Episode Transcript
[00:00:01] Speaker A: Welcome back to the real estate and more show. Thanks so much for listening this segment. The red ants and black ants and Rocks housing report, where red ants represent sellers and black ants represent homebuyers, each have different interests and both are, at the moment anyway, getting along quite well in the same mason jar. Looking back over this past year, I'm going to review the 2023 real estate house, the market. We have red ants and black ants now, then provide the Michael Hatfield remax team's housing outlook for the new year. Welcome to the show. I'm sure glad you're here. The 2023 national housing market has been interesting. Home values across the US generally creeped upward. Some places moved up with much more appreciation than in other cities and locales. The San Francisco Bay Area markets were vibrant until around May of 2023. Then the Federal Reserve's constant fed rate increases changed things. We knew at some point the raising of mortgage rates would get into buyers minds and dampen buyers'spirits in their efforts to purchase, either because of the perception that higher interest rates in a buyer's mind or in buyers being able to qualify and afford a higher monthly payment.
Despite a lesser number of 2023 buy sell transactions year over year from 2022 due to mortgage rate increases. We just talked about home values that could have declined moderately in the US did not decline all that much, nor did they fall off the table in the Bay Area. Why? Why have values not fallen off the table? Well, it's pretty simple. The amount of homes available for sale has been scarce.
Our red ants, the people that own homes that are potentially for sale or could be for sale, are simply not offering them up to the market.
Okay, so we're saying, now, what's he talking about with these red ants and black ants and so forth? And we haven't even got to the rocks yet. Well, sellers, let's just equate to being our red ants in the mason jar. Potential home sellers in the Bay Area are folks who are primarily of retirement age, people that if they have not already sold, enjoy their home that may be paid off or have a very low mortgage rate. They say, why move and then possibly have to pay today's loan prices for a replacement loan on a home at a higher mortgage rate? Makes sense to me. Well, somewhat. We're going to call those sellers the red ants. They're in the mason jar right now. They're behaving themselves alongside the black ants, which are represented by our potential homebuyers. The largest percentage of our homebuyers are of millennial age consisting of ages 27 through 42 years. This group consists of tech professionals, Tesla drivers, new families searching for great schools and neighborhood. Oftentimes they subscribe to the view that they know what they want. And if interest rates have moved too high for their liking, well, that's a reason not to buy. They'll just wait for the lower cost of money.
Our black ants are potential buyers. Like most, all groups are somewhat of the herd mentality. Meaning, in this case, when the buyer groups itself gets motivation to buy, all members of the group get that same interest to buy. And at the same instant herd mentality. It can happen to all of us. It's nothing wrong with it. Well, I guess now let's put the ants, red ants and black ants aside for a moment. Equilibrium.
In my view, in our San Francisco Bay Area housing market, we have a somewhat of a state of equilibrium. Enough buyers who will pay a seller's price, but not so many buyers as to compete and drive a home price upward. There has been, and still is, a limited number of homes available for sale. It is expected to continue in that limited fashion into the foreseeable future. There are not tremendous amounts of homes, or numbers of homes being built at the moment in the Bay area. And there's not a whole lot of homebuyers coming to the plate to buy. To imbalance this equilibrium, buyers have been stymy. They feel confused over the increasing interest rates. They don't want to pay more for the rent of money than they have to. And they're feeling that the market might change and improve for them to buy in future. However, we've got this nagging limited inventory of homes available for sale. So if they. Wait.
Now, this is my key point. We have sellers, the red ants, and we have the buyers, the black ants. And they are in the same jar. And even though they have opposing interests, they're leaving each other alone. They're playing nice, at least for the moment. So we have equilibrium in the Bay Area housing market at the moment.
Okay, so let's talk about what really, really matters and get to those rocks that are part of the title of this episode in this housing report.
Let's take a dive into what historically has really mattered, housing market wise, in the San Francisco Bay Area. Let's start this analogy by imagining a basket with some rocks in it. The larger the rock, the more important, the more value we should regard it. Just trying to be funny.
