Go Niners…oh, and Initial 2020 Leading Indicators in SF Peninsula Real Estate

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Welcome to a New Decade

How about them San Francisco 49ers?! The start of a new year means NFL playoffs, and this year, our Niners will be going to Miami to take on the KC Chiefs in the Superbowl. Usually around Superbowl weekend is when Bay Area real estate traditionally picks up with respect to new listings and more buyers actively looking; this starts provides us with some preliminary data points on how the SF Peninsula’s spring selling season may evolve. This post will be broken down into various categories highlighting some leading indicators as well as risk factors.

Robust Stock Market

Wow, my retirement stock portfolio and my children’s 529 college fund look better now than a year ago. In 2008, the Dow Jones Industrial Average (“DJIA”) closed down by 33% to 8,776. There has been a 10 year bull market and as of 12/31/18 closed at 23,327 which was down slightly by 5.6% in 2018. That’s where the story ends, right? A 10 year economic expansion finally slows down. Wrong.

In 2019, the US experienced incredible stock market growth across all classes of equities.

DJIA+22.3%
S&P 500+28.9%
NASDAQ+35.2%
2019 gains

What does this significant increase to equity investments potentially mean from a real estate perspective?

  • Wealth building to help with down payments
  • Corporate America financial strength means more jobs, higher wages, less unemployment for more potential buyers
  • Within high technology oriented SF Bay, this also is correlated to startups getting private funding to fuel growth, possibly higher valuations for founders, facilitate liquidity events, and create more jobs which then attracts more people into the area
  • There is also a psychological effect for both buyers and sellers in providing confidence in the economy

Interest Rate

Exactly 3 years ago January 2017, I wrote a blog post about year of uncertainty and a historical outline of mortgage interest rates for 30 year fixed. Around that time, rates had crept up to above 4% which I commented is still considered very low by historical standards. Today, Fannie Mae is showing approximately 3.1-3.2% average 30 year fixed which is crazy low.

https://taosiliconvalley.com/2017/01/20/2017-the-year-of-uncertainty-with-mortgage-rates-stock-market-and-the-new-president/

I have buyers closing on a fantastic house in San Mateo in past week on a jumbo loan; they closed with a 30 year fixed rate at 3.0% which is the lowest I’ve ever seen. What does this mean for buyers, with lower interest rates, mortgage payment calculations for qualifying for mortgage amounts is lower and thus allows for higher purchasing power. Rates are incredibly low right now.

The 2020 IPO Pipeline

Last spring, I wrote a post about the 2019 IPO pipeline and what I felt was a more realistic impact to the local real estate prices. I believe my general thoughts were fairly accurate. Uber/Lyft/Pintrest/Slack were some of those companies with big exits, but also saw underperforming stock performance post-IPO. They were still highly beneficial for those employees who got liquidity events.

https://taosiliconvalley.com/2019/04/22/huge-2019-san-francisco-ipo-pipeline-speculations-abound-on-impact-to-real-estate-prices/

In 2020, there is another wave of companies expected to file their S-1 (SEC filing to go public). Some well known names include gitlab, snowflake, credit karma and airbnb. There year is young, much can change, but if some of the expected companies do go public this year, we will see some impact to real estate prices in the area and it’s also an indicator of the continued strength of the economy/stock market lending itself well to overall real estate market.

Google/Facebook Effect

ONE TRILLION DOLLARS. Let’s let that sink in. TRILLION, not Billion with a B but Trillion with a T. Let me see if my old school (non common core) math still works. That’s 1 MILLION MILLION dollars (yes, I actually ended up using calculator to confirm). That’s the current market cap of Google who has a huge presence in SF, Peninsula (their youtube business based in San Bruno) and South Bay.

Then, from a Peninsula perspective, Facebook is about to move a large Oculus business unit into Burlingame Point a now 1 million+ square feet of new office space east of 101 freeway. Ugh, I think it’s safe to say we will see some additional traffic on 101, and more people wishing to live in mid-Peninsula and SF.

https://taosiliconvalley.com/2018/08/23/the-google-facebook-effect-coming-soon-to-mid-peninsula-real-estate/

And The New Year Begins

The first handful of listings have come on market the 1st week of January, and gone into escrow with multiple offers. I know of several SFR with list prices between $1.4-1.7 million range in Belmont, San Carlos and one in Central Richmond of SF that had 3+ offers.  And I also know each of the property had over 20+ disclosure packages requested which is an indicator of interested, and qualified buyers who had that as a budget. The interesting data point is that we know at the start of January, which is still a slower time of year that there is quite a large number of buyers who are actively looking for properties.

Fear not for buyers who wish to purchase in a competitive market. My last few buyer clients successfully purchased their houses with significant competition of 4 offers, 7 offers, 7 offers and one we were able to purchase off-market. There are a lot that goes into being competitive above and beyond just price. I also know of many fantastic houses coming on the market, including one of my upcoming listings of a SF house on a premium street in a great neighborhood.

Black Swan Risk Factors

Things can and do sometimes change quickly. We know there are no guarantees with respect to stock and real estate market. Although many of the current indicators show positive continued data, there are also macro conditions that can affect consumer confidence. Below are a few examples of situations that may affect the markets.

  1. United States get into further and deeper international conflict 
  2. Trump impeachment developments
  3. 2020 is a Presidential election year so people tend to be more nervous about future direction of US

Contact

As always, contact Peter Tao at peter.tao@cbnorcal.com if you ever wish to talk real estate.

Huge 2019 San Francisco IPO Pipeline…. Speculations Abound on Impact to Real Estate Prices!

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Last month, I received multiple emails from friends and clients on an interesting March 7 New York Times article (https://www.nytimes.com/2019/03/07/style/uber-ipo-san-francisco-rich.html) that considered the potential impact on San Francisco real estate prices when employees of these companies gain liquidity on stock options post-IPO. Shortly thereafter, a plethora of articles came out on the subject with respect to the SF real estate market. Below are links to some of these articles from publishers.

http://fortune.com/2019/03/08/san-francisco-housing-price-surge-expected-with-new-ipo-millionaires/

https://www.curbed.com/2019/3/19/18271522/san-francisco-real-estate-tech-ipo-airbnb-uber

https://techcrunch.com/2019/04/10/the-ipo-wave-of-2019-wont-upend-the-bay-area-housing-market/

https://www.recode.net/2019/3/19/18256378/tech-worker-afford-buy-homes-san-francisco-facebook-google-uber-lyft-housing-crisis-programmers

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In the NYT article, 2019 projected IPOs include Lyft, Uber, Slack, Postmates, Pintrest and Airbnb. Lyft already went public on Friday, March 29, while Uber filed its S-1 on Thursday, April 11 and Pintrest just went public April 18. Articles are touting that “tens of thousands of employees” will be newly minted (multi) millionaires ready to spend their wealth of fast cars, expensive wines, Michelin-rated restaurants, and of course, real estate.

