June 2020 South Bay / Peninsula Real Estate Market Update

Welcome to our June newsletter. This month, we’ll continue to update you with important information about your local real estate market. First, we will cover new survey data from the California Association of Realtors (CAR) that shows buyers and sellers are operating under differing expectations about the real estate market. Following that, we will review the local market. Although 2020 is proving to be unique, we hope to provide you with an encouraging analysis of May’s housing data as well as an overview of our expectations moving forward as we phase out of the strict stay-at-home orders. 

This month’s topics include:

• Key News and Trends Impacting Your Local Market: The June CAR survey reveals a rift between buyer and seller expectations. Median home prices remain resilient. Sellers are more hesitant to enter or remain in the market, while buyer demand gets a lift and mortgage applications rise.

• May Housing Market Update: Housing inventory plateaus, single-family homes and condos continue to sell close to list price, and homes under contract climb.

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Key News and Trends Impacting Your Local Market

Since most California counties are beginning to lift restrictions, we will start to see the housing market steadily recover. Although an exact end date to quarantine does not exist, on May 20th, Governor Newsom confirmed that more than half of the state’s 58 counties were moving into phase two of the widely adopted “four-pronged approach.”

On June 3rd, the California Association of Realtors (CAR) released survey data sampling California agents and their clients over the last week of May. The results revealed that buyers and sellers are now operating under very different expectations about the real estate market: the majority of buyers expect home prices to be lower while only a small number of sellers are reducing their listing prices.

In the long run, who is right will depend on how long the economic recovery takes. In the short term, however, the data tells us that single-family home buyers, at least, appear to have wishful thinking.

Silicon Valley median home prices did not decline enough for sellers to cut the listing price. In May, single-family home prices in San Mateo and Santa Cruz were only down slightly compared to the previous year while prices were higher in Santa Clara.

Compared monthly, prices did decline, most notably for Santa Cruz homes and San Mateo condos. However, monthly price movements, which are more volatile and often don’t capture as accurate a picture as year-over-year comparisons, will require sustained declines before homeowners should start pricing their homes materially below comparables.

Weighing in on the subject in his June 3rd market update, Jordan Levine, Deputy Chief Economist at CAR, said:

“We [now] expect some price impacts eventually as a result of some of the negative economic impact. . . . The price impacts will be in the modest category of the low single digits for 2020.”

Evidence supports the idea that price declines will only be in the low single digits for the 2020 calendar year. The market continues to see a larger sell-side impact, meaning that housing supply has declined more than buyer demand. The survey data below shows that far more sellers withdrew listings than buyers withdrew offers.

While sellers continue to grapple with the state of the market, California is again facing a major housing shortage, which prevents prices from dropping. The CAR survey also provided the most recent mortgage application data for both California and the United States. In May, California mortgage applications for home purchases (as opposed to refinances) rose significantly from April and are only down 1.7% from this time last year. Mortgage applications correlate with buyer intent to purchase a property and indicate the number of homes under contract and home sold.

All of this is welcome news. The May data assures homeowners that their home equity is still intact as restrictions begin to lift. It should also encourage buyers who may have been delaying a home purchase to enter the market.

A fourth CAR survey result illustrates the degree to which both supply and demand is currently stagnating. Over half of the California realtors surveyed indicated that they had at least one client that was delaying buying or selling until conditions changed. We assume that this pent-up demand will give way in the coming months to more participation and market activity from both sides.

Alongside pent-up demand, there are the changes to daily living which may impact home purchasing decisions in the future. In order to ensure employee safety, companies have massively shifted toward a remote workforce, which creates new space requirements for potentially millions of Americans. As a result, millions of Americans may need to consider purchasing a new home that better accommodates work from home. Remote work also means employees can live almost anywhere. Without physical restrictions, employees may look elsewhere for places to live such as locations with lower costs of living. Between new housing requirements, low rates, and pent-up activity, there is potential for a busy summer buying season that is similar to what we usually see in the spring.

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May Housing Market Update for Silicon Valley

Over the last three months, the housing market has changed so rapidly that we began to look at the data on a weekly basis rather than a month monthly basis (as is typical) to illustrate how significantly the market has changed over a shorter timeline. 

In the month of May, the weekly Silicon Valley housing data for single-family homes supported the survey data from CAR. First, housing inventory has hit a plateau after a steady climb from the March trough as sellers continue to hesitate entering the market.

The plateau in inventory is also due to an increase in buyer demand; homes under contract have increased steadily since the phased reopening of the economy began. They have risen well past pre-pandemic levels in early March. 

The sale-to-list ratio reflects the change in the original list price and the final sale price of a home. For example, a ratio of 100% means that a home sold for the price at which it was most recently listed. In the Silicon Valley, sale-to-list prices have been consistent; buyers and sellers are negotiating the final sale price in line with the list price.

