What's Real about the Recent Real Estate Headlines

As you may have heard, there is a proposed settlement by the National Association of REALTORS® (NAR). While the settlement still requires final approval, there have been plenty of headlines in the media causing confusion. To clarify some of the misinformation about the settlement, here are a few facts:

Sellers retain, as they always have, the discretion to offer compensation to buyer’s brokers. The proposed settlement does not prohibit their ability to do so.

Commissions have always been and will continue to be negotiated through transparent conversations with our clients. We believe strongly in transparency around broker compensation.

Commissions have always been negotiable and are not set by law. Reduced fee alternatives have been and will continue to be available for consumers seeking those options.

The proposed settlement would require that every buyer represented by an NAR-affiliated agent sign a Buyer Representation Agreement outlining the relationship between the buyer and broker before touring a property, something that is already required in many states for over a decade.

Buyers deserve representation at every income level. Our experience has shown that transactions flow more smoothly when there is professional representation on each side, creating open lines of communication which benefit all parties involved.

Compass agents provide tremendous value to our clients. As a result, we will continue to encourage a transparent commission conversation that reflects the time, effort, expertise, and support we invest in each transaction.

Compass is fully prepared to adopt the changes laid out as part of the settlement. We see these updates as being positive both for our clients and for the brokerage community, as they provide additional transparency and clarity and will encourage the most professional agents to thrive.

Factors behind the Decline in Homes for Sale

Market conditions are always determined by the balance between the intensity of buyer demand and the supply of homes for sale. Since 2000, and especially since the 2008 financial and housing markets crash and foreclosure crisis, factors such as population growth, interest rate changes, the aging of homeowners and homebuyers, investor home buying, tax law, inadequate new home construction, declining affordability, an increase in the speed at which listings sell, and the pandemic have combined to cause an unprecedented imbalance between supply and demand. Buyer competition for an inadequate supply of listings has become the dominant reality of the real estate market.

The large increase in interest rates in 2022 led to the “mortgage lock-in” effect, and homeowners began listing their properties in greatly reduced numbers, being reluctant to trade a very low interest rate on the home owned for a much higher rate on the one purchased. Also, as rents increased, and the tax benefits of owning rental real estate multiplied (due to 2017 tax law changes) – plus having very low interest-rate mortgages – more would-be sellers rented out their homes instead of selling.

Even before 2022’s increase in interest rates caused the historic plunge in new listings, listing activity had already been declining for years, even as demand increased. Over 54% of homeowners are now aged 55 years and above, and as people age, they typically move much less often and sell their homes much less frequently. And as homes have become more expensive, far outpacing inflation, the median age of homebuyers has jumped to 49, over the past 20 years. The percentage of 1st time buyers, who trend younger and move more often with life changes, has dropped – and the median age of 1st time buyers has also jumped to 36. Due to these factors, the median duration of homeownership has more than doubled since 2005, and this has severely impacted the supply of listings available to buy at any given time.

Another factor in declining turnover in more expensive markets, and with long-term owners in particular, is capital gains taxes on the huge appreciation in home values that has occurred since tax law changed in 1997 from being able to roll-over your principal residence into another without taxes, to the $250,000/$500,000 capital-gains exclusion.

Demand fluctuates due to a number of factors but as population increases, so does the number of people who wish to own homes. The U.S. population increased by 53.5 million since 2000. Over the same period, the average monthly number of active, existing-home listings declined by 45%. When an increased number of buyers compete for a reduced supply of listings, overbidding jumps and homes sell faster at higher prices. Higher prices lead to older, more affluent buyers who move less often continuing the cycle.

Since the foreclosure crisis (when hundreds of thousands of homes sold to institutional investors at fire-sale prices), as well as the advent of Airbnb, an improvement of rental-property tax law, and the effects of the pandemic, investors, large and small, and second-home buyers have made up a much greater proportion of sales, recently averaging 14% to 17% of all home sales (including condos and co-ops), and up to 27% of single-family-home sales.

