What’s Really Going On?

I think it’s time we had a chat.  A serious chat.  This market is messed up, yo.

So…. what are we seeing out there today?  Good homes that should have sold that didn’t?  Yes.  What?  But aren’t more people moving here?  Aren’t rates still good?  Aren’t buyers still out there?  Yes, to all of those questions but the market got strange.  It’s like we went to sleep on Christmas Eve and woke to a different real estate world here.  Explain that?  Oh, I will.

Let’s start with the article from the SF Gate from Friday, March 25 that stated the Bay Area has grown by 90,000 people from 2014 – 2015.  It’s not as great as the 106,000 that moved here in 2013 but that’s still a lot of people.  I’m sure you’ve noticed it on the road, in Whole Foods, trying to get a table at State Bird Provisions.  It’s crazy how we’re growing so much that when you see the mega structures popping up along 101, it makes sense.  We’re going to have housing for these people but our infrastructure isn’t making accommodations when you look at our roads which is pretty frustrating.  Our schools are also way impacted but that’s another tangent.  However, they’re only building luxury apartments assuming that the influx continues and they can afford it.  Can they?  That’s a scary proposition if you consider what would happen if there were mass layoffs – all these projects will stop or sit empty.  Yahoo has already started tightening their pants, will other companies follow in the next few years?  How will that affect these Chinese giants that will own these mega-structures?

So is it a bubble?

According to the CEO of KB Homes (a local builder), we ARE NOT in a bubble.  Oh, that magic word that’s so cute when you’re 4 and terrifying when you’re 40.  Jeff Mezger doesn’t want you to worry your pretty little head about it because, “$1.5 million is affordable in the Bay Area right now.”  It’s great for his business to tell us we’re not in a bubble, everything is fine.  I’m kind of curious why the SF Gate would go to a home builder to ask this question.  It seems like a publicity stunt.  Here’s what I see – $1.5 million as a median home price is unreasonable.  It’s superb to have dual tech or bio-med incomes but that’s the only sector that can afford that right now.  How will our nurses, firemen, teachers, paramedics afford to live here?  It’s unfair to degrade their quality of life with two hour (each way) commutes to the valley.  I think this will be our first mass exodus if you don’t count the natives moving to Portland in droves because they’re already priced out.  With minimum wage not set to reach $15 until 2022, I think businesses will struggle to find the employees who are needed for services here (so expect service quality to go down because only teenagers living with their parents can afford to work for $9 an hour); unless we build affordable apartments, it’s not sustainable.  We can’t have a society of only rich people because we like luxuries like grocery shopping and someone to bandage your kid up when he falls at school.

That brings me to another really interesting article I read on Thursday, also on SF Gate – Palo Alto considers subsidized housing for families making under $250k (per year).  Let that sink in for a bit.  A quarter million in earnings per year is now the middle-class poverty line in Palo Alto.  That’s considered very well off anywhere else in this country.  Palo Alto is doing this specifically to keep their teachers, firefighters, police officers, and government workers where they work.  If they see it and we’re seeing it…. why are other cities not following suit?  Affordable housing isn’t a negative word and it’s going to be necessary.

Here’s another reality check – it’s getting harder to get a loan.  What?  But Sterling Bank is now doing undocumented loans!  (If you sign up for one of these or you sell your home to a buyer with one of these loans…. well, I’m going to guess you weren’t paying attention a few years ago).  Lending has gotten harder to obtain in the last 4 months since TRID started and lenders will tell you it hasn’t changed anything but waiting times but I don’t believe them.  My clients have good jobs.  They’ve worked hard, achieved stellar credit, and now have a down payment saved up.  We send them to a bank that has always performed and…. we’re closing late.  Things are and aren’t happening.  Underwriters are tightening their belts and not making exceptions.  Relatively low risk loan applicants are being put through the ringer.  Not only did I have a client with solid employment (10 years at one company!), astounding credit, and large reserves – he also answered the lenders emails and got him what he needed within very short time frames and he still had problems.  I’m thinking this speaks way louder than the CEO of a building company saying everything is great!  This scares me.  This is why homes are sitting on the market and falling out of escrow.  This is why having an agent who vets the buyers is super important but it doesn’t always mean you won’t be effected.

I think we’ll see an interesting Spring but by the end of the year and going into 2017, it’s going to level out.  Buyers are either waiting to see what happens or they’ll jump in and it will be like years before this where prices will climb until Summer hits.  It’s really hard to predict right now but I think the lower price ranges will be fine.  It’s that $1 million + that will be affected by buyers cold feet.  And let’s not forget it’s an election year.  Those always throw the market off!  Add to this the fact that we’re even mentioning the word “Bubble” and many buyers will cool their heels hoping to wait it out and get a deal in the future.  But that’s a big gamble because if we fall in 2017 or 2018, will it be to 2012 prices or Spring 2016 prices?  You just don’t know….

However, if your investment is for 10 years or more, real estate is still safer than stocks!