Welcome to our April Episode of Bay Area Housing Market Town Hall! Today, we are going to discuss Current Housing Market Stats and Offer Status. As you all know, we will be sharing with you the pricing and rates projections, the inflation rate, and interest rate hikes. We are going to discuss a little bit about housing demand versus supply and also, what does it mean and how are they going to affect our housing market today. It is not only about residential, but also we want to look into the commercial real estate market.
In the bay area, as we are aware today a lot of companies have started their first day going back to work. I know Apple just went back to work today. It is mandatory going back to work for one day a week. I think for the next couple of weeks and then they are going to move towards two days a week and then they are going to try out permanently for three days a week. Google employees as well have started that. You can definitely see the traffic now on the road.
Interestingly, this survey is saying that right now a lot of people are still not going back to work. They are working at home. Only maybe about 10 percent of the people are working three to four days a week; but after the pandemic, you can see that there is a large portion of the people decided to go back to work three days a week instead.
I know that there is a lot of debate right now. One-half of the employees said they want to go back to work. They cannot work from home and then, the other bucket of people say, “No! I wanted to work from home because I can save so much time.” I jokingly said that one-half just cannot handle their spouses and kids at home, maybe, and the other half are like “I love being in my family.” I have been working from home for the last 16 years, so I do enjoy working at home, but because I had to raise three little kids as well, I would be cooking and working at the same time.
I think it depends on your profession. A lot of these engineers have to be in the office and collaborate with other co-workers. I think this is going to be a new working habit now. You do not have to be at work five days a week. I think two to three days a week is a really good model, a hybrid model, that makes the most sense for people. In this sense, it is better for the environment as well. There is not as much traffic on the road, and I hope this is going to last that we are going to work two to three days, but also just because this is going to be a hybrid model, I think before we were talking about how so many people are willing to maybe move to somewhere a lot cheaper because they do not have to go to work. But now with two to three days, you can live far away. I do not think far away means like another state, you probably still need to be within an hour or two of driving distance. Otherwise, it will be way too much. In the Bay Area especially, we do see a lot more people coming back. We do see the rental market has come up. So, we are going to go into more statistics about that as well. As a matter of fact, I want to bring up one more point is that I just came back from this CSUM conference, a lot of people nationwide. They asked me, is it true that a lot of people from California are leaving? Do you guys see less demand for housing? I was like – Far from the truth.
Right now, we will take a look at the numbers.
Let us start with Santa Clara County. As you see these, for the residential market a lot of people have been asking, is the inventory going to go up? Usually, the inventory started to come up or at the most for the year around April, May, and June. As you see that for this year, April, we are almost at the same level as last year’s April time frame. So, we are going to be hovering probably around the same amount or I am predicting it is going to be a little bit more than last year just because of the fact that a lot of sellers do feel like maybe if I want to sell I really should sell now because the price has gone up quite a bit.
In terms of sales price over asking price, you have to be super aggressive to win. This is for March, an average of 15 percent over asking price to win your bid.
As for the median sales price for Santa Clara County, it has reached $1.9 million, almost $2 million, for single-family.
As for Condominium and Townhouse, the median sales price has gone over a million dollars as well.
Again, it is a very scary number for the rest of the country but it is pretty common. We have clients asking “Hey, we have a million-dollar budget. We want to buy a single-family,” Sadly to say that, it is really hard to find any single-family within a million-dollar budget.
In terms of days on the market, as you can see that last year it was about 10 days in the market; it has come down to seven days on the market.
I thought it would be cool to see the days on the market in terms of the price point. You would think that a lower price point should sell a lot faster; but no, a lower price point takes longer to sell, while even all the way to $5 million homes only a week on the market and this is in Santa Clara County and it crept up when it goes over $5 million.
In San Mateo County, it is the same thing. It is exactly the same as last year’s inventory level, the number of new listings, 763; exactly the same number as last year’s March. We are going to start seeing again. In April, May, June, and July, we are probably going to see a little bit more inventory.
As for how competitive you have to be, it needs to be about 13 percent over asking to win your bid.
