Home > Blogs > California > San Mateo County > Menlo Park > The financial Cliff and Luxury Market Inventory expands in Silicon Valley
10,497 views

Gary Mckae's Blog

By Gary Mckae | Agent in 94301

The financial Cliff and Luxury Market Inventory expands in Silicon Valley

Looking at the recent reports from MLS Listings I am wondering about the market place, the difference between the Luxury Home Market and that of recent reports from the various news services on the status of the real estate market.

Inventory of homes for sale have jumped dramatically in certain markets over the past 5 months.  Even the hot market of Palo Alto has had to take a respite from the go-go days of mutiple offers and over bids.

PALO ALTO:  The past serval months have seen some dramatic changes in Palo Alto.  As of July 2012 97 homes were for sale.  That is higher than a year ago and every month since February has seen an increase in listings.  Home sales have not seen any dramatic increase in relation to listing increase.

By clicking the town below, it will link you to the report for each of Number of Homes For Sale vs Sold.  What concerns me is that the number of listings to the sold only indicates that the ability of the sales to clear the inventory will increase and take some time.  Towns like Atherton and Woodside which had a low inventory expanded without an according increase in sales.  That is no exception to communities like Redwood City which have lower priced or Median priced homes.  Take Woodside for an example, 64 listings and 7 sales in July.  That means it will take 9 months to clear the inventory.  In Redwood City and Menlo Park Park it will take 2 and 3 months respectively to clear the inventory. Atherton will take 12-13 months to clear the inventory!

REDWOOD CITY

LOS ALTOS

WOODSIDE

MENLO PARK

PORTOLA VALLEY

ATHERTON

To give you a taste of the Days on the Market in the Luxury Home Market versus the Median price market look at the towns below.  They represent a dramatic shift in buyer support of the median priced home versus the Luxury Priced home.  Why is it occurring?

WOODSIDE

PORTOLA VALLEY

ATHERTON

REDWOOD CITY

In each case of the respective Towns which represent the Luxury Home Market Days on the MArket has increased. whereas, in Redwood City it has decreased.

What would cause the inventory in the Luxury Home Market to increase, sales to listings decline and Days on the Market to increase; along with it, months to clear inventory?

My thought is the “Financial Cliff” and the Presidential Election.  

The “Financial Cliff” refers to the expiration of the Bush Tax Cuts and the 3.8% Obama Care tax which will become effective in 2013 for all real estate profit over the $500,000 joint exemption.  From what I have heard the Financial Cliff will cause a 3.5% cut in GNP growth.  The last report was a 1.5% GNP growth.  A 3.5% cut would mean a minus 2% in GNP or a RECESSION.  Recession is not good for Luxury Homes.  

Along with the Financial Cliff will come the increase in taxes that will cause the 3.5% drop in GNP.  Selling a home next year will create a 60% increase in taxes.  The best article on this is the LINK to the New York Times.  there is the chance that Congress will work together to extend the cuts.  The House has already done so and the bill is off to the Senate.  From a Republic House to a Democratic Senate.  I think of the timeline to the financial crisis as my look at that probability occurring.  To my way of looking at it, we are already seeing the Luxury Home Market down sizing in Cars.

Could we be seeing a down sizing in the Luxury Home Market?

The test will come in the price cutting and the inventory movement over the next 4 months.  If we are to see Atherton, Portola Valley and Woodside clear their inventories, we will need price cuts to stimulate buyer’s interest.  Of course if we have a revival in the economy and the IPO market heats up, all will change.  I don’t put a great deal of faith in that happening.

What I do see is that investors are interested in diversifying their assets.  A stock market that jumps up and down 200-300 points is not a trend to follow.  Interest rates at record low levels is not a long term investment nor is it a secret to wealth accumulation.  I most interesting is the fact that Foreclosures and I believe Short Sales are the key to our rising median price in homes.  Growing activity in the Spring Housing Market brought out new growth in home prices because it was based upon investor demand.  The fact that distressed properties as are Bank Sale Foreclosures and Short Sales is well known.  So is it known that these homes sell 30-40% below the price of standard sales. 

WHEN FORECLOSURE SUPPLIES FALL, THE BOTTOM FALLS OUT OF HOUSING.  THIS IS DISTURBING!  We are now at a juncture where short sales and REO’s are no longer a major part of our local real estate market.  

The recent housing recovery was really a fact of REO’s and Short Sales made possible by investors.  NO HOUSING RECOVERY IN THESE CHARTS.  

We have seen Median Price has increase over the past quarters to a new high since 2007.  That is not a hard explanation.  When you consider that over 25% of homes in America where under water, or the market value of the home was less than the mortgage, you have 25% of homes off inventory.  the recent celebration has been we have gone from 25% to 23.7% with the last increase in Median Prices.  WHOOPEE!  Let’s look at Arizona where 40% of the homes are under water.  It had a 20% POP in their Median Prices.  Remember the rule of Supply and Demand.  

Now think about who owns all the foreclosed properties.  It is the US Government through Fannie Mae, Freddie MAC and the FDIC.  They now control inventory.  If they keep a tight grip on inventory and inventory is confined by available housing 23.7% under water, is it surprising that Median Home Prices jumped?

The best method to test the market’s resiliency is to feed some property on the market, NEW CROP OF FORECLOSURES COMING.

We are moving to a market in which supply and demand are being controlled.  Prices will not get out of line, if they do, inventory will increase.  AFFORDABILITY WILL BE KEPT IN MIND AS OUR GOVERNMENT PLANNERS WILL KEEP  THE MARKET IN CHECK.

FORECLOSURE MARKET TRENDS AUGUST 2012, will give you the best banks to buy property from and show you foreclosure activity in your own back yard.

So what does that mean for real estate in our markets?  I think it is all positive.  It returns the markets to value and affordability.  It brings the real estate market back to what it should represent, a roof over our heads.  It brings it back to a long term value versus renting.  It creates the ability for first time home buyers to become owners rather than renters.

Investors now have an alternative to the volatile stock market and equally risky bond market.  3% for 30 year bonds?  The risk is too great.  I would prefer a 6% yield on a rental property to a bond with the risk of principal loss and a 3% yield any day!

I am going back to my belief that we are in a return to the 73-74 recession when real estate became the choice asset over stock and bonds for 10 years.  It was in 1983 that the stock market broke out over the 1970 highs!  13 years to correct a recession that was nothing compare to what we last witnessed and what we are going through.  We still don’t know what the shape of Europe will look like.  Funds are flowing out of Greece, Italy and Spain like water from a faucet to the US, Switzerland and London.  the Miami market was almost destroyed after the Lehman Failure.  Today is is up and stronger than ever as money flows into the Miami Market.

There isn’t a day that passes that I don’t see signs of changes to the real estate market in structure and regulation that does not indicate a stronger and better market ahead.  The trouble is you will have to wait another 10 years to look back and say, Gary was right.  Let’s hope we are all here for that.

POST
 
Copyright © 2014 Trulia, Inc. All rights reserved.   |  
Have a question? Visit our Help Center to find the answer