Let's weigh the heavy rocks more weightily anyway. Value your home. The largest rock in that basket goes to the huge benefits a home has to an owner and his or her family. In lieu of paying rent. You no longer have to pay that rent. You're going to pay a mortgage. But you have a home to come home to from work, a home to grow your family in, enjoy a glass of wine, a steak on the grill, a domicile perhaps, to conduct your work as part of the largest rock in the basket. We find value that that domicile has. Schools, a sense of neighborhood, friends, family. In my view, the home is a sacred place for a family and a place on this earth to be valued in the extreme valued. The largest rock in the basket, the value of your home. We're not talking about the financial value. We're talking about that personal value. That personal value to you. The largest rock in our imaginary basket, home appreciation is the second largest rock of importance, specifically in the Bay Area. If we take and we apply historical charts and determine a new homeowner's hope for value increase due to home appreciation over time and over time is important. Owning your home should not be viewed in the same way as one would consider a day trade. This is your home. Live in it. See the largest rock in the basket. Again, the value of your home. This is not a day trade, home appreciation or the increase in a home's value over time. Thus, a hope for increase in owner equity has historically been the most rewarding contributor to the financial benefit in owning a home in the Bay Area. Most all of us can point to a person who bought their home ten years ago at $500,000 and now the home is estimated value at $800,000 as an example.
More recently, there has been an incredible rise in Bay Area home values over the last three and a half years. And just as my grandson can say wow, well, I say wow also. Indeed.
So the second largest rock, home appreciation, the one of importance, the one of value that is number two as far as weight in the imaginary basket.
Number three, the third largest rock in the basket is one most people don't pay a lot of attention to. And they should. It's tax benefits.
I like to think the third largest rock is actually three factors all bound up together.
Most folks who have been renting do not realize the money they have been paying for rent will soon become a contributor or an offset to their new mortgage loan payment. So yes, perhaps a new homeowner mortgage payment could be more, and is likely to be at the time than the rent they pay for. Illustration let's just have a little example.
So if we were to take an anticipated $4,500 monthly house payment and then offset it by a $3,500 rent payment that we may be making before we buy each month. Then the difference is just $1,000 per month. Now, where can a new buyer find that third largest rock in the imaginary basket with tax benefits? This is where most buyers either lose interest or fail to consider the size of this imaginary stone in the basket. Again, tax benefits. This is where most buyers either lose interest or fail to consider the size of this imaginary stone. The third largest stone in the basket, actually. And sometimes new potential home buyers don't realize how important that stone in the basket is, the tax benefits of it. But it's there. And it's there to help you make up that difference between your rent that you pay right now and a planned mortgage payment. We have been talking about the third largest rock in our imaginary basket, tax benefits. I'd said that there's actually three factors that are inclusive in this tax benefits that most people don't think about. Now, I want you to understand, before you take any action, to consult your CPA or the person that is your tax expert. I am not a tax expert. I'm only illustrating a point here. In one of our upcoming episodes, we have a CPA, a very good CPA, that'll come on and talk about real estate benefits on your tax return and how they all connect. But for this purpose, we're talking about those rocks in the basket at the moment. As illustration purposes, the mortgage interest deduction is the first factor of the third largest rock of tax benefits. As a precursor, I have to tell you, I'm just illustrating a point here. The mortgage interest deduction is a rule that allows one to deduct what they pay in mortgage interest on their mortgage loan and they can deduct it from their taxable income on their tax return. Of course, up to a limit, this can be as much as your employer has been withholding from each of your paychecks. And now that you own a home, can it be applied to one's mortgage payment? This is really a great tax benefit.
The second factor of the third largest rock of tax benefits is depreciation on your home structure. What is depreciation? Depreciation is non cash deduction on your tax return based on the fact that the government says, hey, we realize that this home structure, this house that's built on the land and only the house here is going to deteriorate over time. So they allow a taxable deduction on your tax return. Usually you can take the value of the building structure itself and divide it by 27.5 years, which is kind of the norm. And it comes up with an amount. That amount it will help you on your tax return.
Again, consult your CPA before taking action.
Another wow. As my grandson would say, and I have to agree with him, it's wow. When you put them all together, all of these rocks in the basket, then the interest rate being up a .2 points, three points, doesn't take on as much importance when you look at all of the other benefits of owning your own home.
