Tag Archives: Market Commentary

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How Will Rising Interest Rates Affect the Housing Market?

This is the topic that’s on everyone’s mind right now.

For the past year, mortgage interest rates have been at crazy, historic lows: http://www.freddiemac.com/pmms/pmms30.htm

Those rates, combined with the robust local economy, have sent buyer demand sky-high and housing prices soaring. The spring market was a frenzy of multiple offers, often far over listing prices.

Then at the end of June, the market threw us a curveball. The average 30-year fixed mortgage rate jumped from 3.93% to 4.46%–the largest weekly increase since April 1987.  While rates are still historically low, this surge was a jolt for buyers sweating the spreadsheets trying to decide exactly how much house they can afford. The rise in rates will change the equation for some homebuyers.

For buyers who are stretching their budgets, rate changes can have a big impact. I predict that the $1.8-$2.5 million market will be the hardest hit because these buyers tend to be doing the most leveraging. Below that the effects on the monthly payments are not as great, and above that buyers are coming into the deal with more cash and are less dependent on loans.

So what does this all mean?

The basic economics are that as interest rates rise, buying power decreases and the buyer pool for houses decreases as home prices increase. In our hyper-local market with so many cash and international buyers, it remains to be seen if small increases in interest rates will have a substantial effect. Still, in this volatile market, there are likely to be fewer multiple offers on properties and more loan contingencies.

Advice to Sellers: If you’ve been on the fence about putting your house on the market, do it now, while interest rates are still low. If interest rates continue to rise, it will negatively affect the marketability and price of your house. Also, when you put your house on the market make sure that it is well prepared and makes a great first impression. You might not get a second chance.

house

The Glass is Full

The Spring real estate market sales activity continued with an upward trajectory for all of our local markets. However, in June we saw the beginning of the end for all-time low interest rates. Announcements by the Fed of a strengthening economy and the reduction of its bond buyback program triggered an uptick in the Treasury yields, which pushed interest rates off of their all-time lows. During the last 2 weeks of the June, the 30-year fixed interest rate bounced between 4.5% to 5% in comparison to sub-4% rates during most of the first half of the year.

As expected, the Palo Alto market continues to clear most of its inventory within 7-10 days on the market especially in the sub $3 million price point. Menlo Park and Los Altos also continue to witness high demand for the sub-$3 million properties. However, both cities are starting to feel a slight slowdown in the luxury market. Homes priced north of $3 million may now offer an opportunity for price negotiation, especially with more than 60 days on the market.

The common denominator across all of the mid-Peninsula cities, from Mountain View to San Carlos, is the high demand of first time homebuyers looking to purchase properties between $900,000 – $1.5 million. These buyers are often dual-income with young children (or have kids on the mind). They are looking to move down from San Francisco or out of a rental property.  We are witnessing a “glass is full” phenomena: these buyers are priced out of Palo Alto and Menlo Park, since these cities rarely offer properties in this price range anymore. They are now happily expanding their home search to include the surrounding cities of Mountain View, San Carlos and Redwood City, where properties are more affordable but still offer close proximity to lively downtowns and easy access to their places of employment.

What remains to be seen is what effect, if any, the rise in interest rates will have on buyer demand.  Since the majority of these first time home buyers need mortgage financing to purchase a home, it is this group that is most sensitive to interest rate fluctuation.  Over the past few months, we have received feedback from buyers that they have become accustomed to homes selling for $100K-$200K over the asking price. This has discouraged them from pursuing houses. If there are fewer buyers chasing houses due to the interest rate hike, buyers may have a renewed opportunity to pursue houses that they previously had felt were out of reach.

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.

Top 5 Tips for Winning in a Multiple Offer Situation

Top Five Tips for
Winning in a Multiple Offer Situation

In today’s real estate market, with an abundance of buyers
and a shortage of inventory, many desirable properties are receiving multiple
offers—often over asking price. As a buyer it’s scary to think that you have to
compete in an auction to get the house you want.

So what do you do when you find a house you love and are
ready to buy, but find yourself in a multiple offer situation? How can you
improve your odds of making the winning offer?

In my 20 years of working as a real estate agent, I’ve been
through multiple offer scenarios many times—on both sides of the table. I know
what a seller’s agent is looking for and I also know how to present my buyer’s
offer to win the deal. Here’s a countdown of my best tips:

5.  Bid over asking price.

Many times a property will be
listed with a price that seems too good to be true. It is. The agent is pricing
the house low to attract a lot of “buzz” that will result in multiple bidders.
But in the current market, even houses that seem fairly priced are getting
multiple offers over asking price. The trick is to anticipate the level of
interest, know how much to bid and make sure that the seller’s agent is willing
to work with you if you need to go back and forth on price.