What about the median sales price for single-family. Historically, usually San Mateo County has a much higher median sales price compared to Santa Clara County and they are right now at over $2 million, at $2,040,000. I am just surprised it is not that far off from Santa Clara County.
As for condos and townhouses, it is slower compared to Santa Clara County. It is under a million dollars at $935,000.
Days in the market is about eight days on the market. Well, as you can see again lower price point. I do not know what is this $200,000 to $400,000 property unless it is a mobile home, but I did not include a mobile home here supposedly. Anyhow, it is 80 days on the market, but again, as you can see that the higher price point does not discourage people from buying. It is only six days on the market for even $5 million and up a purchase price.
Alameda County – The number of listings is also very similar to last year, around the same time and it needs to be 17 percent even more competitive than Santa Clara and also San Mateo County.
In terms of the median sales price for single-family, it is about $1.4 million.
For condos and townhomes, it is about $775,000.
It is only eight days on the market for Alameda County.
This is across all three counties. Lower price point, it takes much longer to sell and when you are between about $1.4 to $1.6 million range, it is pretty normal. Even for $5 million plus only four days on the market.
This is interesting to see because I think a lot of people say if it is a really expensive home, it takes longer to sell. In the Bay Area, it does not look that way at all.
In the last 30 days, our team had made some of the offers that we have made and I think if you have been watching our webinars, you might notice something, is that we see a lot more single-digit numbers this month, the last 30 days. Usually, it is all double-digit numbers in terms of the number of offers. However, the amount that they are accepting is still quite a bit higher than their asking price. Just because they do not have a lot of offers, people are still relatively aggressive does not mean that people are not making their aggressive offers. For example, if you look at this property 2.85, we have received a preemptive offer, it still went over about ten percent over asking price, and for this one in Santa Clara City, asking price 1.5, received nine offers and went over $2.05 million. So, it is a huge price jump still and Dublin for East Bay $1.2 million asking price and had gone up to $1.558.
People are still pretty aggressive but you do see the number of buyers is less and we can go into a little bit more discussion about why that is and there is definitely something to do with the interest rate.
Speaking of interest rates, some people think that because of the rising interest rate, the home price is probably going to come down.
These are some of the projections from some of these organizations and agencies that have predicted the home price forecast for 2022. On average, it is about a 6.7 increase in the home price still. Nobody is predicting that the home price is going to crash in 2022 despite the interest rate hikes.
One of the main reasons we have talked about is that no matter what supply and demand are, supply is still very low, demand is still very high and one of the reasons why the supply is very low is because the construction is just not there. We are not including here why the construction is not building; but in the previous webinars, we have looked at the construction cost, regulations, the impact fees, and development fees is really high right now. As a matter of fact, when I went to the CSUM conference, I have met some developers and they have told me that “Hey, we have three deals under contract and we canceled them because we realized the construction cost is way too high” and they had forfeited their earnest money deposit, they do not care. They would much rather be losing the earnest money deposit than going in, buying the property, and then finding out that the construction cost is way too high. So, this is one of the reasons why we are not building enough housing units and fulfilling our supply and demand.
Here is our inflation rate, every month for the last five or six months, we have been talking about an increased inflation rate. This is the highest in 40 years, the highest in 40 years, and again, we are the highest in 40 years. Now we are reaching 8.5 percent for March in terms of the inflation rate.
The Fed official said that “It’s ‘fantasy’ to think modest rate rises will tame inflation,” this is by James Bullard. He thinks rates may still need to rise 300 basis points to tame it. He backs a half-point hike in May. They were talking about there is probably going to be a six to eight rate hike this year and the total could be up to 300 basis points, that is a three percent increase.
Let me go into a little bit more about the commercial real estate market stats as well because rates have affected the cap rate, and the valuation of the property as well.
If we look at 2011 Q1 to 2021 Q1, as you can see that for multi-family, the vacancy rate has been coming down. It was elevated in about 2020 but generally, it has come down to a five percent vacancy rate only. For the office, it has gone up in 2011, which was one of the biggest recessions, the second-largest recession in history, and it now has gone back up to about 12.3 percent in terms of vacancy rate. Industrial is doing so well.
Helen: I am sure Max when you do a loan for industrial properties, do you have a lot of demands for an industrial property loan, right now?
