessly pumped bigger and tighter.

However, the 2008 crash was abnormal in its scale, and much greater than other downturns going back to the Great Depression. The 2005-2007 bubble was fueled by home buying and refinancing with exorbitant, unaffordable levels of debt, promoted by predatory lending practices such as deceptive teaser rates, no-down-payment loans and an abysmal decline in underwriting standards. The market adjustments of the early 1990’s and early-2000’s saw declines in Bay Area home values in the range of 10% to 11%, as compared to the terrible 2008 – 2011 declines of 20% to 60%. (Bay Area prices are now above their 2007 peaks.)

Whatever the phase of the cycle, many people think it will last forever. Going up: “The world is different now, profits don’t matter, the rules don’t apply anymore, and there’s no reason why the upward trend can’t continue indefinitely.” Well, it turns out that the rules do still apply, and up-cycles always end sometime. And when the market turns: “Homeownership has always been a terrible investment and the market will not recover for decades.” But the economy mends, the population grows, people start families, inflation accumulates over the years, and the repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumped back in – or “exploded” might be a better description – and home prices started to rise again. The nature of cycles is to keep turning.

As long as one doesn’t have to sell during a down cycle, Bay Area homeownership has almost always been a good or even spectacular investment (though admittedly if one does have to sell at the bottom of the market, the results can be quite painful). This is due to the ability to finance one’s purchase (and refinance when rates drop), certain tax benefits, the gradual pay-off of the mortgage (the “forced savings” effect), inflation, and long-term demographic and appreciation trends.

The best way to overcome cycles is to buy a home for the longer term, one whose monthly cost is readily affordable for you now, ideally using a long-term, fixed-rate loan (refinancing to lower rates when that option opens), while keeping an adequate financial reserve for emergencies – and then resisting the urge to use one’s home as an ATM during times of significant appreciation. If one keeps to those rules, then it is usually true, quoting a NYT editorial, “Renting can make sense as a lifestyle choice… As a means to building wealth, however, there is no practical substitute for homeownership.”

————

Market Changes & Home-Price Segments

The next chart, also based on S&P CoreLogic Case-Shiller Home Price index data, illustrates an important point about the last market bubble and crash: Different price segments experienced bubbles and crashes of vastly different magnitudes, mostly due to each segment’s exposure to predatory subrprime lending practices and the foreclosure crisis that followed. It was the lowest price segment that was most drastically affected by subprime lending: The blue line reveals its vastly bigger bubble and commensurately enormous crash. All Case-Shiller numbers refer to a January 2000 value for any home of “100.” Thus a reading of 250 signifies appreciation of 150% since Jan. 2000.

The 2008 crash was an anomaly caused by the fact that tens of millions of Americans bought and refinanced homes with loans they could not afford on day one. Happily, underwriting standards have recovered from the abysmal standards of the subprime bubble. That and low-interest rates, so far, have kept mortgage debt well out of the danger zone.

It’s also interesting to note on this chart that when the dotcom bubble popped, only the higher-price home segment was significantly affected (and that relatively briefly), because more affluent households have more assets invested in financial markets, and follow those changes most closely.

The Confluence of Economic Indicators

The 3 charts below show how real estate market cycles generally move in sync with other economic indicators such as – using 3 examples – financial markets, employment and consumer confidence. The S&P 500 chart goes through the end of 2019 and does not reflect the crazed volatility created by the coronavirus situation.

The CoreLogic S&P Case-Shiller Home Price Index does not evaluate median sales price changes, but employs its own proprietary algorithm to measure home price appreciation over time. Since its indices cover large areas – for example, the San Francisco Metro Area is comprised of 5 counties – which themselves contain communities of widely varying home values, the C-S chart numbers do not refer to specific prices, but instead reflect prices as compared to those prevailing in January 2000, which are all designated as having a consistent value of 100. A reading of 250 signifies that home prices have appreciated 150% above the price prevailing in January 2000.

