The market from January through March 31, 2022

So just how wrong can one person be?

At the end of every year, for the last 30 years, I go through the same exercise. I dust off my crystal ball and try to predict the real estate market for the coming.  You would think that with the systemic and unpredictable shocks to the system brought by COVID that I would have learned my lesson. But I did it again. So my stated predictions in December for the market in 2022 were as follows:

Inventory of homes coming to market will be significantly tighter than in 2021.

Interest rates will slowly rise, ending the year at around 4.75%, but definitely less than 5% as the Fed slowly tightens the vise.

Post-Pandemic Inflation will show signs of leveling off by the end of Q1 as the supply chain catches up with demand.

Prices of homes in the Spring market will have modest gains compared to 2021 somewhere in the range of 8-12%.

Multiple offers in a competitive Seller’s market will continue, but with 3-4 offers instead of 20-25.

Apparently, the only thing I nearly got right was the prediction of lower inventory.  Here are the Year over Year facts in the nutshell for Q1 of 2022:

Inventory of homes for sale was Down 4%.  I barely got that one right…

(Insert Active Inventory graph combined area)

Interest rates have already tipped over 5% which is the highest in a decade.

Inflation continues to spike upward as a result of two sequential, major shocks to the economy.

The Median price of homes in our East Bay market shot up 23%.

Competitive offers continue.  Not quite the same crazy Mosh Pit we saw in 2021, but nowhere near my prediction.  Although the number of offers on properties has leveled off.  We are rarely seeing 20 + offers now.  Most everything across all price ranges have 4-12 offers.  That is some encouragement for Buyers.

Now let’s zero in on our Local Market:

Year to Date Unit Volume Sold is down after a record year last year.

     o Our market’s unit volume is down 15% in the first quarter.

     (Combined area Unit Volume graph)

    o  But the dollar volume of sales is only down 2%.  That adjusts for the sharp rise in median prices. 

      (Combined area dollar Volume Graph)

     o  While it is not surprising that we are still far ahead of the rickety market we had this time in 2020, our Sales Dollar Volume is a bit higher than it was in 2019, pre-COVID.

The Volume of new listings coming to market is only slightly down.

·       Even though Active Inventory is only DOWN 4% Year to Date over last year to date, this has still not solved the supply-demand dynamic.

      The interesting dynamic in the market is that Days on Market (DOM) is increasing. 

o   Last year, 93% of all closed sales in April of 2021 were on the market less than 30 days.  Currently, only 72% of our Active inventory in April of 2022 has been on the market for less than 30 days.

The Median Price is UP and moving quickly.

     Our entire market is up 23% in Median Price Year to Date over last year to date, ending March at $1,275,000.  As I said earlier, this is over twice the appreciation I expected this year.                       

      (insert combined area Median price graph)

      (insert monthly median price comparison graph)

      However, given the increase in days on market and the amount of inventory that appears to be coming to market now, mixed in with rising interest rates and eroding Buyer purchasing power, we should begin to see a leveling off of Appreciation in the market.  It’s gotta happen.

So why are interest rates going up and why is Inflation out of Control?

As I mentioned earlier, this is not due to the traditional supply and demand equation of economic theory for an over-heated economy.  This is really caused by two sequential, major shocks to the economy without sufficient recovery time:  COVID-19 and Vladimir Putin.  Let me simplify this to an example that is easy to understand, dear to my heart and encompasses all of the issues related to today’s inflation…. Beer.

Beer is a $26.9 Billion industry in the U.S., producing 24.8 million barrels of beer in 2021 (a barrel of beer is 31 gallons).  60% of that production is bottled or canned in a normal year.  2018 saw a distinct move to aluminum cans as a preference for packaging over bottles.  Then COVID hit in 2020 and the economy shut down.  Breweries survived by canning 100% of their product for a while.  Supply could not keep up with this immediate demand.  COVID restrictions cause numerous aluminum manufacturers to close plants, further reducing supply.

Things started looking better at the end of 2021.  COVID restrictions eased.  Restaurants and bars were fully opened serving draught beer and pressure on aluminum can inventories eased.  Then the Russian –Ukraine conflict emerged.  Russia produces 9% of global aluminum.  The largest manufacturer in Russia has 25% of its production in Ukraine which is now shut down.  Soaring oil and energy prices have forced the closure of many manufacturing plants in China.  All factors leading to a rapid rise in sheet aluminum prices.

Now consider that Ukraine and Russia are major wheat and barley producers for the world.  Obviously, those supplies are now disrupted.  Barley prices alone are up 22% since the start of the conflict.

So what does this all mean?  One thing is clear that your favorite can of beer is going to be much more expensive.  It also seems to me that the Federal Reserve is trying to fight inflation for the wrong reasons and with the wrong tools.  In a typical inflationary economy, demand for goods and services exceeds the actual normal capacity of uninterrupted production.  But what we are seeing today is Highly Interrupted production.  We do not have an unbelievable increase in demand for beer, driving prices for a pint through the roof.  Instead, we have extrinsic shocks to the economic system that have caused major supply chain issues that have driven prices up and caused beer inflation.

Shall we talk about Strategy, History and the “B” word?

Let’s talk about the elephant in the room that the Fed brought up in a press conference recently; the word BUBBLE.  For everyone thinking of buying or selling real estate, predicting a Bubble is the Holy Grail.  And in the last 30-plus years, I have seen a couple of bubbles.  They do happen.  Did I predict any of them?  Well…no.  But I do understand their fundamental causes after the experts have sliced and diced and put them under a microscope after the fact.  Let’s briefly explore the foundations 2 well-known Bubbles in real estate and put them into perspective with our current market.

