Covid-19 and SF Peninsula Real Estate in Q1 2020…So Many Questions…

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Back in January, I wrote a detailed blog post around a state of union type article discussing the current SF Peninsula real estate market, as well as many of the key drivers of local real estate. The first 75 days of 2020 was off to a fantastic start across multiple spectrums. I helped multiple buyer and seller clients get into contract in highly competitive multiple offer situations. And there were a slew of other clients looking to make a move later in 2020. On personal side, my daughter’s 8th grade school basketball team which I assistant coached just won back-to-back county championships. And my son’s high school varsity tennis team, along with him and his #2 doubles partner were almost halfway through the season, undefeated, and tracking to win their first PAL title in 19 years. Carlmont hands M-A first PAL tennis loss in seven years

Then, everything came to a screeching halt.

Covid-19 – The World Changed Just Like That

Although Coronavirus had been in the news from other countries, there were only some suggested best practices and warnings in the United States. It was not until March 16, when the official shelter-in-place (“SIP”) came out in the Bay Area. This significantly affected schools, small businesses, large corporations, elderly, everyone and everything. Initially for 2 weeks, on March 31, the SIP was extended through May 3. More restricted constraints, and the CA governor and state school superintendent indicated it would be likely for schools to remain in an online learning environment for the remainder of the school year. 

Revisiting and Updating Topics from January Blog Post

First, the Forty Niners lost a heartbreaker in the Super Bowl to the KC Chiefs with all world QB Patrick Mahomes. What a season though and Niners has young nucleus for future.

Investors currently are riding the ups and downs of the stock market. Due to many businesses being closed down or dramatically affected, the DJIA, S&P 500, Nasdaq, and other equity indexes are significantly below it’s previous high level mark – giving back much of the gains from 2019. We can surmise the 2020 IPO window to be closed in the near future. Specific to Silicon Valley, my venture capital and start-up friends indicate that VC funding will be significantly tougher, particularly for late stage companies.

Mortgage interest rates are still low by historical standards. I have written about rates on a couple previous posts. Do keep in mind that when reading about the Feds lowering borrowing rates, they are referencing the short-term, overnight Fed Funds rate. Mortgage interest rates track to the medium term treasury yields.

Lots of Unknowns and Moving Parts for Local Real Estate

Real estate activity, typically peaking in the Spring has slowed down immensely. The SIP rules place major restrictions on the sale of real estate. This link provides some details to our local market. https://www.samcar.org/posts/coronavirus-faq-updates-1311.htm. At a high level, here is some legal and logistical impact on residential real estate:

  • Sale of real estate is considered an “essential service”, but properties can be listed only under very restrictive circumstances
  • No public open houses or broker tour
  • Showings done virtually and electronically, with exceptions under strict guidelines
  • Many property and appraisers are not working now 
  • Residential construction/renovations to be halted with some exceptions

Changes to Supply and Demand

For the past 5+ years, there has generally been higher buyer demand than supply of available properties in the spring selling season. Let’s break down what the current economic and pandemic situation means for real estate from a theoretical perspective:

Supply: 

  • Owners sell and list for several main reasons: a) move out of area, b) move up buyers, c) downsizing, d) financial/job issues, e) investors/developers who wish to sell
  • SIP limits most “ordinary” sales activity such that most sellers are delaying listing or changing their plans.
  • There is still some inventory on the market right now, mostly in those situations where a house is vacant.

Demand:

  • Typically there may be five categories of open house attendees: a) serious, actively looking owner-occupied (“OO”) buyers, b) passively looking, early stage OO buyers, c) investors/developers, d) neighbors, and e) curious “looky loos”
  • SIP eliminates D and E
  • Most of C not actively looking due to uncertainties of shaky economy
  • Many of B who were early in the process likely disinclined to jump in
  • BUT…there are motivated owner-occupied Buyers with a medium-long term viewpoint seeing this as a buying opportunity with less competition. They may have lost out on a couple offers in the last few months and/or they may have school aged children who need to register for Fall school enrollment within a district

See one of my early articles on the Supply and Demand dynamics of real estate. This is my most popular blog post and receives #1 Google organic search ranking when typing in “microeconomics real estate silicon valley”. https://taosiliconvalley.com/2013/08/26/microeconomics-101-for-real-estate-2/

Real Estate Sold over Past 30 days:

There has been so much uncertainty and variables during the first few weeks of SIP. Deals in escrow were still closing on time. Transactions that had just gotten into escrow right around SIP may have been delayed due to inability to schedule appraisals and other factors. A few deals fell out of escrow due to buyers who were greatly impacted financially and/or job situation from SIP. 

What about properties that are more recently listed right when SIP got put into effect in mid-March? They did not have the benefit of a public open house and were limited by stringent requirements in private showings. There has been a significant decrease in active Buyers looking. However, there is also a segment of highly motivated owner occupied Buyers who view this to be a less competitive buying opportunity and want to get into the market. There is also a decline in Supply of properties as mostly those properties that are vacant are on the market. Thus, vacant houses that can be visited, in good neighborhoods and priced appropriately are selling. Some are even selling with multiple offers but just without the high overbid situations like we did only a couple months ago. 

On the other hand, some properties with more aggressive list prices that don’t show well, in less desirable locations will likely sit on the market longer than during “normal” times.

What Does This All Mean?

Hang on for a lot of changing dynamics for the remainder of 2020. There are just so many unknown factors that will drive what happens to real estate in our area. I have lived through and owned real estate during the dot com bubble, the dot com crash, the subsequent recovery, then a huge financial crisis from the subprime mortgage meltdown, and then then a substantial bull market and now Covid-19. 

No one has a crystal ball to totally predict how all this shakes out. Having experienced multiple economic cycles plus my undergraduate and graduate finance degrees provide me good perspectives on our current plight. In my next article which I will publish next week, I will provide some data and my perspectives on how potential buyers and sellers may think about the market. 

As always, contact me if you wish to discuss or brainstorm.


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