The third factor of the third largest rock tax benefits is the tax credit one can receive when down the road they turn around and sell the home to move up into another one or go elsewhere. Married folks who own their own home can reduce a taxable gain. That is what is computed a little bit differently than taxable income, I am told. Their taxable gain they can reduce if they're married by $500,000 before they have to pay tax on a gain. Single folks who own their own home can reduce their taxable gain by 250,000 when they sell. Again, check with your tax expert on this. Let them advise you to the actual details of how it all works. The fourth largest rock is the one representing mortgage interest rates. And again, in my view, it is the smallest rock in the basket and the smallest size rock in importance factor as well. And why do you say that? Everybody says, oh my gosh, the interest rates run. Mortgages reached almost 8% in November. Of course, they've declined a little bit since then because I say my take is that all of the rocks serve larger size, dramatically larger size and dramatically outweigh the interest rate rock in value and importance. Let me say that again. I'm sorry, I repeat myself sometimes.
Remember, the 50 year mortgage rate average is 7.72%. Interest rates on mortgages go up. Interest rates on mortgages go down. Expect it. Buy your home. Enjoy it. Live in it. Don't look at it as a day trade. Enjoy that beautiful home where you raise your family. You live in it. You grill the hot dogs. You have the boys over for football games. The ladies have their input, whatever they do.
But buy your home, refinance it when the interest rate makes sense to refinance it, and they recede. So I feel as a summary, here we go, the number one largest rock of value in our imaginary basket. If one considers the immense personal value of owning your own home, remember grilling hot dogs and burgers, raising children, working from home, tinkering in your garage with your car, how do you measure the value of that other than huge?
The second largest size rock, again in importance is the financial of being a homeowner versus renting. It entitles you to the possibility of enjoying historical home appreciation and hopefully equity appreciation over time. This is a big rock, too. I mean, it's huge and you have to probably put this basket on a cart in order to carry it. The third largest rock in size of value importance are the three great tax benefits that we spoke about. They're associated with home ownership only, not with rental ownership, not with renting. The financial side of owning really moved the fulcrum on the teeter totter to the great side. When you take into account those three important tax benefits that you have, and I have to say it again, please sit down with your CPA. Check it out before you take action. Number four again, the smallest rock in the basket, the one I think is anyway, mortgage interest rates, that rock's in the basket. But by view, in my view, interest rates moving some up a point or two are of less importance by far than when you combine the favorable benefits of all the other larger rocks in our basket. I have to tell you, as an aside, when I bought my first home, I paid 12.5% interest. That's right, 12.5% interest. Two, three years down the road. Yeah, I kind of had to tighten up the belt a bit there. But two to three years down the road, I refinanced it, got my lower interest rates, and lived so much better after that because I had the home ownership. However, today, the perception of a high interest rate on a mortgage is more important to some people than to others. And it can be a powerful detriment to someone that wants to buy their own home. I say, in my view, don't let it be your detriment.
Let it be just a challenge that you may have to deal with a little bit down the road by a way of a finance. But one can also consider what happened recently when rates were lowest to zero, five to 4%. Look at what the market did. When rates do come down, the vitality of the market goes up and home prices are going to go up. That's just the way this things seem to work here in the Bay Area. So why wait? So why are buyers reluctant to buy now? Will some wait until interest rates decline a little and declare that was smart thinking? Will some wait until the whole herd of buyers starts chasing towards the same few homes for sale while competing with the rest of the herd? Possibly. Maybe some will. Maybe it just feels good being in the herd for some. But on the other hand, some of us may not want to pay more than he has to for a very nice home. At this moment in time in the San Francisco Bay area, we have a jar that is half full of red ants. The home sellers of retirement age and a jar that is half full of black ants are potential home buyers. The red ants home sellers have different interests and objectives than the black ant, potential home buyers. But what will happen when some factor like rate cuts shakes up this jar of ants with different interest? It shakes up that jar. Oh, my gosh. Now you're going to have some difficulty in buying a home, and it's going to be a little bit challenging for those homebuyers. It sure looks to me like, say, in an election year, if mortgage rates go down as they are expected, many buyers will join the herd and compete for the same number of homes available for sale. It will be tougher to get a contract to buy a home and certainly not as fun in the process of doing it. So moving forward into 2024, this is what I believe we're going to be faced with. We still have the same limited inventory of homes for sale. We still have buyers that want to buy. They're just being a little reluctant.