The emails sliced my thoughts and observations about the current local real estate markets. As a Realtor, I am asked almost daily what I think of the markets and whether real estate prices are trending up or finally cooling off. It has to at some point, right? Only in January 2018, I wrote a blog post on whether SF Bay real estate can sustain its growth trajectory. https://taosiliconvalley.com/2018/01/24/wow-what-a-strong-2017-in-terms-of-price-appreciation-and-stock-market-gains/

Every first time homebuyer in the last few years feared they were buying near the peak of the market. Regardless of that fear, all my buyer clients were ecstatic that they were now “in Bay Area real estate”. Although we all discuss real estate as an investment, a property also has the significant benefit of a certain lifestyle and place to start the next phase of life; it’s not pure financial decisions. With last month’s flurry of IPO articles, people’s view of near term future real estate prices have trended significantly more optimistic and seems to have assuaged much of buyer near term fears. But let’s dig a bit deeper than what these mainstream articles proclaim. Although directionally interesting, they don’t fully capture the nuances/details important in evaluating potential impact on the demand side of the equation. (https://taosiliconvalley.com/2013/08/26/microeconomics-101-for-real-estate-2/)

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Just recently in 2nd half 2018, listings didn’t always sell in the 1st two weeks on MLS – some properties actually sold with no competition and some were taken off the market until the new year. Articles at that time questioned if this was finally the start of a market slowdown. We now know the answer – it has been a resounding “no”. Some data from late January came out in SF Chronicle. https://www.sfgate.com/business/networth/article/Bay-Area-housing-market-cools-but-it-s-still-13578433.php

My friends regularly ask my opinions on the SF Bay real estate and financial stock markets given my daily Realtor job, my BS/MBA in finance, and my former role as a start-up technology executive where I still keep up-to-date and have many high level connections in the industry. I have always tried to combine both my practical on-the-ground real estate knowledge with my previous analytical experiences to provide some directional and risk/reward/probabilities framework to friends and clients.

Before diving into some thoughts, note the following disclaimers: these are a) my personal ideas and not that of Coldwell Banker, b) high level overview and not a result of deep data analysis, c) recognize that the economy, stock market and thus real estate market can and do change very rapidly, d) commentary meant more to spur conversation rather than making any predictions, and e) a single macro-level trigger could shift the market rapidly and derail the IPO pipeline, economy and/or stock prices.

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Articles on the SF IPO pipeline and its effect on the local real estate market somewhat over-simplify their analysis, and leave out several nuanced factors.

  • There were many successful IPOs from recent years that did not garner the same headlines as this batch in 2019. The 2019 IPO pipeline contains many high profile consumer technology companies (Uber, Lyft, Pintrest, Airbnb, etc) compared with companies of past years which may have been more software, cloud, biotech and other less consumer recognizable names garnering less sensational news coverage. With that being said, this current crop does have some huge valuations historically unseen.
  • IPOs are not the only form of liquidity events. Late stage venture funding and acquisitions are often liquidity events for founders, and early employees that are often unreported. For example, some early employees of Uber have already cashed out part of their options. https://www.pymnts.com/news/ridesharing/2017/uber-offers-longtime-employees-a-liquidity-event/. Others may have included a portion of their equity in a recent funding round. Most stock option grants have an accelerated vesting provision in a “change of control” situation. I have heard from my start-up and venture capitalist friends that more and more privately held companies want to remain private to avoid the scrutiny and higher costs as a public company, given the advent of significant capital available from late stage venture funds. Thus, some of the people who stand to gain with these IPOs may have already cashed out part of their equity earlier and already purchased real estate.
  • A much smaller percentage of total reported full-time employees at these SF IPOs will see a “significant” cash windfall than what these articles purport:
    1. Options are vested over typically a 3-4 year vesting cycle. With a rapidly growing employee base, a large percentage of employees have less than 2 years of tenure.
    2. The more recently hired employees don’t receive as much stock options as earlier employees once companies gain traction and raise multiple stages of venture funding opting to pay competitive base salaries in lieu of big options grants. Majority of full-time employees will receive some options, and a liquidity event is something to celebrate and is meaningful, but may not be quite the impact that these articles purport.
    3. There is typically a 6-month lockout period post-IPO for employees. A lot can happen during that time. For example, Lyft went public on 3/29 and as of 4/19; their stock price dropped 19%.
    4. Although the companies such as Uber, and Lyft are SF based, their full-time employees are based all around the globe, so only a fraction of these employees are local. But yes, being headquartered in SF means that many of the executives and senior manager have some concentration in San Francisco.
  • After a 6-month lockout, most employees do not suddenly cash out of their entire vested equity. Yes, some will sell a portion of their stock to purchase things or just to diversify their portfolio, but it’s not typically a sudden rush to sell it all when the lockout end. A blog post I wrote a few years ago talked a bit about my experience with lockouts and risk of illiquid in-the-money options. https://taosiliconvalley.com/2015/12/15/the-epic-story-of-unicorns-and-dragons/
  • These articles discuss primarily the city of San Francisco real estate market. Only a fraction of those who work in San Francisco will want to buy in SF. Some will choose to buy in the Peninsula, and some will go to East Bay or Marin. Thus, the influx of people who now may qualify to purchase real estate or become move up buyers will not just be concentrated in the 47 square miles of beloved SF. Why?
  1. They can typically buy a more spacious property elsewhere outside city of SF.
  2. Cities outside SF have higher rated public schools – a very significant factor even if people don’t have kids yet.
  3. Those who choose to live in Peninsula (San Mateo county) want the flexibility in being in the midpoint between technology hubs in SF and South Bay. Silicon Valley is still the center of major high tech employers. Living in SF makes for a long commute to South Bay, even with the many company shuttle buses that pick up and drop off in various locations in San Francisco. https://www.citylab.com/transportation/2016/09/the-reach-of-the-bay-areas-tech-buses/500435/ Dual career households are commonplace nowadays for the young couples/families so having reasonable commute flexibility is paramount.
  4. Bay Area has fairly decent public transportation such as BART and Caltrain that allows people to live in East Bay or Peninsula and commute to SF.
  • Discussion has been San Francisco companies based, but there are other Bay Area IPOs on the horizon that will have a cumulative affect driving higher demand too. For example, Zoom Video just went public on April 18 the same day as Pintrest. Zoom if based in San Jose which itself is seeing a surge of interest in downtown real estate. Rubrik, a Palo Alto based unicorn is also on the IPO horizon.

Start of 2019 has been very busy for me as Realtor and I have been active in different price ranges. I have had multiple listings and multiple buyers close escrow at the start of 2019. In each case where I represented the Sellers or the Buyers, there were 5+ offers in competitive situations.

We shall see what happens in Q4 this year and into Q1 2020 when companies who went public and have their 6 months lockouts expire. Will there really be an anxious rush to buy real estate driving up prices or will the market be able to more slowly absorb it into existing inventory over a longer period of time? In 2020, there is a macroeconomic factor – a Presidential election year. In 2016, there was a slowdown in real estate in both transaction volume as well as a small price decline from summer through the elections during a time of uncertainty. After the election, the stock market saw an uptick that also saw real estate prop up in the new year.

Regardless, even with all these additional factors that the popular news articles may not describe, the big SF IPO pipeline is a precursor to an increase in the demand-side of equation for nearby Bay Area real estate. The scale and level of impact that is the unknown. It’s also psychologically affecting both buyers and sellers on their motivation to buy right away, sell right away or wait. With strong job market, limited excess land to build new inventory, fantastic weather, close to mountains/ocean, cultural diversity and the center high tech, there is a reason why real estate is so fascinating and why prices are higher on $/square feet than most of US. There are near-term indicators of continued strong Demand while the Supply (listings) is limited; one must be aware that there are many factors that can affect short term valuation movements that the articles do not consider. As mentioned in previous blog posts, buying with a medium-to-long term horizon has proven for most to be a wise financial investment.