New home construction has trailed far below population growth, with the gap between household formations and new homes built numbering in the multi-millions over the last 10 years – and here too, investors are buying a significant percentage of units

The balance between supply and demand is continually shifting – sometimes subtly and sometimes very dramatically – due to a wide range of changing economic and demographic conditions, but, generally speaking, since the market recovery in 2012-2013, demand has increasingly and severely outpaced supply. Even after interest rates rose in 2022, significantly depressing buyer demand, by 2023, the supply of listings unexpectedly declined as much or more, renewing upward pressure on home prices and all these factors do not look to be changing anytime soon.

What is Going on with Homeowners Insurance in California?

What is Going on with Homeowners Insurance in California?

State Farm and Allstate have announced they will no longer sell new home insurance policies in California because of wildfire risks and an increase in construction costs. Here are some facts:

State Farm and Allstate are not leaving the California Insurance Market:  State Farm and Allstate will continue to service and renew policies of existing clients in the state and will continue to offer new auto insurance policies. However, they will not be issuing any new property insurance policies for the time being in California.

1. What are the implications of the decision for prospective homebuyers?  In certain high-risk areas of the state, there are very few insurance companies willing to write new policies. In some higher risk areas, State Farm was the last private insurance company writing policies. In those areas, unless the Insurance Commissioner is successful in its effort to get more private insurers to write policies in such areas, the generally more-costly California FAIR plan may end up being the only property insurance available.

2. Why did State Farm and Allstate stop issuing new policies?  State Farm stated that it made the decision “due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” Allstate said the company "paused" its offerings "so they can continue to protect current customers." State Farm and Allstate's decision is not necessarily an indication of what other companies will do.

3. Will more companies follow State Farm and Allstate's move?  There are still a wide range of companies writing policies in California. However, those willing to write new policies in higher risk areas in particular are declining and as stated above, with the departure of State Farm and Allstate, those in more high-risk areas may have no option than the FAIR plan.

4. What are the main problems for the insurance market in California?  The California market is heavily regulated and has various strict requirements for rate increases, which were put into place by Proposition 103 in 1988. However, there are two areas where possible changes could result in a better climate for insurance without requiring major changes to consumer-friendly rate increase requirements. Those include allowing insurance companies to have rates that better reflect their reinsurance costs and allowing insurance companies to utilize forward looking risk models. Current law only allows companies to look back when setting rates. However, given the issues with climate change, many insurance companies argue that looking backward does not allow companies to adequately capture risk.

5. The California Dept. of Insurance provides several information guides, tips and tools to help homeown understand home/residential insurance so that homeowners can make the best decision for their situation. They can also call the California Dept. of Insurance Consumer Hotline for assistance.

The Insurance Industry and the Department of Insurance have also been looking at and discussing ways to address the state’s insurance challenges. The issue is large and complicated. There is cautious hope that these moves may create some greater urgency on how to address this insurance situation.

What is Normal?

What is Normal?

The news seems to be full of dire predictions about the state of the real estate market. The market was red hot until May of last year when everything hit the brakes as interest rate hikes started hitting. But let’s break down how we got here. We have had one of the longest up cycles in real estate in the past 50 years. The market began to climb in June of 2012 and finally slowed mid 2022. A “normal” upcycle is approximately 5 years followed by an approximately 2 year down cycle. The market began to slow naturally in 2019 when the pandemic hit and changed everything with many reevaluating where they wanted to live causing an exodus from cities and having a phenomenal impact on the real estate market everywhere. This caused the naturally slowing cycle to jump start to a new extreme high fueled by emotion and cheap money. This could not continue.

The current market feels more like a normal market with days on market increasing, some listings making price adjustments, maybe only one offer on a home versus multiple offers. This is considered a normal market. What was happening in the Spring of 2022 was far from normal and not sustainable. It is extremely difficult to predict when different parts of the cycle will begin or end. There is a reason for the saying “you can’t time the market”. 

