Author Archives: Michael Dreyfus

house_rates

Do Rising Rates Mean Falling Prices?

Newsflash. Mortgage rates are on the rise, hitting above 4% last week for the first time in more than a year. Gone for now are the all-time-low 30-year fixed-3% rates that had us all running to our brokers to refinance in 2012.

How are these rising interest rates going to effect the housing market?

The short answer is: Not the way you might think.

Logic seems to dictate that rising mortgage rates would bring the cost of real estate down iin price because sellers would need to make their home prices affordable to buyers paying higher mortgage rates. Historically, however, this has not been the case.  According to Yale economist and S&P/Case-Shiller Home Price Index guru Robert Shiller, “There is not a tight fit at all between the two: high mortgage rates do not translate automatically into low home prices.”

The reasons for this seeming illogic are actually pretty logical, especially when you apply them to real estate in the boomtown of Silicon Valley.  Rising mortgage rates typically signal an improving economy, resulting in higher wages and rising inflation.  People are earning more, so they can afford to spend more on their homes.

Another reason home prices don’t necessarily come down with rising interest rates is that sellers are simply not always prepared to bring the cost of their home down.  Whether they can’t afford to or are unwilling to take a loss, most homeowners are going to buy another home after selling theirs.  When they do, they’re going to be stuck with higher interest rates just like you, and we can assume they don’t want to buy a lesser home than the one you’re hoping to buy.

With this in mind, if you find a home that’s right for you, I would suggest that you refrain from refraining.  Don’t wait around for rising interest rates to bring housing prices down.  It’s not going to happen. Since 2009, besides one brief three-month blip, average monthly 30-year fixed mortgage interest rates have been at or below 5%. This is completely unprecedented: average rates never even hit 5% prior to 2009. So what we consider “rising interest rates” are still pretty darn low.  And historically, once interest rates are on the upswing, they swing up quickly.

If I haven’t put a spring in your step yet, here’s another newsflash. The Case-Schiller index reported this month that house prices have returned to 2003 levels across the country. This combined with a robust local job market and a bullish stock market mean we are even less likely to see local housing prices go anywhere but up.

I absolutely stick to my golden rule that you should let the house, not the market, decide for you when making a home purchase — in other words, don’t buy a home you have serious reservations about because you feel like you just have to buy something.  But if you do find a home that is right for you, act now.   By waiting for a downtick in the local real estate market, you might just wait yourself into a market with higher housing prices, higher interest rates, and possibly even lower inventory as rising interest rates create a flurry of buying activity.

Do Rising Rates Mean Falling Prices?

Newsflash. Mortgage rates are on the rise, hitting above 4% last week for the first time in more than a year. Gone for now are the all-time-low 30-year fixed-3% rates that had us all running to our brokers to refinance in 2012.

How are these rising interest rates going to effect the housing market?

The short answer is: Not the way you might think.

Logic seems to dictate that rising mortgage rates would bring the cost of real estate down in price because sellers would need to make their home prices affordable to buyers paying higher mortgage rates. Historically, however, this has not been the case.  According to Yale economist and S&P/Case-Shiller Home Price Index guru Robert Shiller, “There is not a tight fit at all between the two: high mortgage rates do not translate automatically into low home prices.”

The reasons for this seeming illogic are actually pretty logical, especially when you apply them to real estate in the boomtown of Silicon Valley.  Rising mortgage rates typically signal an improving economy, resulting in higher wages and rising inflation.  People are earning more, so they can afford to spend more on their homes.

Another reason home prices don’t necessarily come down with rising interest rates is that sellers are simply not always prepared to bring the cost of their home down.  Whether they can’t afford to or are unwilling to take a loss, most homeowners are going to buy another home after selling theirs. When they do, they’re going to be stuck with higher interest rates just like you, and we can assume they don’t want to buy a lesser home than the one you’re hoping to buy.

With this in mind, if you find a home that’s right for you, I would suggest that you refrain from refraining.  Don’t wait around for rising interest rates to bring housing prices down.  It’s not going to happen. Since 2009, besides one brief three-month blip, average monthly 30-year fixed mortgage interest rates have been at or below 5%. This is completely unprecedented: average rates never even hit 5% prior to 2009. So what we consider rising interest rates are still pretty darn low.  And historically, once interest rates are on the upswing, they swing up quickly.

If I haven’t put a spring in your step yet, here’s another newsflash. The Case-Schiller index reported this month that house prices have returned to 2003 levels across the country. This combined with a robust local job market and a bullish stock market mean we are even less likely to see local housing prices go anywhere but up.