Max: Absolutely! there is a there’s a lot of demand for industrial property in the Bay Area in general. It is a lot like the residential market. A lot of demand, and very low inventory.
Helen: That is so interesting. You are right. You look at the commercial side, industrial and multi-family, they are very similar to the residential side, the housing market but not office. Retail is getting better but the office was really, really slow. Retail is improving to 4.5 percent, and we definitely hear a lot more people coming out to say they want to lease again, and they have more confidence to be out there, have a storefront, and do their business.
As for the Asking Rent for the apartment had gone up 11.1 percent while office went up only 0.7 percent and as you know, it still, of course, is heavily relying on people going back to work right and if the company is saying, you do not need to go back to work anymore, of course, that market is going to shrink, but most of the companies do require people to come back to work at least a few days a week. In industrial, their asking rent has gone up to 10.6 percent and retail has gone up 3.9 percent.
As for the sales price, year-over-year percentage change. For apartment, has gone up 10.5 percent and one of the main reasons why apartment has gone up 10.5 percent is also because the cap rate has been so low and as for office, still gone up 2.4 percent, industrial 15 percent, and retail at 5.1 percent.
When we look at cap rates, as you can see that in 2011, it was 6.6 percent on average but came down to 5.2 percent. Well, this is nationwide, by the way, this is not the Bay Area cap rate. I know some people will say, no there is no way, it is 5.2 over here. I agree but in a lot of areas in the nation, they are about a 6 percent cap rate right now too. Office – Their cap rate is around 7 percent, industrial at 6.3, and retail at 6.9 percent.
I thought this one is pretty interesting, it is from CBRE Research, their cap rate survey as of March 2022, as per their report, looking at the sales volume four-quarter rolling in the gold line is representing multi-family. The multi-family sector saw the biggest increase, accounting for nearly half of all sales volume in 2021, according to Real Capital Analytics.
I think a lot of people going to say like but we do not see an inventory right now because a lot of these multi-family sales are done off-market, believe it or not. Not every multi-family seller requests their property to be placed on the market. A lot of times these are being conducted off-market. That is why you will see that inventory is really, really low on the market but there are a lot of transactions being done off-market.
As for the cap rates versus bond yield, you can see that the cap rate has been coming down quite drastically; however, they expect the yield on the 10-year treasury to increase to 2.3 percent – A level that would maintain a healthy spread relative to real estate cap rates and property market fundamentals, which are driving returns, will be underpinned by strong economic growth.
We are going to talk a little bit about the economic growth later too because I think a lot of people kept thinking that it does not sound like we are going to have any economic growth but we can talk a little bit about that as well later. They do anticipate that investors will continue to look to real estate for both relatively attractive returns and an inflation hedge.
Interest rate hikes have been a huge topic these days. Every month I have been using Wells Fargo’s interest rate. Back in February, the high-balance loan in Santa Clara County interest rate was 3.75 percent and if you look back today for high-balance conforming 30 years, it is 4.875 percent and that has gone up 1.125 and look at this jumbo 30-years, in February, it was 3.375 and then as of today, it is 4.125, went up only 0.75 percent.
So, it is a little bit cheaper to do the jumbo loan compared to the conforming loan.
Looking at the rates historically, I think back in January, I did ask the audience – Do you know what is the highest interest rate or what year was it we had the highest interest rate? It was in the 80s. The interest rate has gone up like 18 percent at that time. I remember in 2014, 2013, we kept saying like this is a historical low, that was about 4 percent and then, of course, 2020 we came down to like high 2s, low 3s and that was amazing, a lot of people feel like that is free money but now it is going back to about 4 percent. It is still really low historically but I know we are just so spoiled now by that 2 and 3 percent and say 4 and 5, we just want to cry. When I first started investing, as I mentioned earlier, I paid 7 percent for my loan.