What we do know is that there is still a scarcity of inventory in Marin, especially homes that have been updated to today's tastes and prepped and staged for sale. These homes are still in high demand and usually sell well and quickly and with the Spring fast approaching, buyers will be back to buy in coveted Marin. And, the market will return to its normal cycle. 

“Buy land. They ain’t making more of that stuff.” -Will Rogers.

The Only Thing That Is Certain Is Change

Across the Bay Area, Q3 median sales prices retreated dramatically from their spring peaks. Part of this was due to seasonal trends – median sales prices often peak in the Spring, then drop in summer but part of the decline was clearly due to changing market conditions prompted by shifts in interest rates, inflation, stock markets and consumer confidence. The number of sales fell by 26% caused by lack of sufficient inventory and rising mortgage rates. Only 44% of homes traded above list price this quarter vs 75% the previous two quarters of this year signaling a gap between seller expectation and buyer realites.

It appears that after the big drop in demand in early-mid summer, conditions have mostly stabilized. In general, sales numbers are no longer appreciably dropping, though overbidding continue to decline and days on market to continue to climb. 

When looking at recent market changes, it is important to remember how overheated the market was in 2021 and early 2022 with comparisons distorted by the unusual and sometimes frenzied conditions that prevailed then. The economy and real estate market are still in a period of adjustment. 

 There has been no surge of desperate sellers. New listing numbers are actually down from last year. Stock market declines, though substantial, cannot compare with those seen in 2008-2009, and employment remains very strong. This is not to minimize the correction the market is going through. There are certainly major economic challenges at play right now likened to a slow leak in an over-pressurized tire rather than a blowout on the highway at high speed. 

The relatively short autumn selling season began after Labor Day and runs through mid-November. The typical mid- winter holiday slow down then runs through mid-January. Though sales continues in every month of the year, listing and sale activity drops dramatically as we near Thanksgiving. There will be opportunities for buyers in this slower season but the the selection of inventory tends to be more limited too.

The only thing that is certain is change. We are seeing an adjustment to a more normal real estate market similar to market conditions in 2019. Marin is weathering the changing conditions better than most markets with our relatively limited inventory, unparalleled lifestyle and proximity to a world class city.

The Dangers Of Overpricing

The Dangers of Overpricing-

Most of us believe our homes are special. We have many reasons for thinking our homes are more valuable. Maybe we want to recoup our investment on costly improvements. Maybe our personal taste doesn’t match with current market trends. Maybe we did some misguided research, or maybe we’re just going with our gut. Whatever our reason for an unrealistic sense of our home’s value, they can all be deadly to a listing’s chances. Ironically, instead of getting more money overpricing usually stigmatizes a property and reduces the eventual sale price to less than it would have been if more realistic pricing was used at the beginning.

Here’s how it works-

Your first days and weeks on the market are the most crucial. When your listing goes live on the MLS, it triggers a cascade of events meant to help drum up interest in your property. Notifications are sent to buyers and agents through automated MLS alerts and search websites like Zillow and Redfin, when a home that meets the Buyers criteria hits the market. Open houses and broker tours will also populate the various sites and your agent will be marketing your listing with emails, social media, advertising and networking. If the home is overpriced, Buyers may not give it a second look.

A home usually has about a two to three week period to capture the attention of Buyers but once that period has expired, a listing starts to become stale. Buyers move on to the next new listing that may be more well priced and forget about this listing. In fact, the most common refrain heard when buyers visit a property is “how long has the house been on the market”. If the answer is more than a few weeks, many Buyers follow up with the question is “ what’s wrong with the house”. 

The vast majority of Buyers will not make offers on homes they perceive as overpriced. Either they don’t want to waste their time or they feel uncomfortable with “offending” the Sellers. In any case, they simply move on to other listings.

Well priced homes create a sense of urgency in the Buyer and Broker community to act quickly with a strong clean offer and often lead to competitive bidding between buyers which is the most likely way to increase the sale price.