As always, please reach out to Peter Tao anytime if you wish to discuss anything real estate related at peter.tao@cbnorcal.com. Please like my FB page at https://www.facebook.com/PeterTaoProperties/ if you wish to get future posts or my upcoming listings.

MID-PENINSULA YOUTH SPORTS OVERVIEW

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WHAT DOES YOUTH SPORTS HAVE TO DO WITH REAL ESTATE?

I started this SF Bay Area real estate blog 5 years ago to provide an on the ground analytical perspective of real estate. Most realtor blogs focus on property listings, and wished to produce something different. Given my former background in finance, banking and high technology startups, I felt I had a unique perspective of assessing real estate properties valued by my Silicon Valley oriented clients and friends. Several of my blog posts over the years have organically garnered high Google keyword rankings depicting that my posts have unique content.

This article will stray away from my usual analytically oriented topics and into the realm of youth sports in the Mid-Peninsula – from Burlingame, Hillsborough, San Mateo, Belmont, San Carlos, Foster City, Redwood Shores, Redwood City to Menlo Park. Youth sports organizations are booming right now and a key aspect of one’s community for those families with kids who play sports. http://time.com/4913687/how-kids-sports-became-15-billion-industry/. Back when I was growing up, we mostly played sports in our yards/parks/streets with friends most of the year. Yes, some would play little league or soccer or do some summer basketball camps, but they were highly seasonal and only the rare kid did a single sport year round. Nowadays, there are year round club sports for almost everything. What is interesting is that different cities with different public and private schools have strengths in different sports with various levels of opportunities with club teams. The nuances are hard to discern until one’s children are of age, show an interest in sports and have parents who support the endeavor. Youth sports dynamics usually are not a top consideration when homebuyers prioritize. Characteristics such as transportation, schools, amenities, neighborhood feel, proximity to work, and property condition/style/layout generally are the most important factors, as it should. However, it is always interesting to get emails/calls from my past clients and friends who now have older children asking me for advice/recommendations on youth sports given my long-term involvement in Mid-Peninsula sports scene.

WHY I AM PASSIONATE ABOUT YOUTH SPORTS

In a past life I had a demanding corporate career as a VP-Business Development/GM for high-profile technology startups (one went IPO and one was acquired), and M&A/Strategy for Fortune 500 companies. I managed large teams of people with aggressive P/L goals that led to long work hours. Growing up in a single-working mother household who didn’t get home until late, I knew I wanted to be an active parent when I had children.

I have always been passionate about real estate, been licensed since 2002, so going into real estate was natural progression. Although work schedules are unpredictable, it’s allowed me ability to coach my kids in sports, volunteer actively in the community, and work with my clients/friends on one of their most important financial/life decisions. Its been rewarding to be both involved in my community and with my kids, while still ranking as a top producing agent at my Coldwell Banker San Carlos office.

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MY INVOLVEMENT WITH VARIOUS SPORTS

I have a high school son, and middle school daughter who were exposed to different sports over the years. I am in my 6th year on the Board of Directors at National Junior Basketball (“NJB”) Sequoia Chapter having served previously as the volunteer Chapter Director/President for three years – the chapter fields 30+ boys and girls basketball teams spanning 3rd to 8th grades from Burlingame down to Redwood City. Through this role, I’ve become friendly with many sports and civic leaders, and I have had the special pleasure of working with amazing volunteer Board members at NJB who “do it for the kids!” Thanks Sean F. for taking over this season and doing awesome job! Having coached 8 soccer teams and 10 basketball teams are experiences I cherish. Thus, I have an experienced perspective in the landscape of youth soccer, basketball, tennis, and other sports locally.

REAL ESTATE

There are opportunities for every sport in every city, although each city/school has its strengths and weaknesses in specific sports. Why is this relevant to real estate? In this day and age, youth sports are no longer about neighborhood kids meeting up at someone’s house to play outdoor games. Kids who play sports spend more of their time playing in leagues and/or clubs rather than in someone’s yard or at the park. Seems like people’s social community beyond their immediate neighborhood often revolves around their kids’ school/activities, and particularly around youth sports teams if their children are active in sports.

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SOCCER

There are AYSO chapters in each city fielded by volunteer parent coaches that is a great entry into team sports. Organization consists of team banners, all volunteers, equal playing time, positive reinforcement, and after game orange slices build a solid foundation for young kids. I love AYSO and the positive environment it seeks to create for players. Some of my favorite teams I coached for my son and daughter include Star Strikers, Blue Diamonds, Gladiators, Pink Pandas, and Blue Sharks. After U8, my daughter went on to play club soccer for DeAnza Force North (San Mateo). Additional strong club soccer organizations include Burlingame United, Peninsula (Foster City), Belmont United (Belmont & Redwood Shores), San Carlos United, Juventus (Redwood City), and Alpine Strikers (Menlo Park) – they all have teams for boys and girls. These clubs generally compete in Premier, Gold, Silver, Bronze and Cooper levels. Even within the same clubs, the levels will differ depending on the age group. What I have observed is that the club soccer teams are now starting programs for younger age groups as early as U6. Although I understand why clubs are starting this early and why parents are enrolling kids in club soccer at younger age, I have to say that some of my kids best memories were being part of the Star Strikers in U6 girls or the Blue Sharks in U8 boys where my kids made friends with their direct community and I stayed friends with people I coached with and many supportive parents.

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BASKETBALL

The area’s basketball opportunities are numerous, although more fragmented and more confusing to navigate. At the younger ages, YMCA in San Mateo, M&M organized by Ralston Middle School (Belmont) gym teachers, and City of San Carlos/Burlingame basketball leagues are good options. Other organizations in the Peninsula include Legarza, i9 sports, and Next Level. Legarza runs sports camps and leagues in various sports that originally started with basketball and now expanded to other sports. i9 has a franchise/franchisee model. Next Level is interesting as they partner with local High Schools and leverage the HS basketball players to provide gym space and coach kids. These are very attractive options for players who want to play recreationally with lower commitment to practices and less driving all around Northern California to games.

For boy players who are more serious about basketball and want higher competition, options include National Jr. Basketball (“NJB”) and various AAU organizations. NJB Sequoia Chapter covers Burlingame to North Redwood City while NJB Redwood Chapter covers South Redwood City to Menlo Park. Up North, AAU boys teams include Renegades, Lunardi, and Peninsula Basketball. Further South is Supreme Kourt, which my son played for and led by my friend and one of the best skill development coaches around – Royce Nelson. There is also Team Esface based in Redwood City, and Atherton Bulldogs.

On the girl side, there is also NJB plus a couple strong AAU clubs: 1) Renegades out of San Mateo run by a Serra coach who I’ve played pick-up basketball with Darrick DeLeon, and 2) Torch out of Atherton led by a former Stanford PG and current Sacred Heart varsity coach Melanie Murphy which my daughter currently plays on and really likes.

