With the Bay Area real estate boom in full force, many of us don’t quite know what to expect for the future. Will housing prices keep rising? What is the prediction for interest rates? How will the tax increase affect buyer demand? While we do not have a crystal ball, economic forecasters say that the Bay Area job growth and its robust local economy show no signs of slowing. The tech sector is generating solid profits and companies continue to hire new employees from San Francisco to San Jose. Solid stock market gains, in addition to high paying jobs, continue to create an abundance of local wealth. As for the overall U.S. economy, forecasters have a cautious outlook for 2014. Some predict that corporate growth may slow as well as consumer spending which will be directly influenced by the federal income tax increase from 35% to 39.6% plus other tax changes. Foreign money continues to pour into the area, especially Palo Alto and Atherton, in the form of all cash purchases in the $4 – $7 million range. With already low inventory in the high-end market, the foreign buyer competition has made it even more frustrating for local buyers to buy a house.
Interest rates and Mortgages: Historically, strong economic growth has led to rising inflation. However, virtually every measure of inflation has been falling over the last two years and forecasters do not anticipate a change in 2014. Actions by the Fed are holding down longer-term interest rates and expectations suggest rates will remain relatively stable (under 5%) for 2014 and with a slow rise starting in 2015. For today’s buyer, the recent interest rate movement appears large and it is when viewed through a short-term lens of one year. However, technical trends suggest there are limits of how far rates may shift within a given time period. So while the long-term downward trend may be coming to an end, that does not necessarily mean interest rates will reverse and increase at a dramatic pace.
In the beginning of 2014, the mortgage underwriting guidelines will be further tightened to continue the quality control initiative for newly issued loans. There is likely to be some short-term interest rate fluctuations as the loan market adapts to the newly implemented changes. However, rates are expected to settle by mid-year and remain relatively flat through the end of 2014.
What to Expect: It will continue to be a sellers’ market as buyer demand will remain high. Sellers should not wait to list their homes for sale. Despite our typical “slow” winter months, there is so much pent up buyer demand that the typical seasonality factor is not relevant in this hot market. Interest rates should remain attractive and continue to fuel buyer demand in the sub-$2 million zone through until 2015. The tax increases may throw a curveball in the level of buyer demand in the 1st half of 2014 as buyers adjust to lower cash reserves. However, a strong bonus season in the finance sector as well as continued stock vesting may counterbalance the tax affect on buyers’ purchasing power. We actively see a multitude of buyers looking in the $4M+ range (usually with all cash) and the sub-$2M range (usually with loan financing). However, there appears to be slightly less competition for properties in the $2M- $3.5M range (with the exception for Palo Alto which shows no signs of softening) in Menlo Park and Los Altos. That said, since there are so few active listings in any of the mid-Peninsula cities between $2-$3.5M you can still expect some level of competition with 2-3 offers for homes in this price range.
In conclusion, our real estate market will continue its strength throughout 2014 and will likely bleed into 2015. And even if the growth of our local economy slows a bit, the demand to live on the Peninsula will continue to outpace the other parts of the Bay Area and that will support the new benchmark of housing prices that have been set, especially at the entry level ($1M-$1.5M).