If a listing has been overpriced the sooner it is recognized as such and the price reduced, the smaller the negative impact. Price reductions must be big enough to gain the attention of buyers and their agents - typically at least 5%.

Ultimately, neither agents nor Sellers determine market value, only the market with willing and able buyers determines the market value. In the best case scenario, the agent and Seller work together to create a plan which includes fair market pricing, detailed preparation of the home and comprehensive marketing to maximize the conditions that through effective negotiation and management of the disclosure and due diligence process reliably achieves the highest possible sale price.

The Winds of Change

Leaning into Market Headwinds, Appreciation Rate Drops

The impacts of this year’s severe economic headwinds – soaring inflation and interest rates, stock market declines, fears of recession – on Bay Area real estate markets are speeding up. The first effect was on buyer demand (fewer buyers, offers and listings into contract), leading to changes in supply (more homes for sale, more price reductions), which began to alter buyer and seller psychology and the balance of power between them. Especially after one of the longest, most dramatic upcycles in history, the psychology, circumstances and plans of individual buyers and sellers shift unevenly in the early months of a transition as they try to make sense of changing market realities. Eventually statistics based on closed sales – prices, appreciation rates, overbidding, days on market – slowly start to adjust. Generally speaking, closed sales are lagging indicators of what occurred in the economy and market weeks and months earlier.

If stock market prices are like a jet skier on a triple-espresso, home prices are like a giant cargo ship, which decelerates and turns slowly. It took a few months from when the big economic changes began, but the high year-over-year appreciation rates of recent years are now dropping fast in Bay Area markets, though the degree of any actual, longer-term “correction” to prices, if it occurs, remains to be seen.

A correction is not a crash. The precipitating factor in the 2008 crash – tens of millions of households talked into home loans they couldn’t afford, forcing frantic sales during a recession – does not apply today. Indeed, mortgage payments as a percentage of income are close to all-time lows (and most homeowners’ mortgages are also at historically low rates). Outside the 2008 crash, market corrections over the last 4 decades typically ran from a simple flattening in appreciation, to price adjustments of 5%to 10% (relatively small compared to the appreciation rates which preceded them). It is far too early, with far too many factors at play, to make predictions.

An overheated market cooling or normalizing, slowing from an unsustainable rate of acceleration, does not necessarily imply a weak market by historical standards, even if the speed and scale of the change is startling. This report will review year-over-year changes in supply and demand, reflecting the significant adjustments occurring, but also longer-term trends to provide greater context to these recent changes.

Monthly data can be volatile, fluctuating according to a number of factors, including market seasonality. For example, in most Bay Area markets, it is not unusual for median sales prices to peak for the year in spring or early summer. It is best not to jump to definitive conclusions based on a few months of data: Longer-term data is more meaningful than short-term fluctuations.

Different regions and market segments are cooling at differing speeds and each region has unique conditions – and in the Bay Area, each home is relatively unique as well. But barring very special circumstances, markets across the Bay Area (and the country) can be expected to eventually move in roughly parallel directions because of the broad macroeconomic factors at play. Within this report is a link to a review of many of these factors. As of July 7, 2022, according to FHLMC, the average weekly mortgage rate for a 30-year fixed rate loan fell to 5.3% from 5.81% two weeks earlier.

What's A Preemptive Offer?

Preemptive Offers- To Be Offering ot Not To Be Offering , That Is The Question

The Marin Real Estate market is hyper competitive and has only gotten more so in 2022 with a scarcity of inventory and several interest hikes.. In this super charged seller’s market , you may find many buyers undergoing a bidding war and more often than not, having their offers beat out. 

What’s a buyer to do? Sometimes, a buyer and their agent will decide to submit a preemptive offer. What’s a preemptive offer, you ask?

A preemptive offer occurs when a listing agent sets an offer date for a property and posts it in the MLS, Often, the listing agent also posts that the Seller requests “No Preemptives” further clarifying the wishes of the Seller. Yet, the Buyer decides to submit a preemptive offer anyway.