They have to talk to themselves about that, have a little conversation with themselves, because it will be tougher to get a contract on a home, and certainly not as easy as it is right at the moment. And that's not saying it's easy right at the moment, either. So if the scenario does happen in the election year where the interest rates are reduced by the Federal Reserve, thus mortgage rates go down, the potential homebuyer is going to be forced to run around vying with many other homebuyers for a limited number of homes available on the market.
Would it not be more intelligent and a lot more of a better home buying experience, carefully considering each rock inside our imaginary basket and what they represent, than looking ahead in time to estimate how it will all weigh out? If you do, then I shall make my buy move. While the market is somewhat in equilibrium, especially with poised ants that are red in color to eat the black ants because their interests do not coincide, they're okay right now. They're inside that Mason jar and they're not going at each other like crazy. However, if you shake that jar, things are going to happen that may make a home buyer find difficulty in the process of buying a home.
So, summary from a home seller standpoint, let's talk about that home values remain at attractive levels as we have seen significant home values run up in the last three years. For sellers, it becomes a question of when to sell their asset and where to go from there. There may be some considerations that can be useful to potential sellers. Perhaps a great time is now to speak with your trusted and experienced realtor moving forward into 2024. And now a little drum roll. The 2024 new year and my imaginary crystal ball whispers that is likely that the Federal Reserve will reduce the fed rate. Thus, mortgage interest rates will decline accordingly. Upon this happening, buyers will come to the great housing supermarket to purchase what is to be a small amount of available loaves of bread or homes available for sale.
Number two is the heartbeat or the momentum. Should rates subside a little as anticipated? One can bet a potential buyer's heartbeat to purchase a home can take on a more rapid timetable. Expect buyers to have a rapid, beat per minute tempo if this occurs.
Number three, if housing inventory maintains its current relatively low inventory, why should it not? Home prices are likely to move higher. How much higher? It's undeterminable at this moment, but 10% or better is my best guess, or something near that.
Number four, should the preceding actions occur where interest rates have been reduced and many buyers come to the table, expect more multiple offer situations, more real need for a home buyer to have a trusted, experienced agent to help her or him. But it is not likely to be an easy to win the home process. Number five new in 2023 an attractive feature we now have in California is the ADU to add value to your property while at the same time making room for an aging mom or dad, family member or friend per state. AB 100:33 if a city or county has opted into it, 1 may build an ADU auxiliary dwelling unit under relaxed local planning building guidelines. Get an address for the ADU like you would a condo, then sell it. If you are a home buyer, having a sharp eye out for enough room with a potential property you'd like to buy is a smart idea. Number six, we should not ignore the tremendous wealth building potential from investment in a home or real estate, especially in the San Francisco Bay area. It is a great idea to consider the various size rocks in the basket. Look at what is happening with the red ants and the black ants in the mason jar. Then weigh what may just happen between those ants if something shakes that jar, such as a reduction in interest rates. I'd like to thank you for listening to the red ant, black ant and rocks housing report this morning. You've been listening to the real estate and more show we talk about interesting topics, great people and of course, real estate. You can listen to archived real estate and more shows at Slash radio. The real estate and more show is now also available on demand on all major podcast directories as well. We hope you listen and I hope you tune in next week, but until then, have a blessed week.
[00:26:46] Speaker B: The views and opinions expressed are based on current economic and market conditions and are subject to change. Information on the show provided for illustrator purposes only and does not constitute professional or legal advice. Information from sources deemed reliable, but accuracy and completeness not guaranteed. Michael Hatfield and the Michael Hatfield Remax team have no liability for information discussed on the show. Consult with qualified professionals prior to taking action.
[00:27:16] Speaker C: We at the Michael Hatfield Remax team enjoy representing our valued clients. If you or someone you know is interested in buying or selling and wishes to schedule a complimentary appointment with the Michael Hatfield Remax team, call us at 925-32-2775 that's 925-32-2775 or go to our website, michaelhatfieldhomes.com.
[00:27:39] Speaker A: I'm Michael Hatfield. Thank you for listening today. Join us next Saturday for the next real estate and more when we again sharpen our focus on house the market.
[00:27:50] Speaker C: Join us next Saturday and have a wonderful week. Best wishes and blessings to you.
CRE 1493.
