Tuesday, May 6, 2014

Slap a Sign Up and We Are Outta Here

Is there a real estate bubble in the East Bay?  If so, is it time to cash out?  If you want a one way ticket out of the Bay Area and you own your own home, the numbers seem to be in your favor. In April, 49 homes closed escrow in Berkeley at an average of 120% of their asking price.  The upside potential is even more amazing as three lucky sellers closed at more than 150% of their asking.  Back in March, we saw an example as high as 167%. Apparently, it pays to have the great home everyone wants, as higher quantities of multiple offers drive the highest overbids.  Luck only works as an exit plan unfortunately, because jumping into the bidding wars as a buyer isn’t as opportune. (See Priced out of my own ‘million dollar’ Berkeley block by Reichi Lee as published by BerkeleySide.)  This may be one of the main reasons for sale signs aren’t up in more front yards.  If you cash out now, it may look daunting to try to buy back in.
Back to the bubbly: I hate to label the current housing boom as a “bubble” mainly because of the fear the word provokes in an area where many are still nursing wounds left by the recession.  We need a less scary word, maybe just “bubble-lite.”  True, the market is soaring in much the same pattern as once again our housing supply can’t meet the current demand.  But this market is somewhat different. It is expected to have a softer deflation, because this time homeowners have more skin in the game in the form of actual equity in their homes.  This is due to two factors.  First, new lending restrictions are implemented which often necessitate higher down payments in order to qualify for a home loan.  The second reason is a little less obvious to those outside the feeding frenzy and is a direct result of the psychology associated with multiple offer situations:  You know the expression, “a bird in the hand is worth two in the bush.”  In this case, the birds are Benjamins.  Given the choice between multitudes of buyers, many sellers feel most comfortable with the buyer who has the most Benjamins in hand. In most cases all cash offers, or offers with high down payments, stand a better chance at being accepted.  As a result, homes still sell high, but with more actual pennies in place.   In 2013, 52.2% of buyers had down payments greater than 20%, and nearly 30% were all cash buyers. These two equity elevators will work like a buffer against the fear of future short sales and foreclosures.
Timing is everything and more housing inventory has come on the market this week, easing some of the market zealousness experienced in April.  Such weekly shifts are not predictors as small blips in inventory will not adequately meet demand and level the market place.  East Bay housing demand may be on the rise.  Before this bubble can pop, we have another market propellant unique to our neck of the woods (or seeping in our direction out of Silicon Valley).  Facebook was the first to test the waters of the post-recession economy by going public.  Despite a bumpy start, they paved the way and now it seems many California technology companies are ripe for going public. According to the founder of several tech companies, Marcus Nelson, “Should the bull market come out to play, expect a successful Twitter IPO to kick off a domino effect for other Silicon Valley tech companies – and well beyond.” As companies go public and stock options are realized, this could inject more fuel to the equity fire.  These stockholders may look to the city first, but often come across the Bay to find relatively affordable real estate.  Prepare to see more cash offers in our future.
Now, if we only had more homes to sell….

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