4.  Get your financing and paperwork in order.

In this fast-paced market, deals
wait for no lenders. Sellers want to be certain when they accept your offer
that your loan will go through and you can close escrow within their timeframe.
Make sure you are pre-approved and ready to go.

3.  Be prepared to have few or no
contingencies.

In many cases a seller will have
inspections done before they put the house on the market and expect you to
accept their reports. Of course, you can ask to have your own inspections done,
but this may make your offer less favorable than that of another buyer without
this constraint. If you want your own inspection, you can arrange to have it
done before you present your offer to avoid this.

And the contingency of selling
your current home before you buy is a thing of the past in this market. If you
need the cash from the sale on your existing home to buy the next one, your
best move is to sell it first or find some bridge financing.

2.  Don’t be difficult to work with.

If you or your agent exhibit signs
of being too demanding or high maintenance, the seller’s agent may advise their
client to take another offer to avoid the hassle. Make sure you are reasonable
and pleasant in all your interactions.

And the #1 most important tip to winning in a multiple bid situation…

Work with an experienced, respected agent with deep local knowledge in
the area where you want to buy.

An active, local agent knows the
inventory, knows the community and knows her fellow agents. She can advise you
how much to bid, recommend lenders to help you get pre-approved and tell you
what contingencies are important. The seller’s agent will have confidence that
she can move things along easily and quickly.

In this competitive market you
need an experienced agent who you can trust. My clients are made up of 85%
referrals from people I have helped happily buy and sell houses. Call me and
let me help you find the perfect home at the right price for you.

Next Blog: Anatomy of a Multiple
Offer Win—And We Didn’t Have the Highest Bid!

To Hold or Sell Your Home

The big increase in prices, extreme lack of inventory and record low interest rates this year are creating a perfect storm of a seller’s market. If you’ve been on the sidelines waiting for the market to improve, this may be just the time to finally put your house up for sale. The big question for homeowners on the fence is:

Do I hold or sell?

Should you put your house on the market now to benefit from recent uptick in the market or should you hold on and hope that housing prices continue their upward spiral?

That’s a good question! If only I had a crystal ball, I could give you the perfect advice.  But, since that’s not the case, let’s think about this…

Although we can never tell if the market will move up or down, we do know that the market tends to move in cycles.  Look at the graph below, which shows the median sale prices in Palo Alto, from 2004 through 2012.  It is based on 4,214 listings in Palo Alto.

Sales prices

From this data, it would appear that 2013 might be a year similar to 2012, perhaps with a slight increase in price. If that’s the case, there’s little difference between selling now and holding on a bit longer.

But there are lots of factors that could influence sales prices.

For example, record low interest rates are driving buyers into the market NOW. Should the rates increase, the buyer pool is likely to shrink.  This will lessen demand, and in turn, decrease sale prices. A downturn in the stock market or loss of confidence in the economy could also dampen buyers’ enthusiasm and result in lower prices.

Rather than try to predict the unpredictable, it’s better to look at what makes sense in your individual situation:

If you are considering downsizing, now is a fantastic time to sell.  You may pay more for a smaller home than you would have in the past few years, but you will also make much more on the sale of your larger property.

If you want to buy a new home before you sell your current home, now is a good time to sell. Currently, there are some lending options available, like bridge financing, that make it possible to buy your next home as you get ready to put your current home on the market.

If you are 55 or over, you may be able make a one time transfer of your tax basis to your new home, making it a great time to sell and make a profit on your current home, while keeping its low property tax basis—even if your new home is worth more.  As with any tax related information, be sure and check with your CPA or tax attorney to see if you qualify.

If you want to more up to a larger home, but don’t qualify for the tax base transfer, it makes sense to hold onto your house if your 55th birthday is within striking range.

There are many more factors to consider when deciding whether to hold or sell. Contact me and I’ll be happy to walk you through all the options and help you make the best decision for you.

A Realtor Buys a House – A New Dad’s Journey Through Hell – Part 1

My wife and I have been wanting to move to Portola Valley or
Woodside for a couple of years (OK, 20 for me, she is a more recent convert),
and looking with varying degrees of seriousness. During that period, I have
mentioned our interest to several clients as I was helping them buy or sell
their homes in the area, and my comment was often met with a mix of suspicion
and fear that I would somehow buy up all the “good” homes, leaving them with
the dregs.

I thought that it might make for entertaining reading to
actually document how we went about this process and share our experience. It’s
probably remarkably similar to yours, especially if you are a client of mine.
If you aren’t, you should be. Shame on you…..

In the interests of full disclosure and transparency, I’m
approaching this like the television program HouseHunters. We have already
found our house in Woodside and are in escrow. We move in May.

