Is That A Bubble Bursting?
What is really happening in the real estate market? I get this question a lot these days. Usually more articulately stated, but this is its essence. With massive economic and geopolitical uncertainty, and a torrent of contradictory, hyperbolic headlines, it’s no surprise that people are nervous about the market. But just like there are no new storylines in Hollywood, we’ve seen this movie before too and we know, more or less, how it ends. (Avatar was a timeless Cowboys & Indians story, and Top Gun: Maverick was a total reimagination of Luke Skywalker’s 1977 run at the Death Star.)
To know where we’re going look at where we’ve been. Since the pandemic first shut down our world in March of 2020 the housing market in the Bay Area has experienced somewhat of a feeding frenzy. As bidding wars intensified and prices continued to escalate, it’s only natural that people assumed it was a bubble and expected it to burst at some point.
This spike in prices was due to a few "inorganic" factors: the government flooding the economy with insanely cheap money, and demand shifts driven by the pandemic. Queue feeding frenzy.
As the Fed and Treasury took their foot off the gas recently, interest rates jumped and we’ve seen a rapid shift in real estate market behavior. Is this it? The proverbial bursting of the bubble? The inevitable market correction?
No. Well, maybe sort of. Over the past year, I have consistently made the case that we were not in a bubble, and I stand by that assertion. The fundamentals were and are still sound.
That does not mean the market was healthy or sustainable. The correction we are experiencing now is really a return to normalcy, not the bottom falling out. And while a material housing downturn is possible I don’t expect it and it’s certainly not inevitable. Frankly, the fundamentals just don’t support it.
Correction = Return to Normal
Real estate markets are surprisingly dynamic, shifting quickly as economic conditions and consumer sentiment shift. But at the inflection point, which is where we are now, there is confusion and a disconnect between buyers and sellers. Buyers look forward 6 months, changing their behavior quickly. Sellers look backward 6 months, resistant to accept that the market has changed.
Due to long cycle times, real estate data lag market reality. Adding to the muddle, the shift began just as we entered the slower summer season, making it hard to tell how much is a fundamental market shift and how much is normal seasonality.
It's definitely both, we just won't know how much is seasonality - compounded by 2 years of pent-up travel demand - for a few months.
Five to six months of inventory is considered a balanced market nationally. The only time we’ve seen inventory that high in the Bay Area is after the 2008 financial crisis. Around here we normally run 2 months +/- of inventory, and we are approaching that level now from lows 0.5 months earlier this year.
Over the past two years, I have publicly and repeatedly stated that we did not have a supply problem. The number of properties coming to market is roughly the same as it's been for years. The problem has been one of velocity, and that is what has changed almost overnight.
Silicon Valley has always been a fast real estate market, with turn times of 20-25 days being normal (compared to 30-45+ nationally.) Over the past year, most houses sold in well under 2 weeks, with many selling in a single weekend or before coming to market at all. This intense velocity made it appear as if not enough homes were available, when in fact it was simply that demand far outstripping normal supply.
Remember the great toilet paper shortage of 2020? Toilet paper production didn’t change. The normal amount was being shipped to stores but they couldn’t keep it on the shelves. If you didn’t get to the store by 8AM you were sh*% out of luck (pun intended.) It’s been the same with housing and resulted in some whacky bidding wars and rapidly rising prices.
What would the price of toilet paper have been if it had been sold like this? ▶️
While the data is just beginning to show a slow down in time to sell, being in the market every day I know that it is not unusual for a property to take 3-5 weeks to sell. So if you see a house that’s been on the market for 20+ days resist the urge to wonder what’s wrong with it? 20-40 days to sell a house is not unusual - in a normal market.
Competition & Pricing
A few months ago it was normal to receive 5, 10, 15+ offers on a listing. Today the majority of homes get from 1-4 offers. This still reflects a good market with healthy demand, and there is still competition for well-positioned, well-priced homes, it’s just less frenetic, more rational, and far more manageable. We’re starting to see moderate softening in sales prices, but certainly nothing dramatic. What is changing is pricing strategy. Throughout the pandemic, too many agents have been egregiously underpricing homes. The common belief was that driving 10-20+ offers would result in a higher final sales price. I’ve never seen any evidence of this. Competition is good and will drive price, but in most cases you will maximize your sales price with 3-5 relevant offers. What is true is that consumers were stressed and confused, having no idea what a reasonable offer for a house is. Thankfully those days appear to be behind us.
Good Time To Be A Buyer
Today transparency is returning. In most cases buyers are no longer willing to bid 10%-20%+ over ask, hard offer dates are no longer being set, and you can do more than one 15-minute visit to a house before dropping a few million dollars. The Hunger Games era of home buying has ended, at least for now. The right preparation and marketing strategy is critical if you want to optimize your sale for both price and timing.
It is still a seller's market in Silicon Valley and still competitive, so no heyday for bargain hunters. The jump in interest rates has caused real challenges for some buyers, especially at the entry level. But today there is breathing room, transparency, and a modicum of rationality in the market. These are the necessary ingredients for a long-term, healthy real estate market.
This may be the best time to be a buyer that we've seen in the past few years.