I absolutely stick to my golden rule that you should let the house, not the market, decide for you when making a home purchase — in other words, don’t buy a home you have serious reservations about because you feel like you just have to buy something.  But if you do find a home that is right for you, act now.  By waiting for a downtick in the local real estate market, you might just wait yourself into a market with higher housing prices, higher interest rates, and possibly even lower inventory as rising interest rates create a flurry of buying activity.

2012 in Review: Real Estate Cycles and Our Market Forecast

Here we go again
The median price in Palo Alto rose 24% over the same last quarter in 2011, but more impressive is the 20% yearly increase from 2011 to 2012. For those into cycles, 2012 looks awfully similar to 2004 when we began what ended up being a 35% run on the median price from 2004 to 2008. Doing the math that means a $2,000,000 house today will be $2,700,000 by 2016. Our forecast for this year is a 12% to 15% increase in Palo Alto housing prices with that appreciation being realized early in the spring and prices holding throughout the rest of the year.

North Palo Alto
The story for North Palo Alto in 2012 revolved around land, and the intense demand for it. Buyers bid up teardowns at such a fierce pace that the concept of exactly what was a teardown started to get challenging for local realtors. Some very livable homes were sacrificed at the altar of “having it my way” and the value distance between move-in homes and teardowns got uncomfortably close. That being said it was a bang-up year for property values across the board. The average sale price for the neighborhoods north of Oregon Expressway was up 39% against the same quarter in 2011. The super high end (over $6,000,000) was quiet after an active 2011, but that may have been due to a lack of such homes for sale as opposed to any market condition. Entry level homes moved solidly above $1,500,000.

What this means for our buyers
It’s pretty clear that the market is back and this is the first year since the 08 crash with public and media sentiment in the new year strongly positive towards local real estate. It’s time to get in and the sooner the better. Early buyers put themselves in a position to get a price that won’t be seen again, even after the next crash. If you dawdle you may be facing inventory being priced off the next price rise. And finally, interest rates are tremendous and there is no guarantee that is going to last.

What this means for our sellers
Based on past trends, we have two big price moves in this cycle. We think one is this year, and the next most likely in 2015, will be the last one. It’s great to catch the last one, because that is generally the bubble move, the manic price move that will result in excess and then a crash. The problem is the risk of timing it perfectly. Think of it this way: we are in the start of the third quarter of a football game, except it’s with a running clock and a soccer ref who keeps the game time, but nobody knows exactly what his watch says. If you are thinking of selling in the next five years, you can make a good case to do it within the next two years on the back of this next market move. If you don’t, you take the risk you miss the magic moment and you are stuck waiting an additional four years for the market to get back to where you were seven years earlier. Interest rate rises are also a wild card in the deck. Rising rates could suck some steam out of the market and take some profits off the table.

PA sales 04-12

How Not to Get Burned in a Hot Market (or, Fools Rush In)

Spring is here, and it’s pretty clear the local real estate market is on fire. With inventory low and demand high, houses are selling in record time. Lots of bids, offers way over asking, no contingencies, the works.

If you’re selling a home right now, lucky you. You’re in the proverbial catbird seat. Even properties with significant flaws will sell in this market, so if you’re holding onto a property with an inferior location, an awkward layout, or substandard construction, I would highly recommend that you get a For Sale sign up in the next couple of months.

If you are buying a home, all is not lost. You have options.

The most important thing to hold onto during these periods when the market is sizzling is your sanity. In the frenzy of getting a roof over your head, don’t talk yourself into a flawed location or a bad layout just to get the deal done. Because when the market normalizes, which it will — after 23 years in the real estate business, I promise it will — the flaw that you convinced yourself you could live with will become glaringly obvious. You will realize with a sense of doom that you really don’t want to live with it. And because the market is no longer as hot as a pistol, you might have to. As I’ve said to many a house-desperate client: Even if you buy the best of three bad houses, you’ve still bought a bad house.

So now you’re saying, “That’s great, Mike, but what can I do? I need a house and I need it now.”

I can sum it up in three words. Rent, and wait. I know, I know. It’s not what you had hoped for. You want to nest and paint and plant tulips. You don’t want to have to move again. You don’t like the idea of “just throwing away money” on rent. But I’m here to tell you that in this hot real estate market, renting may be your best option, saving you from paying too much for an impulse home rather than your dream home. Rent and wait for that right house.

My second piece of advice is to get a really good real estate agent that you trust implicitly to put your interests first. Do your homework. Ask for recommendations from friends who live in the neighborhood where you want to buy. Interview several agents before choosing one.You want an agent who is willing to talk you OUT of buying the home with the awkward layout, who will tell you what you are NOT seeing on the market right now, who will say, “Let’s blow out of this open house and take a look at that rental.” In a hot market, when inventory is low, the temptation is strong to close the deal, but a good real estate agent will put your interests first, knowing down the line that when it’s time to buy, you’ll be back, ready to plant your tulips.