Thanks for reading and stay tuned…….

A Realtor Buys a House, Part 2 – Laying the Groundwork

Where Do I Go?

Where Do I Go?

The popular topic in the local real estate community is the
ongoing lack of inventory of homes for sale. According to our local MLS, the
number of homes for sale in our local market (Palo Alto, Menlo Park, Atherton,
Portola Valley, Woodside) is down 40% – 60% versus this time a year ago,
depending on the price point and neighborhood. Since our are generally has
fewer homes for sale relative to the number of homes and buyers, this inventory
decrease translates to it feeling like there is NOTHING for sale, and multiple
offers on the few homes available are the norm, not the exception.

Adding to this, with the phenomenon of overseas buyers and
recent liquidity events and stock run ups for local companies, we are seeing
more wealth and resources available to purchase homes than ever before. This is
like adding gasoline to the proverbial fire, and driving prices upward at
impressive rates. Check out these charts, showing changes in median home prices
(half of the houses sold for more, half for less) in our communities over the
past year. Palo Alto up 20% 2011 to 2012, Menlo Park 11%, Woodside down 10%
(I’ll come back to that), and Portola Valley up 13%.

That’s better than the NYSE which is up 12.9% over the same
period, and you get a place to keep your stuff too.

So let’s assume you have been sitting in your house in North
Palo Alto for the last few years while your kids finish High School, watching
houses around you sell in a week at prices you can’t believe. You come home,
realize you don’t need a four bedroom house and the property taxes and say to
yourself “Self, let’s cash out!” (Actual clients’ example here). Your next step
would be to call me and say ‘Chris, what is my house worth?’. I’d give you a
range (say $3M – $3.2M) and you would say ‘wow, that’s like $500,000 – $700,000
more than I paid for it in 2006’ or something like that. Then you would ask me
the hard question:

Where do I go?

So you sell your house in Palo Alto and pocket a $500,000
net gain after selling costs, plus your original equity and you are going to
downsize to a three bedroom house. The kids are in college so schools don’t
matter much but you don’t want to move to Napa. Your new budget is $2M so your
property taxes will be lower and your mortgage is something you can pay off
before retirement.

Woodside:

OK, I’m biased as I am currently buying a home in Woodside.
Why? Read my other blog article “A Realtor Buys a House”. For our
fictional couple here, it’s close enough to all the fun stuff you did in Palo
Alto, the market isn’t as tilted in favor of sellers (prices down 10% last
year), and you get some land or a view depending on where you are in town. If
you have little ones, Woodside Elementary School is fantastic. Woodside Bakery
and Buck’s are experiences in and of themselves. Bring your horse.

Ladera
Ranch:

Ladera is really unincorporated San Mateo County, but it is
a closely knit community border Portola Valley with off-street walking paths
leading down to the shopping center and a community center with pool and tennis
courts, so it combines the best of rural and suburban living. Many of the homes
have views and the neighborhood feeds into the excellent Los Lomitas schools.
Convenient to 280 and open space preserves.

Portola
Valley:

Extra space and views of the Bay or open space are hallmarks
of Portola Valley. The small town vibe and peaceful feeling make it an escape
from the madness that defines most of Silicon Valley. Generally, there are more
bikes than cars and the open spaces define the views and feeling. If you feel
like Woodside is getting too uppity and flashy (the locals say too Palo Alto),
then PV is the place.

Emerald
Hills:

Views on a budget. Roy Cloud Elementary is excellent and the
market and prices make for a great downsizing option. You are car dependent,
and the narrow, winding roads will have you trading the Suburban for a Vespa.
If you like Tuscan hill towns, Emerald Hills may be just your thing.

Redwood City:

Redwood City is the largest city on the Peninsula and where
I think the biggest potential for appreciation is. Prices are relatively low
compared to the surrounding cities, and Redwood City has invested heavily in  an urban renewal of its downtown that is
drawing more business to restaurants, The Fox Theatre and the Cineplex. As we
have seen in Mountain View over the past 20 years, an attractive, bustling
downtown leads to gentrification which leads to rising property values. Redwood
City, especially neighborhoods like Mount Carmel, is my appreciation pick for
the next decade.