Additional competitive and good leagues include the very popular Japanese leagues and Asian Leagues around the Bay Area. These Asian leagues/tournaments field top tier competition with top players. I have many adult basketball friends who played on these teams growing up in Bay Area and they have told me that some of their best friends were made playing for those teams. In the mid-Peninsula for both boy and girl teams, there is the Asian-based Foster City Flyers and JYO for Japanese league.

BASEBALL

Baseball and softball are very popular sports across the board. Cities have their own little league and softball organization. Above and beyond little league, for the more serious players, there are club opportunities to play almost year-round. What was interesting is seeing growth in certain youth sports registrations in the season immediately after the Warriors or the Giants win a league championship. In the last 10 years, the Giants have won in 2002, 2004 and 2006 while the Golden State Warriors won 2015, 2016, and 2018. I still remember back in the summer 2013, it was quite exciting for Belmont and Redwood Shores. The little league all-star team of 10-12 year olds went on a roll and advanced all the way to Western US finals – just 1 game away from advancing to Little League World Series in Williamsport, PA. It was quite exciting particularly as I knew a couple of the players and coaches. Right after that season, an already popular sport became even more so as kids wanted to strive for similar goals.

OTHER SPORTS

Lacrosse is an increasingly popular sport in the area. There aren’t the city leagues like some of the other sports, but a couple of well regarded clubs based in the area. The Coyotes based in Burlingame and Firehawks based in south part of San Mateo county. I only know because I play basketball at the Bay Club Redwood Shores with a couple Firehawks coaches, one of whom is also the assistant coach for Carlmont High varsity lacrosse team, and another who is the head varsity coach for Sequoia High. I wish I considered playing lacrosse growing up as it looks like a lot of fun with similarities to basketball and soccer.

For tennis enthusiasts, Foster City seems to produce a lot of strong tennis players. Their middle school has fielded top teams for over 10 years straight that then feeds into the various San Mateo high schools. I suspect it’s that Foster City has more public tennis courts than other cities. Around the Menlo Park/Portola Valley/Woodside area, some of the top private tennis clubs are tucked in those very nice communities – Ladera Oaks and Alpine Hills. Ladera’s head tennis pro is one of my son’s friend’s dad, Ray Bilsey who is excellent. My son who is on his high school tennis team trains at Bay Club Redwood Shores which has a great youth program and nice facilities coached by long-time head coach John Hubbell who has coached some of the top tennis players in the state.

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Those who like to run, Belmont’s got one of the premiere cross-country trails in the Bay Area – Crystal Springs Cross-Country by Hallmark park. Trails are absolutely stunning, well cared for and well marked. This trail was practically built by my former Coldwell Banker San Carlos office broker’s husband Bob Rush who continues to maintain the trails to this day. It can be used year round. During the fall, middle and high schools schedule cross-country meets there and they travel from all over. I am not a jogger, but if I were, I’d be running on these trails regularly.

FINAL THOUGHTS

  • Obviously not every organization was covered, but I included the ones I am familiar with or have heard about
  • Just because a club is bigger or more well known doesn’t necessarily mean one is better than the other, but it is also highly dictated by the coach, coaching style and make up of the team
  • Lots of coaching turnover/changes from season to season in these team sports that can impact a player, so definitely expect that
  • Don’t discount community based leagues with parent coaches for the fun and community aspect of it
  • Check out Positive Coaching Alliance website for tips to coaches and parents
  • I’ve had the great pleasure of coaching with a lot of phenomenal parents who many I call friends, shout out to Steve S., Peter A., Roc P., Steve O., Jeff M., Kevin G., Gary C., Todd LV, Joe H., Rob W., Rick S., Tim T., Tim N., Ed S., Will R.

As always, please reach out to me at peter.tao@cbnorcal.com or 650-504-7588 cell if you wish to discuss either of my two passions of real estate and youth sports. Please “like” my Facebook page at https://www.facebook.com/PeterTaoProperties/ and comment on any of my blog posts! Thank you for reading.

The “Google/Facebook/Apple Effect” Coming Soon to Mid-Peninsula Real Estate…

Back in 1996 when I moved to SF Bay Area from NYC after graduating with my MBA, South Bay (“Silicon Valley”) for technology companies, San Francisco for financial services and the Peninsula was a convenient place in between SF and South Bay that had Oracle and some other companies here or there. We chose to buy a house in mid-Peninsula and establish roots here nearly 20 years ago largely due to providing maximum career flexibility in being equidistant between SF, San Jose and Oakland with easy access to all 3 airports.

Circa 2018, San Mateo County is hot with major technology companies and venture funded startups taking on commercial leases of significant square footage with the many new commercial developments around towns. For example, Redwood City is headquarters for Box, Shutterfly, Equinix and many start-ups. Having more and more companies settle around here bodes well for employment growth, and desirability of living nearby to lessen commute times. How does the real estate future look further down the road in 2023? Two big names – the proverbial 800 lb. gorilla: Google and Facebook.

20 years ago, Mountain View (“MV”) was far less desirable city to live in than nearby Cupertino, Palo Alto or Menlo Park. I had a friend who relocated to Bay Area in 1997 and shared a rental house in Mountain View. The house wasn’t great, the neighborhood was questionable and there was nothing to do nearby. Since Google started expanding ferociously in MV with employees working very long hours, people wanted to live nearby work. Then, after Google went IPO in 2004, many employees suddenly was flush with cash and started purchasing real estate; Mountain View started really catching up in pricing metrics to its more expensive neighbors, then more and more nicer restaurants, bars, retail began opening up rendering MV even more desirable. Now Mountain View is an expensive city to live….and that aforementioned starter home in MV would probably sell for close to $2 million. The “Google Effect” on residential real estate.

Menlo Park has always been a highly sought after city with fantastic schools, proximity to Stanford and accessibility to South Bay. Once Facebook exploded on the scene, that had a ripple effect on East MP, Redwood City and even across the Dumbarton Bridge into Fremont and the likes (no pun intended). The current MP headquarters had previously been the HQ of Sun Microsystem, so the incremental impact didn’t have the same boom that Google had on MV. But when FB prior to its IPO, I know that they offered a housing stipend to anyone who lived within some miles from campus given the long hours employees were working to change how the world communicates through social media.

So in 2014, Google purchase approximately 1 million (pinky pointed to mouth emphasizing the M) square feet at Paciific Shores in East side of Redwood City. The offices were mostly leased up, so it would take some years for Google to vacate some tenants, do tenant improvements to Google standards, and then slowly move into the buildings. See link for details. https://www.bizjournals.com/sanjose/news/2014/10/03/google-to-buy-big-chunk-of-pacific-shores-iconic.html. Additionally, Googles rapidly growing Youtube business unit out of San Bruno has been aggressively purchasing office buildings in San Bruno just off the 380 freeway to expand growth at Youtube too. The price appreciation in San Bruno will also be interesting for those buyers who can afford more house in SB than in Burlingame, Millbrae, San Mateo or for those who work at Youtube or in South SF where many biotech firms exist.