These are the projections made by Freddie Mac, Fannie Mae, Mortgage Bankers Association, and National Association Realtors. We kept telling everybody that even their projections change from time to time. Every single month, I try to track as much as possible, so right now, they have added 2023 1Q and 2023 2Q numbers. I feel like Mortgage Bankers Association, they are the closest to reality. They are already at about 4.4 percent for 3Q 2022 while the remaining agencies were still in their 3s. But as I just pointed out to you guys, it is already over 4 percent. So, even these agencies’ projections can be off, but I just want to share with everyone that the projection is still trending upwards in the next 4 quarters or so.
Here is a very interesting slide to show everybody – What is the impact of rising rates on housing – Changes when mortgage rates rise by about more than 1 percent?
If you look at historically, again, we have to keep bringing back history because people just do not remember and we are not being shown this historical data all the time so that is why people are relying on watching YouTube and seeing what people are saying. The historical data here is from January 1996 to September 1996, for 8 months. The interest rate had gone up about 1.2 percent, and they landed at about 8.23 percent. But at that time, home prices went up 2 percent despite home sales volume going down 2 percent. From 1998 to 2000, they had like 19 months interest rate hike and it went up about 1.81 percent to 8.52 and the home prices have gone up 13 percent despite again a down in home sales volume. And then from 2003 to 2004, in 12 months, it went up to 6.29 percent. Home prices, again, had gone up 13 percent and the sales volume had gone up 2 percent and they had an average, this is a more normal 5 months supply of inventory on the market at that time. Then, 2005-2006, again for 13 months straight, went up 1.18 percent to 6.76. Home price went up again although home sales came down 14 percent and then from 2012 to 2013, went 4.46 percent, the home price went up 11 percent, home sales volume came down 2 percent with 4.8 months of inventory nationwide.
This is data provided by Freddie Mac.
So, what is the point of this slide? Even though the rate goes up, historically saying, it does not have a direct tie to home prices is going to crash because of the interest rate.
I know again there are so many people out there saying that because of the interest rate, the housing market is going to crash. We do not believe that the home price is going to crash. It is going to go up by a single digit only.
Now, if we look at the months of supply now, even though we do have “a lot more” months of inventory in the Bay Area, we used to have 1.3 to less than one month supply on the market, now we have 2.1, basically two months supply. The good news is that I have shown you earlier in terms of our offers, that you have more inventory, you have a little bit fewer buyers, so you can have a higher chance of winning a property now. I know it was so frustrating, you make 10 offers and you do not get anything accepted, but now you probably have a little bit more inventory to look at.
Looking back to 2008, we had 14 months of inventory and we have gone down to less than one but then now, we are about two months of inventory at this time.
Freddie Mac – What they are saying is that “History suggests that when interest rate rise, there is an initial bump in home prices as many move quickly to buy a home before rates increase further.”
Which is what we are seeing now. At the beginning of the year, everybody was expecting the interest rate is going to go up, that is why we have a really, really crazy first 3 months.
“But after that period, home price is slow. Freddie Mac analysis showed that a 1 percent increase in mortgage rate results in home price appreciation that is 4 percentage points lower. For instance, a 1 percent increase in mortgage rate would change home price growth from 11 percent to 7 percent.”
I think we have made our point pretty clear.
In summary, I think we do have Economic Growth still:
1. 1.7 million jobs increased in 2022.
2. We have a very strong unemployment rate of only 3.6 percent.
3. Retail sales rose 16 percent year-over-year.
4. Earning growth, we went up 5.6 percent.
5. We have very healthy vacancy rates in multi-family, retail, and industrial.
6. Asking rents for multi-family, industrial surpass the inflation rate.
Although, the risk is that
1. The supply chain is still an issue throughout 2022.
2. Inflation is 8.5 percent and may go higher until like, of course, now the Fed rate is increasing maybe, we can start slowing the inflation.
3. Construction continues to slow down due to an increase in costs, which will affect the supply of housing.
4. We are expecting Fed rates to have aggressive rate hikes this year potentially 2.5 percent or more this year.
5. Then, the months of inventory is increasing as well.
Thank you so much for reading our April Bay Area Housing Market Updates. For this month’s webinar, we also invited Daniel Gat, a veteran of the residential lending industry, as well as Maxim Shapiro, an experienced CRE finance professional, to share with us how the real estate market is affected by the rising interest rates, from both residential and commercial viewpoints. You can watch it here.