Home sweet second home

I get this question a lot from friends and clients who own homes in and around Palo Alto. Does it make sense to buy a second home? My short answer is, sure, I think it makes a lot of sense.

Now I can hear a good friend of mine giving me the “I can take a vacation anywhere I want and stay anywhere I want for less than the cost of paying for and maintaining another house AND don’t get me started about the hassle” speech (he recently bought a second home). Which is largely true. But that thought string fails to address a couple of larger considerations about the value of a second home outside of its immediate weekend use and some very good reasons to make that purchase now.
First and most fundamentally, the financial climate is in your favor, and it won’t be forever. Interest rates are low, rents are high and real estate in many vacation resort areas is relatively reasonable, at least when you compare it to local real estate prices.

The second factor: The baby boomers are coming, and they’re coming in droves. These 76 million Americans born between 1945 and 1964 control over 80 percent of personal financial assets and more than half of all consumer spending, and they’re heading into retirement en masse. I have nothing against baby boomers, being on the tail end of this boom myself (and I mean VERY tail end, of course), but if you’re considering investing in a second home, the time is now or possibly never. The longer you wait, the more likely it is you’ll be duking it out with an ever-growing number of newly retired baby boomers. It’s a game of whoever gets there first as market pressures become increasingly intense in the more competitive real-estate markets.

Which are those? There is a big trend for retired folks to want to buy a small place in-town. If you envision yourself downsizing your current home and living in a pied-a-terre in the city, be it San Francisco, Manhattan even downtown Palo Alto, now would be a good time to consider nailing down that place. If you don’t plan to use it for a few years and need the income, consider making it a rental property, or, if you can afford to, use it as an urban escape.

A final and very important factor to consider is that your second home might become your primary residence, or at a minimum, your extended family’s home base, so you might want to envision it that way. The more likely it is to become your home, the more important it is that you feel great about the house its layout, location and community. 

Let me give you an example that’s very close to home, because it’s mine. My wife and I love the idea of downsizing to a small place in San Francisco when we retire so we can experience a more urban lifestyle (see baby boomers above). We also want our kids and their kids down the line to feel like they have a home, a place they feel connected to, and where multiple generations can congregate. Enter the second home in Tahoe. 

The fact is that families tend to get spread out over time and the high cost of living in our area probably increases the odds of our children living elsewhere. We need to lure them back somehow, even just for vacations and holidays. Unless you’re in the group of folks who plan to stay in your family home after your retirement (or one of the lucky few who can help your kids buy one), you might want to consider establishing a home base somewhere else, be it in the mountains, at the lake or near the beach, that’s attractive to the entire family. The sooner you make it a part of your traditions, the more it will feel like home sweet home down the line, even if it’s home sweet second home right now.

I’ve seen a lot of my friends and clients go through the emotional experience of selling the family home, the place where steps were taken and bikes ridden for the first time, where beloved dogs have come and gone, where hundreds of family meals were shared and sibling squabbles resolved. Believe me, it can be heart wrenching!

Having that other home base where your family has created memories and shared life experiences makes it a whole lot easier to say goodbye when it comes time, knowing you all have a sense of place in this second home as well. And you won’t get a lot of complaints from the kids that they have to ski the bumps or ride the waves on Christmas day either! 

Column published in Palo Alto Weekly Real Estate Matters, Feb 14 - http://www.paloaltoonline.com/news/show_story.php?id=28609

Woodside Real Estate Sales Cycles: Looking Back, Forecasting Forward

The 4th Quarter numbers were held down by some weak sales in the Glens, and the median for Woodside was down 10% for the year, largely as some larger properties were sold after significant price reductions. The year ended well, however, with an off-market sale that was the second largest residential sale ever in the United States. That sale coupled with some other quiet super high-end sales may forecast the turn off the bottom and a return to the price appreciation seen from 2004 to 2008.


Agents’ market wisdom now streaming across our website

No one has deeper insight into our micro-markets than our team, and we want to share our collective wisdom with you. Our agents are pouring their market knowledge into a stream of tweets and blog posts on our website. Visit our activity stream for their insider’s view of the market, its valuations, and the people, places and things that surround the four walls of a property listing.

Palo Alto Real Estate Sales Cycles: Looking Back, Forecasting Forward

Here we go again. 

The median price in Palo Alto rose 24% over the same last quarter in 2011, but more impressive is the 20% yearly increase from 2011 to 2012. For those into cycles, 2012 looks awfully similar to 2004 when we began what ended up being a 35% run on the median price from 2004 to 2008. Doing the math that means a $2,000,000 house today will be $2,700,000 by 2016. Our forecast for this year is a 12% to 15% increase in Palo Alto housing prices with that appreciation being realized early in the spring and prices holding throughout the rest of the year.