We also look at months supply of inventory, which measures how many months it would take for all current listings on the market (including listings under contract) to sell at the current rate of sales. In May, the months supply for single-family homes rose. This may seem counterintuitive to the weekly data above (which shows less inventory and more homes under contract), but remember that months supply compares inventory to sales. Low sales volumes recorded in May are the result of the low volume of homes under contract in late March and early April; said another way, homes under contract turn into sales around 30 days later. Expect recorded sales volume to increase in June and months supply to decrease. San Mateo stayed relatively flat from April to May because sales and inventory increased at a similar rate.

In May, sales volumes were only slightly down from the previous year in Santa Clara and Santa Cruz, rebounding from April lows. In San Mateo, sales were up by 20%. This shows how rapidly the housing market is recovering.

As we discussed in previous newsletters, the fundamentals of the housing market were strong before the global economy stalled, and they have continued to show stability during the months of quarantine.

Looking ahead to July, we anticipate housing market activity to increase as pent-up demand turns into participation from both sides. We will closely monitor the evolving state of the market to make sure that our clients are pricing and negotiating to get the most value out of their transactions.

Economic Update from Steve Papapietro of Opes Advisors, Palo Alto

Our view on rates this week is that the most widely followed indicators are sending different signals, but short term rates are likely to be steady with upward pressure on long-term rates. Increased  volatility is likely as the markets adjust to the new qualitative guidance from the Fed.  

Here is what we are watching:

Back to the Future

The U.S. added 192,000 jobs in March with the unemployment rate holding steady at 6.7%. Total private payrolls reached 116.1 million, finally surpassing pre-recession highs.  Employment numbers were also nudged higher for January and February.
 
In sum:  Moderate improvement in the labor market means that the Fed  will continue to gradually reduce stimulus while keeping interest rates low.
 
It’s the Weather
 
U.S. exports fell 1.1% in February to hit a five month low causing the trade deficit to widen. This shift surprised most economists who were expecting the deficit to narrow.  There were some hints that transport delays related to severe weather were to blame. Oils imports hit a 14-year low – good news for U.S. manufacturers now less dependent on more costly and volatile foreign supplies.
 
Manufacturing and non-manufacturing economic activity picked up in March, continuing an upward swing.  The Institute for Supply Management (ISM) reported growth in new orders, employment and production.  Both the overall economy and the manufacturing sector are growing and the rate of change is increasing.
 
In sum:  Economists are racing to reduce Q1 GDP estimates due to lower exports, yet the data show favorable demand and good business conditions. Combined, this is neutral to slight support for higher interest rates.
 
They Will Definitely Probably Think About It
 
The European Central Bank (ECB) kept rates steady at .25% and said it was ready to turn on its money-printing machine to avoid deflation. This is significant change and signals their thinking on the strength of economic activity in the Euro Zone.  The strong Euro is keeping prices down and too low inflation makes it harder to deal with debt burdens and slow economic growth.  The U.S. is tied to the European economy through interest rates, trade, and exchange rates.  Any shift can cause the Fed to change its stance.  Be skeptical; the ECB has perfected the art of saying one thing and doing nothing.
 
In sum: Expect no reaction from the Fed to the ECB announcement. If anything, continued weakness in Europe supports lower interest rates.
 
The Week Ahead
 
Wednesday, April 9th:   The Federal Open Market Committee (FOMC) releases detailed minutes from their last meeting.  The markets will look for signs the Fed is keeping rates low following confusion sparked by the Dot Plot  and Janet Yellen’s post-meeting remarks.
 
Thursday, April 10th:  Jobless Claims data. This has a big impact on financial markets because it measures emerging unemployment and gauges the strength of the job market. This provides insights into the direction of economic activity.
 
Friday, April 11th:  the Producer Price Index (PPI) This provides markets with insights into the direction of inflation.
 
Finally, Industrial production data are expected from a variety of big European countries. This will be an indication on the need for ECB to take action (see above).
 
In sum:   All provide insight on economic momentum and indicate the direction of interest rates. Increased jobless claims and a favorable PPI indicate a continued low rate environment. Labor market and price pressure and lack of clarity from the FOMC support higher rates.
 
While Opes Advisors, Inc. uses all reasonable efforts to ensure that the information contained on in this email is current, accurate and complete at the date of publication, no representations or warranties are made (express or implied) as to the reliability, accurate or completeness of such information. Opes Advisors, Inc., therefore, cannot be held liable for any loss arising directly or indirectly from the use of, or any action taken in reliance on, any information appearing in this email.
 
This economic update was brought to you by Steve Papapietro, Mortgage Advisor at Opes Advisors in Palo Alto. For any additional questions about this information or about your mortgage questions, please call him at 650.319.1642.