The impetus for this article stemmed from recent news that Facebook was close to negotiating around 800k square foot of new commercial space in tony Burlingame. This would greatly affect the mid-Peninsula as FB fills this space with employees. https://news.theregistrysf.com/facebook-eyes-burlingame-with-800000-sqft-lease-at-kyllis-burlingame-point-development/ We won’t observe the direct impact on Peninsula real estate prices in the near term. However, as referenced in previous articles, land is in very short supply in the mid-Peninsula to build new residential housing units, while it appears that we will see greater demand in the medium term future.

Many analysts believe the housing boom is nearing an end in the next 2 years – but I heard the same scuttlebutt and “analysis” 2 years ago too. What do you all think? Do you think there will be a Google/FB effect in next few years? Or do you think the greater economy might eventually soften before that and lessen their impact? How about those of you who live outside the SF Bay Area, have you observed cities impacted by growth of a particular company or industry?

As always, feel free to email me at peter.tao@cbnorcal.com if you wish to discuss/brainstorm SF Bay real estate. Be sure to like my FB Page at https://www.facebook.com/PeterTaoProperties

 

Neighborhoods Close to Downtown Areas and Transportation Options are HOT – San Mateo Village and Other Neighborhoods West of 101 and East of El Camino Real Prime Examples!

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Serenity, views, privacy have always been highly sought after characteristics in real estate and continue to command premiums. In the mid-Peninsula, I predicted a trend 5+ years that neighborhoods close to downtown areas of shopping, restaurants and public/private transportation will see above average appreciation as buyers are attracted to areas that require less driving. As the Bay Area economy booms, we see negative impacts to the 101 and 280 freeway traffic and bridge backups; rush house seems to start earlier and earlier. In particular, neighborhoods East of El Camino Real and West of 101 freeway are seeing a huge demand surge of buyers who want to be in close proximity to amenities. Examples of neighborhoods include Mateo/Glendale Village in San Mateo, and Clearfield Park around Laureola Park in San Carlos, are good examples of HOT, HOT neighborhoods in these sub-markets.

You may see on some listings that tout the Walk Score. The Walk Score is calculated by a company, which factors in the “walkability” to amenities such as businesses, parks, theaters, schools, restaurants, retail, transportation and other common destinations. The Walk Score output can be interpreted as:

Walk Score® Description
90–100 Walker’s Paradise
70–89 Very Walkable
50–69 Somewhat Walkable
25–49 Car-Dependent
0–24 Car-Dependent

Generally, 90+ Walk score are in high-density cities such as San Francisco. In suburban cities, neighborhoods scoring in the 50-80 ranges are generally considered in prime areas near amenities highly attractive to many of today’s homebuyers. For example, I had a great listing in San Mateo Village recently that was just blocks away from the Caltrain station, Hillsdale Mall (undergoing a major expansion upgrade), Whole Foods, Franklin Templeton headquarters, Bay Meadows, 101/92 freeways. Based on close to 200 groups attending the open houses, many buyers reviewing disclosures, and the significant number of offers on the house driving price 22% higher than list, the feedback from buyers (besides the beautiful house itself) was the extremely convenient location close to everything.

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San Mateo/Glendale Village Comparison to Areas W. of El Camino Real

    900 to 1500 SF   900 to 1500 SF  
1/1-5/31 # W. ECR San Mateo # San Mateo Village  
2013 18 694.41 12 641.6 108%
           
2018 16 1314.77 10 1290.75 102%
    89%   101%  

We know every SF Bay property has appreciated significantly in the past 5+ years. If you purchased a property, you did well. “The market is hot”. What constitutes whether a particular neighborhood is “hotter than another”? One gauge might be the percentage appreciation over time relative to the broader market and did it appreciate higher than average. For example, let’s take the aforementioned San Mateo/Glendale Village (“The Village”). In 2013, for a Single Family Residence (“SFR”) between 900-1500 square feet from January 1 to May 31, 2013, the average $/square feet was $641.60; in 2018 from January 1 to May 31, the average was $1,290.75. Compared this with the average $694.41 $/square feet for all SFR in San Mateo West of El Camino Real in 2012 and $1,314.77 $/square feet in 2018. The Village appreciated an incredible 101% in 6 years, while West San Mateo appreciated still a very high 89%. The Village seems to have appreciated at a higher percentage than the historically popular West San Mateo.

Key characteristics in the Bay Area affecting this trend towards living in locations close to things include:

  • Traffic seems to get worse and worse. A recent article suggests that sections of 101 freeway show traffic at 80% worse in 2017 than in 2010. Don’t know how they measured it, but it seems directionally correct from my daily experiences. People already spend quite a bit of time commuting to and from work. When they are home, people don’t want to spend more time in their cars.
  • Being close to public transportation such as Caltrain, BART, technology shuttle buses, and Samtrans provides attractive commuting alternatives.
  • Those that are able to purchase in this expensive area tend to work in demanding jobs. Many of those who chose to live in SF Bay want to be part of the action.

That doesn’t mean everyone wants to be close to a downtown area. Many still prefer being away from everything when they get home. In the current low supply, market, it seems every neighborhood sees strong demand. As I have written about in past blog posts, purchasing real estate isn’t just about financial considerations, but a lifestyle.

As always, anyone want to talk real estate on any topic, feel free to reach out to me at p_tao@yahoo.com or 650-504-7588. Please “like” my FB real estate page at www.facebook.com/PeterTaoProperties; it’ll be focused more on articles rather than just marketing my listings.

Wow, what a strong 2017 in terms of price appreciation and stock market gains – will it continue in 2018?

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I wrote a post this time last year discussing uncertainty in the real estate and stock market post Presidential election, along with potential for increase in interest rates. Similar sentiments of uncertainties existed even 2 years ago. The uncertainties turned out to be unfounded as the S&P 500 appreciated EVERY month in 2017 ending at 19%+ higher than start of year. https://seekingalpha.com/article/4134832-stock-market-1st-90-years. Going into 2018, many Wall Street analysts predict the stock market to continue rising, albeit not quite as rapidly as last year. https://www.cbsnews.com/news/can-stock-market-in-2018-possibly-match-perfect-2017/. So what does that mean for real estate?

Our current SF Bay Area real estate boom roughly started at the end of 2012, which has now spanned more than 5 years. The bubble burst occurred approximately 2008-2011. As my BS and MBA degrees were in finance with heavy dose of economics, I recall that the financial and real estate markets over the course of history generally run in full 7 to 10 year economic cycles. We are currently right in the middle of this time span, but yet there are not many indications of an impending slow down.

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Two years ago, I wrote about unicorns – how private company valuations do not necessarily represent liquidity events for a high majority of non-founding employees of these companies. https://taosiliconvalley.com/2015/12/15/the-epic-story-of-unicorns-and-dragons/. With that being said, many investment bankers and financial pundits do forecast some of these unicorns to go public in 2018. https://www.marketwatch.com/story/ipos-in-2018-here-are-six-tech-companies-that-could-go-public-2017-12-26. Many of these potential IPO companies are based in San Francisco, Peninsula or South Bay. Should even a few of these companies go public, we can expect some thousands of employees unlock previously illiquid paper wealth into cash that will motivate some of them to enter the real estate market, upgrade houses and/or buy investment property. This would have a material impact on real estate demand, and thus valuations.