Econ 101 Palo Alto style – Another View of Low Inventory

Yesterday on Palo Alto Patch, Michael Talis posted some data highlighting the lack of inventory of homes for sale so far this year. This isn’t really earthshattering news to anyone who has been looking for or making an offer on a house in Palo Alto lately, but he does put some numbers behind the refrain ‘There is NOTHING for sale right now’ and prayers of new listings coming after the Superbowl.  Here is a link to the post: http://paloalto.patch.com/blog_posts/january-2013-palo-alto-housing-drought-continues

While we are clearly in a Seller’s Market the numbers are a bit off from the ones in this article. The MLS, which is the database of homes for sale, estimates that up to 30% of the homes in Palo Alto sold this year were sold without being posted on the MLS. This is usually referred to as “Off-Market” which is really a misnomer, because the house was for sale, exposed to the market and sold, just not through a particular channel. It’s kind of like selling your used car to your neighbor without putting it on CraigsList or putting an ad in the Palo Alto Weekly.

As a home buyer, these two trends of low inventory combined with pent up buyer demand and an increasing number of homes being sold without posting to the MLS create two situations to be aware or beware of.

1) Econ 101 Palo Alto Style – As we were taught in Econ 101, in the face of scarce resources (homes for sale) and high demand, market forces will drive prices upward to equilibrium, in this case pricing a lot of folks out through a combination of absolute prices and terms (cash, no loan, no contingencies, free rent back to the sellers, throw in a dog or kid, vacation in Hawaii, do your laundry, please, please, please let me buy your house!!!!, etc.). 

2) Market knowledge – I can’t tell you how many folks I met last year at open houses and otherwise who had the strategy of looking at houses on Redfin.com (very cool phone app for trolling the MLS) or Trulia.com, then looking at the houses at open houses and not utilizing a local agent. They thought they had perfect information and would love to tell me what the house sold for last time and how many $/square foot the neighborhood sold for and a bunch of other data. Guess what – they are still looking for a house, only seeing 70% of the market (the non-MLS stuff doesn’t show up on Redfin), wasting a bunch of their time and getting frustrated while the market appreciated 24% last year. 

24% – That means an entry level three bedroom, one bath house in South Palo Alto that sold for $1,000,000 in January 2012, is now going to cost you $1,240,000. I don’t care how many shares of LinkedInGoogleFacebookAppleWhatever you have, $240,000 is a lot of money. You can get a really nice, low mileage Ferrari 430 for that!

If you have read this far, here is the punch line – the Palo Alto market, and by extension almost everywhere within a 10 mile radius, is ON FIRE in 2013. There are few homes and way too many buyers with way too many resources fighting over way too few homes. We don’t see anything that will change this dynamic for at least a year, potentially until 2015 or 2016. After the correction then, prices will still be 20%-40% higher than they are today, so if you are playing in this market play to win.

Arm yourself with the data and the local knowledge that you only get from a real estate professional who knows the market you are looking in. Here is a great place to find one: http://dreyfusproperties.com/realtors. Discuss your goals, why you want to buy a house and set realistic expectations, including expecting to pay a premium. Take a deep breath. Drink – A LOT.

Good luck!

Palo Alto Condo Price Climb

One of my specialties is Palo Alto condominiums and I have been keeping a
close eye on the condo price climb.  Statistics show this real estate
trend is likely to continue as the market responds to the fundamental economic
law of supply and demand.

According to figures released by the National Association of Realtors, homes
for sale across the United States were at their lowest level in 11 years for
December 2012.  Despite increasing demand, home sales fell in December due
to the shortage of homes for sale.  The “Existing Home Supply” report is
based on residences that have been previously owned and not new construction.
 You will see in the attached graph the drastic decline in homes for sale
over the course of the last year. 

The Palo Alto real estate market is feeling the impact of short supply and
condo prices are climbing as a result.  Several factors are contributing
to the short supply of available units in Palo Alto:

  1. Stock market
    volatility- people are relying on their homes as their investment
    potential as the stock markets face turbulent times.
  2. Baby Boomers-
    having purchased their homes when markets were substantially lower, they
    are staying in their homes as long as possible not only for the investment
    factor, but to avoid capital gains as well.
  3. “Facebook
    Effect””- what realtors are calling the trend of IPO companies creating
    massive wealth in Palo Alto and the Silicon Valley, and a subsequent
    influx of homebuyers.
  4. Palo Alto is
    desirable- with top-rated schools and amenities, an address in the
    community of Palo Alto is considered prestigious so buyers are increasing.

As you will see in the following graph, factors such as these have driven
the price of town houses and condominiums up despite a tough economic
climate.  Out of 1,242 listings, the median average in 2012 was $900,000
from only $580,000 in 2004.  This provides a condominium owner with a
significant return on their investment if they choose to sell (see graph below).

The steady decline in available units and the condo price climb in Palo Alto
have created a seller’s market.  If you have a condominium and you are
considering putting on the market you can expect multiple offers and a price
well beyond what you could have expected in prior years.  

I specialize in Palo Alto condominiums and would be happy to discuss ways
for you to not only maximize the exposure of your unit, but also attain the
highest sale price for your condo.