Preemptive offers are typically

·   Competitive offers (many times they are all cash)

·   Significantly over asking price

·   No contingencies (including loan, appraisals, inspections)

·   Have a quick expiration period

 A buyer submits a preemptive to try and leap frog over the competition. The goal is to formulate an offer that will convince the potential seller that he/she will not get another offer like this. Buyers usually do this when they really love a property and want to avoid going against the competition.

 But here’s the risk to the Buyer:

 You might be overpaying. By submitting a preemptive offer, you may be jumping the gun by assuming that the property will be more sought after than it actually is. You don’t allow yourself or your agent enough time to feel out the competition and get a sense of how many offers you’re competing against, and run the risk of paying much more than you need to.

Your offer may be shopped around. If you submit an offer prematurely, a listing agent may use it as leverage for other buyers to submit higher offers, and thus, create a bidding war. Though the practice is not ethical, it can happen.  

 You also run the risk of upsetting the listing agent. When they indicate that no preemptive offers will be entertained but you submit one anyways, it puts a lot of pressure on the sellers and in the end can backfire because the listing agent will be upset that the buyer didn't follow the rules.

And what are the Seller Risks:

 The goal of a seller is to get the best offer for their home, and getting the best offer requires deploying the right strategy. A well received property is one that is well prepped and priced and the response from the market is often immediate. If a property is well received, that is an indication it will receive multiple offers. In that case, it is usually best for the seller to wait until the designated offer date to review all the offers and let the market take the property where it should land. Also, by waiting until the offer date, the seller will truly know what their property is worth. There won’t be any question from taking a preemptive of “did I leave money on the table”. And, that preemptive offer? Well, if they were the best offer and wanted the property that badly, they would wait like everyone else and make their offer on the offer date.  

Fixer vs. Finished?

Fixer or Finished?

There has been a common theme recently: home buyers want brand new or newly renovated homes and are willing to pay a premium for them, often a large premium. It's almost become an obsession. Projects are becoming more cumbersome these days. Here are the top reasons why new or newly renovated may be the way to go:

1. Time is the Last Luxury: enjoying a home immediately is more meaningful to most. Waiting for a renovation or new build is time lost. The time and effort spent on a home build/renovation project is time you can spend on other more important things such as family and friends.

2. In a rising interest rates environment, locking in to a rate has value.

3. When you buy a renovation project you need cash or additional financing to renovate. One financed lump sum is quicker/easier.

4. With rising labor and materials costs, anticipated costs for renovation at closing are bound to rise. Many projects go over budget regardless.

5. Consumers want the least aggravation: older systems require more time, effort and money to service, maintain and replace.

6. New or renovated homes are usually much more energy efficient.

7. New/renovated homes have been adjusted to today's lifestyle needs.

8. The permitting and approval process can be long and arduous.

9. Decorating and furnishing is the fun part.

10. Seeing exactly what you're going to get is much easier than imagining what could be.

11. Being able to identify, hire and manage the necessary people to work on a renovation can be challenging in this environment.

If you’re a Sellers, all the more reason to invest in the updates that will make your home stand out for busy buyers and Compass Concierge can help you make all the needed changes. If you’re wondering where to start, let’s talk.

Rising Rates vs. Rising Prices

Which do you think is better: Rising interest rates or rising prices? 

Here is a perspective worth pondering. 

Imagine two scenarios: 

# 1. Low interest rates with home prices rising 10% per year or 

# 2. Higher interest rates with home prices not rising. Let's use as our sample property a home selling for $1 million to keep things simple: 

Scenario 1 - If home prices rise by 10%, a 3% interest rate 30-year fixed rate mortgage monthly cost rises by about $337 more per month. 

Scenario 2 - If the same home price stays the same, but mortgage interest rates rise from 3% to 4%, the additional monthly cost is $446/month, about $109 more than the price increase scenario with lower rates. BUT scenario #1 requires an additional $20k in cash for the down payment. That $20k alone will pay about for 15 YEARS of the difference between the rising home price vs. rising interest rate scenario if it earns zero interest. 