My most popular blog post titled “Microeconomics for Real Estate 101” is the #1 ranked Google search result if you type Microeconomics Real Estate! Search Engine Optimization (SEO), baby…and I didn’t even try! 5 years later, same dynamic of a) strong demand and b) tight supply yield consistent price appreciation. For example, in Belmont and San Carlos, two appealing cities with top public schools, great location and strong community (as of January 23, 2018), there are only 13 single family residences (houses) Active in MLS at all prices. What if you are a 1st time buyer under $1.5 million? There are only 2 (yes, not a typo, two) houses listed under $1.5m across 2 major cities in the Peninsula.

For the last 2-3 years or so, EVERY buyer client of mine asked if they are buying at the peak of the market. No one has a crystal ball and can predict with certainty. We all have our personal predictions/opinions of course. It’s tough on 1st time buyers looking at historical price appreciation of properties in the SF Bay Area. I always like to fall back on my own personal situation. Back in 1999, we were looking to purchase our 1st house in mid-Peninsula. We outbid many other buyers and were paying record prices for a small house. I told my wife that we may be buying at the peak of the market, but that the Bay Area would be our long-term home; regardless of whether the market goes down in the near term, I was confident over the course of the medium to long term, Bay Area real estate would prove to be a great investment. We ended up buying a larger house in the area, and sold this original house in 2005 with an ROI of over 400% (due to leverage)! The market had in fact deflated approximately 2001 but then came roaring back shortly thereafter.

The key to psychologically overcoming the SF Bay Area market is to view any real estate investment in the medium to long term. If you plan to be a SF Bay Area resident in the long term, is it higher risk to be in the market or out of the market? And keep in mind, unlike buying stocks, bonds, mutual funds and ETFs, you actually also gain enjoyment and comfort with acquiring property as opposed to financial securities. As always, anyone who wishes to talk real estate with me, ping me anytime.

 

2017 – the year of uncertainty with mortgage rates, stock market and the new President…

Average
1990 10.13%
1991 9.25%
1992 8.39%
1993 7.31%
1994 8.34%
1995 7.93%
1996 7.81%
1997 7.60%
1998 6.94%
1999 7.44%
2000 8.05%
2001 6.97%
2002 6.54%
2003 5.83%
2004 5.84%
2005 5.87%
2006 6.41%
2007 6.34%
2008 6.03%
2009 5.04%
2010 4.69%
2011 4.45%
2012 3.66%
2013 3.98%
2014 4.17%
2015 3.85%
2016 3.65%

The above chart is compiled by government entity Freddie Mac on 30 year fixed rate mortgages. See link for source. http://www.freddiemac.com/pmms/pmms30.htm. In November 2013, when mortgage rates went up to the low 4% range, I wrote a blog post on mortgage rates and highlighted key considerations for home buyers as well as offer historical and life perspectives on how to factor that into home buying decisions. I just re-read the post for 1st time in a few years, and I stand by all the key points mentioned. In fact, since it was published, rates for most of the last 3 years hovered below 4% and only recently increased to the low 4%. You can read my original blog post at https://taosiliconvalley.com/2013/11/08/mortgage-rates-have-risen-since-its-all-time-low-should-this-impact-your-timing-to-buy/.

As you can see, low 4% by historical standards is still incredibly low. I was cleaning out my garage last month and came across files from 1999 when I bought by first house. My first mortgage stood above 7% (yes, that is seven). No joke. Then when I refinanced later at 5-6%, I thought it was the lowest it would go, then refinanced again at 4-5%. Never during those times did I ever think it could ever get below 5%, let alone 4%. Two key considerations in today’s market would be 1) rates are still very historically low, 2) no one can completely predict where interest rates will go.

In my original blog post, I calculated payment differences on a sample mortgage based on an increase in interest rate. Will increase in mortgage rates affect average housing prices? Mathematically, yes. But there are other factors that also factor into housing prices such as local economy, supply and demand dynamics, stock market, and macroeconomic factors creating “noise” in housing prices.

This blogs most popular post was also from 2013 titled Microeconomics 101 for Real Estate. This post actually gets quite a bit of traffic, as if you Google “microeconomics real estate” my blog shows up in the #1 slot of Google results! SEO traffic baby! So basically, supply in SF and San Mateo counties is very low. That is somewhat to be expected as we are only in late January, but historically we do start seeing more listings come on the market starting about now.

There also seems to be a sentiment of uncertainty with respect to a new President. A highly controversial President is probably creating  uncertainty as well. 

I don’t have a crystal ball on what will happen. I continue to tell my friends, family and clients that no one can predict what will happen to the stock market or real estate prices. If they could, they’d be able to take advantage of it in the markets and retire from it. I’ve read many economists predict that there will be higher interest rates and inflation in 2017. I certainly believe this to be a strong possibility. However, some predicted that last year too. What I am bullish on is the overall strength of our local Silicon Valley economy. Who knows what will happen in 2017 as there could be short term movements in real estate values and stock prices up or down? But if the SF Bay Area is a medium to long term home for you, my belief is it’s a higher risk to try to time the market perfectly and be out of the market than it is to jump in. In my very 1st blog post, I wrote about buying my 1st house in 1999 in San mateo where I thought there was a high probability I was buying at the markets high point. Wow, 20/20 hindsight and the thought that I was worried I overpaid is quite amusing. 

Here’s to a fruitful, safe and healthy 2017 to all.

The Epic Story of Unicorns and Dragons

Unicorns are everywhere in SF Bay Area! It seems like we read about new “Unicorns” being created every week. The mythical Unicorn is described as a beast with a large, pointed, spiraling horn projecting from its forehead. Ancient Greeks and other European folklore reference the unicorn throughout history. I even have a first cousin who built a hugely popular Unicorn propelled vehicle where he rides around at Burning Man, the Maker Faire and parks around Davis, CA drawing hoards of attention. We all love unicorns. But alas, I don’t speak of the legendary beast. I reference those privately held technology companies with private valuations of over $1 billion dollars labeled as a “Unicorn”. As tracked by the Wall Street Journal and Dow Jones Venture Source study, there are now approximately 116 Unicorn companies, including Uber, Snapchat, Airbnb, and Dropbox with a large percentage of them based on the SF Bay Area. Are Unicorns real or mythology? Does working for a Unicorn equate to wealth and happiness in life? And how does the Unicorn SF Bay Area economy translate to the local real estate market?

dragon

But have you heard of the growing “Dragons” within the mid-Peninsula? It used to be that there was only one Dragon in the mid-Peninsula, but now the Dragon community has grown to several more just the past year or two. Confused? Yes, the creatures with the serpentine and reptilian traits that may even spit fire and fly! Dragons are in Greek Mythology and prevalent in Chinese culture – sometimes in fierce settings and other times symbolizing wealth and power. Well, Dragons in this untold story are mid-Peninsula cities with houses that now command a minimum of $1 million for a small 1,000 sq. ft. or larger house (as defined as single family residence). Although these 1,000 sq. ft. houses are not large, they are highly appealing due to a great convenient location to SF and Silicon Valley in the mid-Peninsula, and have strong school districts. There is a small, but growing list of cities that I now call a “Dragon” city. Just 2 years ago, the only city that may be labeled a Dragon was Hillsborough. You can now add Belmont, Foster City, Burlingame and Redwood Shores to the list. Do note this categorization includes on SFR and not condo/townhouses that may be had for less than $1 million. By the way, I believe I just invented this new terminology, “Dragon”, which is probably why you have not heard of it before.