Case-Shiller divides all the house sales into thirds, or tiers: The third of sales with the lowest prices is the low-price tier; the third of sales with the highest sales prices is the high-price tier; and the third in between is the mid-price. The price ranges of these tiers change as the market changes. The 3 price tiers experienced dramatically different bubbles, crashes and recoveries over the past 18+ years, to a large degree determined by how badly the tier was affected by the subprime financing crisis. The low price tier was worst affected – huge bubble, huge crash, most dramatic recovery – and the high-price least affected (but still significantly affected).

Most house sales in expensive counties such as San Francisco, Marin and San Mateo, as well as affluent communities in other Bay Area counties are in the “high price tier”, and many would qualify for an “ultra-high-price tier,” if such existed. All counties, to varying degrees, have sales in all 3 price tiers.

The Index is published 2 months after the month delineated – the September 2019 index was released 11/26/19 – reflects a 3-month rolling calculation, and one month’s sales generally reflect accepted-offer activity in the previous month. The Index is looking into a rear-view mirror at the market 3 to 5 months ago: The Sept. 2019 reading, released in late November , mostly reflects market conditions in June – August 2019.

The 5 counties in our Case-Shiller Metro Statistical Area are San Francisco, Marin, San Mateo, Alameda and Contra Costa: Alameda and Contra Costa are by far the largest markets; SF itself comprises only about 7% of house sales in the metro area. We believe the Index generally applies to other Bay Area counties, such as Sonoma and Santa Clara, though those 2 have had somewhat softer markets over the past year. There are hundreds of unique real estate markets in such a broad region, with different dynamics, moving at varying speeds, sometimes in different directions. How the C-S Index applies to any particular property is impossible to know without a specific comparative market analysis.

Data courtesy of S&P Dow Jones Indices LLC, CoreLogic S&P/Case-Shiller:

More information: https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

While overpricing almost always has negative ramifications for sellers (lower sales prices than if priced correctly to begin with), it can provide opportunities for buyers who carefully track price reductions and react accordingly. Such buyers will typically face less competition from other buyers – often no competition, which eliminates any need for overbidding – and allows for more aggressive negotiation of the purchase price. Across Bay Area markets, price reduced properties consistently sell for lower average dollar per square foot values than homes that sell quickly.

The Truth about Home Pricing

Ironically, instead of getting more money… [Over-pricing] usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.”

-House Selling for Dummies

Fair market value is that price a qualified, reasonably knowledgeable buyer is willing to pay, which a seller, not under duress, is willing to accept after the home has been properly exposed to the market.

Neither agents nor sellers determine market value: Only the market – willing and able buyers — determines market value. Agent and seller work together to create a plan – which includes pricing, preparation and marketing — to maximize the conditions that reliably achieve the highest possible sales price.

The vast majority of buyers will not make offers on homes they consider significantly overpriced. Either they don’t want to waste their time, or are uncomfortable with possibly “offending” the seller. In any case, they simply move on to other listings.

Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers, and often lead to competitive bidding between buyers – which is the most likely way to increase sales price.

Overpricing wastes the optimum moment of buyer and broker attention: when it first comes on the market. This moment cannot be recaptured.

Overpriced homes kill any sense of buyer urgency and take much longer to sell, which then significantly reduces value in buyers’ minds: “There must be something wrong with it if it hasn’t sold by now.” It almost always eliminates the possibility of competitive bidding.

Overpricing helps sell competitive properties, since they stand out as good values in comparison.

If a listing has inadvertently been overpriced, the sooner it is recognized as such and the price reduced, the smaller the negative impact. Price reductions must be big enough to regain the attention of buyers and their agents – typically, at least 5%.

In order to win the listing, some agents suggest a list price considerably higher than what they believe market conditions and comparable sales justify—because they believe this is what the seller wants to hear. This is called “buying the listing” and is a violation of the fiduciary duty of honesty that an agent owes their client.

• Price it right to begin
• Prepare the home to show in its best possible
• Implement the most comprehensive marketing plan
• Hire an agent who knows how to negotiate effectively on your behalf, and manage the disclosure and due diligence

The difference can add up to tens or even hundreds of thousands of dollars.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.