The Dot Com Bomb of 2000

The basis of that Bubble was Alan Greenspan’s “Irrational Exuberance” of the stock market.  Monopoly Money had made its way into the economy.  If you started a company that had Dot Com in the name, people threw money at you.  Your company was worth more if it was losing money than if it actually made a profit.  This was the “New Economy”.  People would buy any stock that was remotely based on the internet.  Just have Dot Com in your company name and you would be rich.  We saw a similar situation in the 1920’s before the Great Depression.  Anything remotely associated with Air Travel was a darling of the stock market.  American Flyer stock did quite well.  Imagine Investors’ dismay when they discovered it was not a new airline company, but rather a manufacturer of model trains.

In the lead up to 2000, our real estate market was also flying high.  Sharply rising prices and multiple offers were the norm.  Buyers tried to entice Seller to accept their offers by kicking in stock options that they were granted by their employers.  You guessed it; stock options in startup Dot Com companies that were soon to go public.  Then someone turned off the ether and sound financial fundamentals prevailed.  The monopoly money dried up and both the stock market and real estate market tumbled.

The Great Recession 0f 2007

This time, the “Greater Fool Theory” was the culprit.  The Mortgage industry was the wild, wild, west.  Home prices would continue to go up forever.  This was the “New Economy”.  I could walk into the office of any lender and get an Adjustable Rate Mortgage with a teaser rate of 1.5% fixed for the first 6 months.  It was also known as a “Liar Loan”.  Oh, I’m sorry.  That was rude.  I meant to say a “Stated Income Loan”.  That meant that I could tell the Mortgage Loan Originator that I was self-employed and made $500,000 per year, whether I actually had a job or not… didn’t matter.  So long as my credit was good, no one verified my income.  And when my teaser rate ran out, I could just refinance with another loan with low teaser rate.  After all, these loans will be around forever and home prices will never have short-term dips.  Right. 

But slowly, the light got shone into the dark recesses of the mortgage industry.  The credit ratings given these loans that were subsequently sold on Wall Street were as false as the borrower’s stated income.  Next stop, foreclosure town.  Check out this graph.(insert Quarterly median price graph).  There was a precipitous dip in the median price.  But this was partially due to a real fall in value, and mostly due to a statistical skew in the market at that time.

Remember the definition of Median price.  It is calculated over an assumed “normal” distribution of prices.  So if 101 properties sell in a given timeframe, the median price is the one that has 50 prices below and 50 prices above it.  Now consider what happened.  Prices were falling.  Foreclosures were on the rise.  But also, higher-priced homes stopped coming to market.  Homeowners were worried about selling.  Those who were more affluent and had more equity in their homes chose not to sell.  The preponderance of homes that came to market were distressed properties in lower price ranges.  This alone had a drastic effect on the median home price index for several years.  And the precipitous recovery in Median prices seen in the quarterly graph was equally due to the return of a normal distribution of price points returning to market.  So… just to be clear… the great recession was a very grim time.  There was a REAL decline in values.  But there was a REAL statistical abnormality that made the grimness of the times seem even grimmer.

What is Different in 2022?

Well for one thing, I haven’t heard anyone say “New Economy.”  That would worry the heck out of me.  The mortgage industry does not have Liar Loans.  The Dodd Frank Wall Street Reform Act of 2010 is still in place and lending is based upon sound fundamentals.  Buyers in this market actually do earn money and have savings, not stock options that they hope will be valuable in the future.  The real estate prices recovered by 2003 and again by 2012 in both of those major downturns.

I bought my current home in Oakland for $308,000.  Now homes in my neighborhood are selling well over $3,000,000.  I had clients who bought a cute starter home in upper Maxwell Park in Oakland for $450,000 in 2005.  Then came the Great Recession.  The Alameda County Assessor lowered their assessed tax basis to $300,000, thereby lowering their property tax.  Their CPA told them that they should sell their home at a loss as it was a non-performing asset.  My advice was the opposite:  “You can afford the mortgage and the Assessor gave you a gift of reduced taxes.  Enjoy your home and stop worrying unless something with your personal circumstances change.”  Luckily they took that advice.  Today, there is little that sells in Maxwell Park below $1,000,000.  Non-performing asset… my asset! (insert graph of median price 94619 labelled as Maxwell Park, Laurel and Redwood Heights)

What are the lessons here?  We do not see the crumbling foundations that created the Bubbles of 2000 and 2007.  Will prices of homes stop rising so precipitously or even flatten soon?  Appreciation will have to temper due to rising interest rates alone.  For every 1% rise in interest rates, a Buyer loses about $100,000 in purchasing power.  So a Buyer that was able to buy a home for $1,700,000 in January, can now afford a home priced at $1,500,000.  But that $1.5M home today, had a market value of $1,220,000 in January.  Ouch… that is what is known as the Double Whammy.  But here is the rainbow in all this confusion. There is one truism for real estate; Prices always Go Up.  

To be sure, there will always be dips, corrections and down cycles in the market.  But over time prices always go up.  So any savings you might have realized by waiting for a dip have surely been eroded by the rise in interest rates over the last 3 months.

I realize these are very difficult times to try to make informed decisions in the Real Estate arena.  I also do not claim to have all the answers.  Frankly, I am just not that smart.  But I am willing to give you the best advice I have accumulated in 30+ years to try to answer your questions and put you into the capable hands of one of our Agents if that is what you want/need.  So here is the offer, as the Broker for the company, with no strings attached and no expectations:  Call me if you have questions issues or problems and let’s try to find a solution.  This is not about me or the GRUBB Company.  This is about you and your needs.  My cell phone number is 510-206-0479.  I am happy to take the call and help you figure out what the heck to do in this crazy and confusing market.

Until next time, stay safe and healthy.