In Belmont and Redwood Shores, often linked together given the same highly ranked Belmont-Redwood Shores school district, a year ago had one last neighborhood of Sterling Downs/Homeview where fixer-upper small houses could be had for $850-900k. However, in 2015, the same small 2/1 or 3/1 1000 sq. ft. with 5,000 sq. ft. lot houses in the neighborhood were selling for between $1.0-1.2 million. The top ranked school district certainly has propelled Belmont prices in past few years. See my earlier post on Belmont at this link. https://taosiliconvalley.com/2014/06/17/why-belmont-housing-is-hot/

Up until a year ago, there were some pockets of homes in mid-Peninsula where there may have been a few under $1 million fixer upper houses, particularly in Lyon-Hoag, Burlingame Gardens and the neighborhoods between 101 and Caltrain tracks. However, Burlingame is firmly a Dragon now. In the past 180 days, there were 112 SFR properties sold in Burlingame and only 2 of them sold under $1.2 million ($1.06 and 1.198mm). Yes, the Burlingame Dragon is fire-spitting fierce.

Those who are familiar with mid-Peninsula might be asking why isn’t San Carlos or Menlo Park included as a Dragon? In San Carlos, there is one last bastion of houses that can still be had for between $900k to $1 million in the Clearfield Park neighborhood walking distance to Laureola Park. That is the neighborhood located between El Camino Real and 101 on either side of Holly street. Make no mistake, houses that are upgraded goes above $1 million, including a recent sale on very busy Holly street that went above that threshold. However, there have been some recent sales below $1 million for fixer upper 2 bedroom 1 bath around 1000 sq. ft. houses. So if you want to get into the San Carlos school district living in a house, you may consider this neighborhood. And in Menlo Park, right next to the Facebook headquarter campus, there is a neighborhood called Bellehaven that may have houses just below $1 million. Both of these cities may very well be a Dragon within the next year if the real estate market continues to appreciate.

There have been recent articles in the Economist discussing the Unicorn valuations and the difference between private company valuations vs. realities that many/most of these private companies never see true liquidity events for the non-executive employees to truly cash out, as well as the inflated private valuations that provide preferential structures to VC and PE firms as well as founders that ultimately dilute the common shareholder should there be a acquisition or future funding round or IPO.

http://www.economist.com/news/leaders/21679194-correction-startup-valuations-would-be-good-news-technology-sector-gored

http://www.economist.com/news/business/21677192-fable-unicorn-theranos-much-hyped-medical-startup-plagued-doubts

I have been lucky to be part of two great start-up companies back in my former start-up corporate life. I had been a VP-level executive at a high profile Internet company that went public in 1999 during the first dot com bubble and reached over a $1 billion market cap – this is 16 years ago when $1 billion was a really, really big number and impressive. Then, I held a senior position in 2007 for another high profile Internet company that sold to a private equity firm for $1.2 billion valuation which was one of the 1st companies to achieve a huge return for VC investors post bubble.

Although there was a nice financial gain in aggregate, in both instances the upside was severely capped due to stock being illiquid. One had a 6-month post IPO lockout, and the second had been bought by a PE firm who bought majority stake, with the minority stake and unvested portion remaining privately held. Eventually I found out the second Unicorn went through difficulties and company recapitalized with the value of my share holding down to zero; thus, I will now have a $3k capital loss write off for the remainder of my life recouping the AMT tax I paid to Uncle Sam over 7 years ago. Thus, as you read about all these Unicorns being created, just note that majority of non-executive/founder employees at these companies have not yet profited from their stock options.

uncle-sam

Why do I say I was “lucky” even though my private stock options never yielded the financial homerun that I held on paper? Three reasons. First, to this day, I am really good friends and business confidants with many of my former colleagues that I value more that money. Second, those were really fun formative years where I grew professionally and personally and felt I was part of something revolutionary. And third, those experiences in the high tech start-up world has allowed me a very unique perspective to the SF Bay Area real estate in a in strongly technology driven marketplace where I’ve “did it and done it” that allow me to adeptly navigate the competitive landscape of real estate.

On the real estate side, I have owned real estate located in the mid-Peninsula since 1999, and have seen huge returns. My clients who purchased properties in the past 5 years are obviously all extremely happy they are “in the market” now. I get asked nearly every week what I think the real estate markets will do in the near term. I have inclinations and my thoughts. However, no one can truly predict and time the market perfectly. Two considerations I like to provide is a) that if SF Bay Area real estate is a medium-to-long term hold (similar to the US stock market), over the course of time, the SF Bay real estate market has proven it’s ability to appreciate over the course of a 7-10 year economic cycle and b) particularly for 1st time buyers that unlike other financial investments, even in a downturn, at least the investment in a property can be enjoyed through day-to-day living and that provides some immeasurable intrinsic value.

So to my 1st question of whether Unicorns provide wealth and happiness – it can possibly create wealth, but it is not guaranteed and it can possibly provide some happiness but that is also not guaranteed. And I think most would agree that monetary wealth doesn’t automatically guarantee happiness.

Certainly, the technology industry creating Unicorns does have a direct impact to the creation of Dragons. Regardless, as they say, home is where the heart is; purchasing real estate in expensive SF Bay area is both a decision on financial investment considerations and creating a home to settle in. I suppose housing prices in this area is still lower than the cities in NYC, London, Hong Kong and Toyko; we may need to create a different terminology for those cities, but alas, I’ve used up all my creative writing juices.

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Where’s the Beef? Er, I mean listings on the market more than 2 weeks….What does this mean for potential sellers?

Wheres-the-Beef1

The year was 1984, and a new Wendy’s television commercial caught fire.  An elderly lady with this raspy voice would yell into her telephone asking “where’s the beef?” to some competitor burger joint of Wendy’s complaining about the small hamburger size of their product.  I remember as a kid, everyone in school would use that line for almost any situation. “Where’s the beef?” catchphrase kept going for years after launch.

Current year 2015….over 30 years later…I was just looking at one of my MLS saved searches (on 4/17/15) – single family residence (house) listings Active on MLS in cities from Millbrae down to Palo Alto under $2 million list price that has been Active on MLS for 20 days or more. There are 12 cities in the search.  Guess how many houses there were?  75-150 might be a reasonable guess given the low inventory, high demand real estate market in the mid-Peninsula market.  There were only 25 houses that have been on the market for more than 2 weeks and not pending sale.  That equates to approximately only 2 houses per city.

Although I am not precisely tracking data by recording in a spreadsheet, I have had this internal MLS sort for approximately 4 years now. I do not remember another year, regardless of month of year, where SFR 20+ days in this mid-Peninsula area of 12 cities was able to fit on the 1st page of my web search. Properties sell within 1-2 weeks on the market given low supply and high demand. So, what does that mean for sellers and buyers?

For sellers, you may think this might be all great news.  Both yes, and no.  If you are seller moving out of the SF Bay Area, this should be great news.  Sell your house and be able to buy a bigger house for less money in nearly anywhere else in the US (NYC excluded). Even though other parts of the US also is showing strong appreciation with low inventory situation, it is unlikely to be at the same level as the SF Bay Area.

