Historically, spring is the time of year in the Bay Area when new homes for sale literally blossom by the dozens on the market. But, this spring, rather than have your pick of the new crop of inventory, we are experiencing a mini drought of new homes and opportunities for buyers. What is the cause of seller pullback this year as opposed to prior years? There are a number of explanations, and we have solutions.
I have never blamed the weather for causing a downturn in real estate in the 25 years I have lived here. That’s because, as opposed to other parts of the country that really have to deal with the winter elements of snow, ice, and cold temperatures that affect their real estate sales, the Bay Area winters have always been more predictable and mild…except for this year. I will admit, we are spoiled and not used to these type of extremes in weather. That means we are also not prepared, both literally and from a mindset standpoint to adjust accordingly to the atmospheric rivers, bomb cyclones and unpredictability from one day to the next. As of March 22, when I wrote this blog post, it looks like we still are going to have the same weather pattern at least until early April. Should sellers wait until the weather changes to put their home on the market? My opinion is no. I have been to several open houses over the last two months and each and every one in the Peninsula and in the South Bay has had 30-50 groups through each weekend day. Those are the same numbers we had at open houses in 2021 and early 2022. That means the buyers have already made the adjustment to the interest rates and the weather. And, because the weather is bad, that also can equate to an opportunity for additional buyer engagement at open houses. During a rainy weekend, buyers have more time on their hands because the other distractions like hikes, beaches, outdoor activities aren’t an option. So, why not shop for houses?
In my advertising agency days, I had an account that was a big box retailer and rainy days were always their best retail days. The same principle applies to real estate. So, if you are a seller, instead of being worried about the weather being an obstacle to open house activity, embrace the weather…It could turn out to be your best days to show off your home.
There is no doubt that the interest rates have had an effect on the ability for many buyers to compete for our high cost of real estate in the Bay Area. Compared to a year ago when interest rates were averaging around 3%, today's average rate of 6.25% has created a sticker shock when it’s factored down to the monthly mortgage payments.
A $2 million home with 20% down with taxes and insurance cost only $8,954 in March of 2022. Today that same home at 6.25% costs $12,060. That’s a significant increase of debt to income and have caused a few buyers to back out. But here is the good news. Many buyers in the Bay Area tech community have options.
More than a few of of my last transactions were all cash or a version of all cash. Many Bay Area Buyers in San Francisco, Peninsula and South Bay have large stock portfolios, either with their employer or a personal account with Charles Schwab, E-Trade and others. Ever since the interest rates started to rise, buyers started looking for options to get into the housing market. One of the more common transaction buyers engaged in my listings and as a buyer rep was taking a margin loan on their stock portfolio.
Buying on margin allows an investor to make a down payment or “pay cash” for a home using securities in their investment account as collateral. They are leveraging the securities that they own in addition to personal cash down payments that they already had to get the cash they need. Using a margin loan is borrowing money. This means interest is charged monthly to a buyer's account until they pay off the loan. This is risky, especially if the stocks in that portfolio decrease in stock value.
But, here in the Bay Area, we have a lot of innovators and risk takers that know how to find ways to get what they want. Many buyers used the cash to purchase the house and then applied for a post-purchase loan to pay margin loan back. Where there’s a will there’s a way. These buyers made the adjustments and figured out how they can still enjoy home ownership.
The Recent Bank Volatility
It’s hard to quantify how the recent bank scare caused by Silicon Valley Bank and First Republic Bank and other small regionals affect real estate. Real estate had little to do with any of the bank's problems. It could be argued that any real estate holding these banks had were the few bright spots in their portfolio. The depositors were made whole and if anyone suffered, it was the SVB shareholders that had their investments zeroed out. While that was a very large sum of money to lose, it affected only a tiny fraction of investment groups, money managers and pension funds.
However, we don’t want to downplay the seriousness of the situation. Tougher oversight rules and regulations are needed to stop this from happening again. Similar rules were enacted after the 2008 financial crisis and they worked. News headlines tend to make this situation seem like it’s affected our entire economic system, and while the banking system needs an overhaul to prevent future failures, the financial institutions as a whole are solvent and still able to process loan transactions for companies, individuals and future homeowners. It could even have a positive effect on interest rates as the Fed starts to wind down its rate hikes.
What Should You Do?
Move forward. The Bay Area is the most unique metropolitan area in the country. While some tech companies are laying off, other sectors like biotech and AI are hiring at a furious pace. Since the 1989 earthquake, we have reinvented ourselves many times over. After 1989, Silicon Valley blossomed and made historic strides. The so-called 2000 dotcom bust was not as trying for our area as the media made it out to be. There were some outstanding technologies introduced during that period that were a bit ahead of their time. When the tech infrastructure finally caught up to the ideas, companies like Google, E-Bay, Salesforce, Amazon, Apple’s I-Pod, PayPal and many more were born out of the ruins of the 2000 crash. After the financial crisis of 2008, Biotech, neurotech, greentech, nanotech, social media, streaming services and more were ubiquitous.
Today's recent issues like the pandemic, the recent inflationary cycle, regional bank issues and more will again prove to be a springboard for yet another chapter in the rise of Bay Areas dominance in technology. So, be prepared and be ready for yet another wave. It’s happening before our eyes in real estate. Multiple offers, well over the list price are back and buyers have adjusted. So our advice, if you're a homeowner considering a move, don’t hesitate to sell, because the buyer demand is pent up and ready to purchase.