The painful consequence of super-low interest rates that impacts monthly costs most is the fact that it can fuel (often very large) home price escalations. 10% is conservative for many parts of Marin in 2021! Now imagine a market where home prices DON'T rise dramatically - if at all - with higher mortgage interest rates. It could be a wash.

Looking Back and Looking Forward

What a year. After much hibernating and isolating, we were finally able to finally move about. One of the most moving moments of 2021 for me was getting my first vaccine shot. Standing patiently in the long line waiting my turn to receive the shot felt vaguely patriotic and emotional. 

The real estate market continued it’s crazy ascent and I was busy helping several sellers with large renovations prior to selling their homes and buyers navigate the challenges of buying a home in Marin with so little inventory and so much demand. Deep gratitude to my wonderful clients who trusted me on this journey. The best part of what I do is meeting so many interesting people whose lives I can have a small and positive impact upon. My why is to connect authentically with each person and to leave things better than when I first encounter them. 

With your enthusiastic response to my annual Your Charity/My Donation program and my participation in the Awesome Foundation, I was able to give over $4000 to local organizations such as 10000 Degrees, Marin Humane, Vivalon, Adopt A Family, Wildcare, the Tam High Foundation, KIDDO and many more in 2021. 

With vaccination came the possibility of doing something I love again-travel. In the Fall, I journeyed to Italy to ride bikes in the Tuscan countryside for 6 days and met a wonderful group of new friends who share my cycling passion. In all, we rode 275 miles, climbed over 20,000 feet and ate countless plates of pasta! Travel has a way of opening my heart and mind and this adventure did just that. 

The highlight of the year was the simplest thing and that is to connect with loved ones. The ability to gather again, to see friends, to share a meal and raise a glass was the most precious and poignant and I will never take the ability to connect for granted again. 

Finally, as I look back on this year of high highs and some bumps in the road, I hope that I met each moment with grace, patience and generosity. Wishing you health, joy, laughter and most of all love in 2022.

Can The Zestimate Be Trusted?

Can we trust the Zestimate? Zestimates have been considered gospel for home valuation by many over the years but Zillow, the creator of the Zestimate, is leaving their home flipping business called iBuyer and laying off 25% of their staff ( 2,000 jobs) after substantial losses and a surplus of 7,000 homes worth $2 Billion that they may have overpaid for and have yet to sell. This will likely have a huge impact on the markets in which these homes are located. With all the data gathered via their site, Zillow still seems to have massively misjudged the cost and timing of flipping homes. 

Home price predictions have always been part of Zillow’s appeal. The company publishes value estimates for 104 million properties and the Zestimate is featured prominently on home listing pages across the site. However, famously, in 2016, the then CEO Spencer Rascoff’s home sold for 40% under its Zestimate.

How is the Zestimate quantified? Zillow does not share the exact formula for its estimates, but says it uses “statistical and machine learning models” to “examine hundreds of data points” for each home. Data points include things like square footage, location and the number of bedrooms and bathrooms. The information comes from property records and local multiple listing services. The Zestimate also takes into account tax assessments, prior sales and, if the home is on market, the listing price and how long it has been available. In the most recent update to the formula in June, Zillow says it made the estimates more responsive to market trends and seasonality. 

While all of this information can be helpful, the Zestimate does much better in homes in planned communities where all the homes are very similar than a neighborhood or town where each home can be wildly different in size and shape and type such as Marin. 

Zillow is also not physically entering a home and can’t see the room that faces the neighbor’s wall, or how the light or lack thereof enfuses the rooms, feel the settling of the floors or smell the cat pee or mildew. These are some of the real world issues that can have a huge impact on the value of a home. The Zestimate should be considered one form of measurement for consideration. Real estate is a hyper local business and the fantastic flameout of iBuyer is a testament to that. With the financial stakes involved in a unique and high value market such as Marin , it’s important to have experienced human real estate professionals who focus on this market to help give the final assessment of value.