Now What?

One day after the FED decides to maintain short term rates because of uncertainty in the economy, oil prices, housing market, and the impending midterm elections, disturbing news has come out of the real estate market stating that the median housing prices has fallen almost 10% over the same period last year and that new home sales numbers though increasing month over the month for the past few months, those numbers are perhaps not as dependable as previously thought as those numbers were revised down.

So what does this very long run on sentence mean for us? Well let's put it into perspective, a 10% decrease in median home prices translates into about $20,000. This $20,000 difference could mean a number of different things: 1) less expensive homes are being purchased 2) fewer expensive homes are being sold 3) home prices overall are falling. The numbers are a likely result of all three factors as work, but homes are actually selling and inventories have been trimmed over the past few months.

But let's look at our area, it's been two decades since our median home prices have been in the $200,000 range and thus a 10% fall in home prices here would be an even greater absolute loss in value. From the very top of the market, I think we have indeed seen a 10% loss in certain situations. But what I mean by this loss is from the very highest sales price at the hottest time of the year from someone who just had to have the property. In fact we have 10% variations within each year, each city, each neighborhood based on various factors that don't necessarily have to do with the overall market. But even if we are experiencing a slight correction, it is a healthy thing that markets do. The difference to keep in mind between homes and the internet bubble is that the irrational exuberance that occurred in the late 1990s and ended in 2000 and 2001 was based on companies with no profits and a lack of fundamentals. Our real estate market, though buoyed by lower interest rates (still historically low and is more likely to decrease than increase in the short term) is also a function of supply and demand.

Demand is likely to remain high as the overall Bay Area economy looks healthy, new home starts are low (just very few places to build, new supply low makes existing supply more attractive), and interest rates look to remain reasonable. However, as we've been cautioning the entire year, do your due diligence and make sure you know what you are buying into and for what reasons. How long do you intend to stay there or are you going to hold the investment for? Do you have the financial means now, not next year or the year after to make the payments? The idea is to stay conservative and proceed with measured caution, but don't be afraid, in fact be ready when the right property for you comes along. Anecdotally speaking, we as a firm are doing well, we have activity from a listing as well as selling perspective so it does indeed seem like we are more likely to have a soft landing in the real estate industry as opposed to a bubble burst.