However, if you were a seller looking to purchase a bigger house in the same area, then there might be challenges. They are not insurmountable, but definitely trickier: 1) buy bigger house 1st if you qualify for 2nd mortgage or can purchase all-cash, then sell current home after purchase, 2) sell current house 1st, negotatiate rent back, and aggressively seek to find AND secure new house before having to move out with back-up plan having to move to temporary residence, and 3) buy bigger house 1st using alternative/hard money lenders, then sell current home after purchase and finally refinancing into traditional mortgage paying off alternative loan. Some other options exist, but those are most common possibilities.

As a seller, it may seem that you may need to do less work to prepare your house for sale. Yes, and No. That may be true to simply “just” sell the house. However, the best agents will still advise you on possibilities to be put your property in the best light to maximize your sale price. Because of my construction project experience, I almost always will talk to my seller clients about possible projects to do to the property prior to selling with some estimated rough range on cost and what the estimated ROI percentages will be on potential upside.  This provides a framework for my clients to decide if the wish to invest time and money into the house to potentially increase sale price. My seller clients really appreciate my outlining in detail their choices so they can make decisions even if they ultimately do the minimum required. Some agents will default to not doing any work or even convince homeowners not to do work, since they can get it on the market sooner and they still know it will sell and it requires less effort to them. Although timing is always a factor in the decision matrix, I believe it is still important for the homeowners to know their options and understand the risk/reward and possible financial outcome of each option.

As always, feel free to contact me if you wish to brainstorm anything related to your home.

 

Should I Stay or Should I Go Now?

“Should I stay or should I go now?
If I go there will be trouble
An if I stay it will be double
So come on and let me know”

TheClashLondonCallingalbumcover_300x300

Those are lyrics by a classic song by The Clash. Okay, so I admit, I’m stretching a bit trying to be amusing and incorporating those lyrics into a blog post that probably should be more succinctly titled “Should I Sell First, Rent, then Buy?”. Last month, the topic of selling your house first, then renting before trying to buy another house has come up in a conversation I had with a friend and during a recent Coldwell Banker office meeting. Thus, I thought it worthwhile to write a blog on the rationale behind this strategy, the inherent risks and the potential benefits. There are various scenarios on why someone would do this and my perspectives change depending how the reason for doing some and your timelines. The following are two common scenarios.

Scenario 1 – The Empty Nester: couple has owned a larger house for a long time, with adult children

In this situation, my friend has lived in a nice, big house in a nice leafy community for decades and now has grown children, and no longer has a need for a large house with a large yard. He and his wife are contemplating the possibility of “downsizing” their house to a) cash out and take some equity out of real estate while their mid-Peninsula house is at an all-time high, b) move closer and within walking distance of an active downtown area in San Carlos, Burlingame or San Mateo, c) change of scenery of just living somewhere different and d) live in a (smaller) single-story house requiring less cleaning and with a lower maintenance yard.

The conversation revolved around the highly common question of do they sell first then buy or buy 1st then sell; I will tackle this bigger question in a separate blog post. My Peninsula friend then said he’d even consider selling first, then renting a San Francisco apartment for a year or two for fun, before contemplating a purchase. In principle, that sounds like a really cool idea. Long time suburbun couple, cashes out of their house as an empty nester, then rents a hip apartment in the big city SF life for a couple years before deciding where to settle back to. From a financial perspective, let’s look at two rudimentary possible market outcomes:

A) the real estate market remains flat/declines or goes up moderately. In this situation, the strategy above would work out very successfully.

B) the local real estate prices continue rising 10-20% per annum. In this situation, being out of Bay Area real estate would come at a negative financial impact. I use the term rudimentary in above paragraph, as you can include dozens of other variables to really determine “financial impact”. For instance, it would be theoretically possible if one freed up capital in selling off a real estate asset and then reinvested that capital in a different investment opportunity that ended up yielding a higher return than if that person remained in real estate; and if you were to include that possibility, you’d need to incorporate “beta” and inherent riskiness between asset classes into that analysis as well. But let’s simplify thing in this following sample calculation. Let’s say your current (larger) house can sell at $1.8 million in Spring 2014 and the target would be to purchase a smaller 3 bedroom, 2 bath house in San Mateo for $1.2 million which would allow you to cash out almost $600k in equity (not factoring in cost of sale, taxes, etc.). What if you sold your current house for $1.8 million, then rented a super-hip SF apartment for 2 years and then started looking to relocated back to mid-Peninsula again in year 2016. And in this situation, the Bay Area real estate market continued going up 15% per year for these two years. That $1.2 million house in 2014 would be priced at $1.587 million yielding net cash of $213k (from the $1.8 million) as the 3 bedroom house would have gone up by $387k. Additionally, there is the cost of the hip apartment rental in SF which will probably be between $4000-6000 per month for a nicer unit in a hip neighborhood which wouldn’t go towards any mortgage principal at all. Now, we aren’t factoring in impact to tax writeoffs, income earned from reinvestment of the freed up capital and other items, but this simple example seeks to illustrate a financial risk in being out of Bay Area real estate market…..in a potentially rising real estate market.

No one knows what any market will do in the short term whether that is stock market, real estate market, currency market, commodities market, etc., but would you be prepared to “gamble” on being out of Bay Area real estate if you ultimately know you wish to own real estate in the long term as both a financial and lifestyle investment?

Scenario 2 – Young Family: seeks to move into bigger house and are not able to buy 1st then sell, so they wish to sell 1st, do short term rental while looking to purchase larger home.

Why would they want/need to do that? They may not have the requisite down payment unless they sold current house, or can qualify for a new mortgage while owning their existing house/mortgage. They may be able to take advantage of having a larger down payment after selling their current house, and be ready to buy and move into a new house, and not have to put in a contingency to sell their current house as part of their offer. There would be more flexibility to put in an aggressive offer with “cleaner” deal terms with this strategy. And certainly, as (B) above references and with any path, there will be potential risks too. There is no right or wrong way to proceed per se.

There will be implications no matter how this situation is handled. Having the money in the bank and ready to make offers with large down payments and without the complications of selling another house would generally improve the probability of winning in a multiple offer situation. But I wanted to just delineate between scenario 1 where my friend would be looking to temporarily cash out of the real estate market for a period of time just to “have some fun” living in the city for a couple years. He and his wife would be gambling in a situation where he has other options should he wish to pursue them. I would advise them to make sure to evaluate all his various options and just to make sure he knows what the various outcomes could be. Versus scenario 2 for the move-up buyer which is a very different situation with different expected timelines; in this scenario, there is risk, but based on timeline and the high competitive Bay Area market, these buyers have more limited options, but the timeline also is presumably shorter too. Thus, there are ways to try to mitigate some of the risks. But more importantly, there is potential upside in going down this path in terms of trying to buy the larger house.

There is generally a major dilemma with many of my friends and clients who are seeking to buy larger houses from their current place. Do you a) sell 1st then buy, b) buy 1st then sell, c) make contingency offers? Very challenging situation in the hot Bay Area market where many/most properties have multiple offers and some have an incredible number of offers. I will do a future post analyzing the options on this. No easy answers no matter how you disect it.