Exuberant Spending | Bay Area Housing Market Update Q2 2021

Exuberant Spending | Bay Area Housing Market Update Q2 2021

“A housing bubble is started by excessive demand, then it leads to inadequate supply, and then exuberant spending really pushes and inflates the housing bubble further.” With all these bidding wars in our market, everyone’s been wondering when is the bubble going to pop? Unfortunately, I don’t have the answer to that. But what I do have is some evidence and some anecdotes to share with you today—more specifically, about exuberant spending—that will give us a better view of what’s really happening with the health, or lack thereof, of our market.

What does exuberant spending mean?

When you type it into Google, you’ll find that the first definition of exuberant is “filled with or characterized by lively energy and excitement,” but that is not the definition that totally explains where we are today. Going to the next definition, you’ll see that it says, “growing luxuriantly or profusely,” and this is what I wanted to focus on today. Right now, we’re seeing a profuse growth of spending in the buyer pool, and I have a couple of cool examples that I’m going to show you.

A couple of properties we need to talk about

There’s a couple of places that I wanted to talk about that I think are really extreme examples. I am picking from my own experience these houses that I was actually part of the negotiation, which I talked about in other videos. I pulled some information, and I’m going to share with you what we saw at the time when we made offers, what we did, and how those negotiations actually turned out.

House no. 1: 418 42nd Street

The first one we’re going to talk about is this place over at 418 42nd Street. It was a 3-bedroom, 2-bathroom house, and it sat in the exact center of Temescal, as you can see in the image below.

Included also are the comps. There were a few others too which the MLS isn’t pulling but this is already a good representation of what we were looking at that time.

There weren’t a lot of larger 3-bed, 2-bath houses that recently sold in Temescal going back six months from March 9th, 2021. What we did instead is pull a couple of comps over from the Piedmont Avenue neighborhood to have a better understanding of the market in the area.

After we ran that search, we saw that we had these properties, shown on the table below, which sold for $1.2M up to $1.525M. Then, when you look at them on a price per square foot basis, the average you get is $777 a square foot, with the highest as far as $846 per square foot.

Of these properties, we’re specifically most interested in the $846 per square foot property in 37th Street and the $844 property in Ridgeway. These were both over in the Piedmont Avenue neighborhood. Do take note that in this neighborhood, traditionally, houses always sell for more compared to when you go over Broadway Ave into Temescal, because Piedmont Avenue is just so desirable.

We went ahead and wrote an offer at roughly $846 a square foot.

Keep in mind though that this is in Temescal. If you know this neighborhood, you know it’s hard to get to that amount per square foot. But we knew the market was hot and we have to make adjustments so we wrote that offer and came in in that $1.4M-$1.5M world.

However, later on, we found out that we were basically in the middle of the pack. In fact, four offers were even in excess of $1.6 million and ultimately pushed the price as high as, wait for it–$1.716 million!

Now, again, this is a really cool house. It’s almost 1,800 square feet, but it’s still in Temescal. It’s not over in Piedmont Ave, nor in Rockridge where you would expect to be seeing this near $1,000 a square foot mark. It just blew my mind.

Also, I’m told that the winning bid had a large stock position in AirBnB and wanted to liquidate it and hedge against some inflation. So there were other factors in how much they actually paid for it, other than just the house. But nonetheless, that has now set a comp in Temescal. So keep that in mind.

House no. 2: 2851 Central Avenue

Here’s one more that I think is worth noting because of the comps and which I think would explain exuberant spending really well. So the address on this one is 2851 Central Ave, Alameda. It’s on a a pretty busy street on the East End Central Ave. If you go just a block over, you end up in the Edison School District, which people tend to try and pay a bit of a premium to get into. Overall, it’s in a great location but it’s price per square foot still doesn’t usually go quite as high as some of the neighboring streets.

The weird thing about this house is that it has only two bedrooms. It has three bathrooms, but two of them were half baths. It’s layout is also not traditional by any means. However, it did have a huge 8500 square foot yard which sort of explains the premium that I’m about to show you.

But hold tight because when you look at the properties on the table below, you can see that I’ve got all the sold properties within half a mile. And anyone that knows the East End of Alameda, knows that you generally don’t want to cross Broadway or go over into the Fernside. It’s also usually better if you can stay on your side of Encinal. Anyway, this an example that I did to show you what data we were looking at because this was a hard one to comp.

Prices usually stay around the $1.3M mark.

You had all these recent sales as shown in the table below. If you look at the sold price on all of these properties, with the sole exception of one that’s over on Bayo Vista, Ave, you see a really strong narrative of the price being right around that $1.3M mark. In fact, even when you kept that one on Bayo Vista Ave. in the computation, you will still have an average price of $800 per square foot. Also, if you multiply that $800 with your square footage (1,569 sq. ft), you would get $1,256,200—just a little bit under $1.3M.

But you know, some of these comps were older and didn’t have a big lot like this house at 2851 Central Ave so we added a premium to our offer. We went all the way up into the upper $1.3M world. It was a significant premium.

What I’m told is this property at 2851 Central Ave ended up with ten offers, and the highest offer got darn close to $1.6million. It’s insane when you consider all of the prices in the table above. There’s nothing in this type of house in this square foot range that sold even close to that, except that one house on Bayo Vista Ave. However, it is in probably one of the best pockets on the East End of Alameda, where it always sells for a premium. But this one in Central Ave got to that price point of $1.6M, which is unbelievable and just exuberant spending, in my opinion.

Another proof of exuberant spending—exceeding over $1,000 a square foot.

Yes, 2851 Central Ave may have a big lot that you could potentially expand and build on, but it’s still on Central Ave. It is not the most desirable street. It’s still a pretty big thoroughfare across the entire island so it is not an obvious A+ location per se. It’s not bad, but it’s not one of those that you would expect to take off like crazy.

Then, when you do the math on this house, and you look at $1.6M divided by 1,569 square feet, you’re already at over $1,000 a square foot. It does have a big yard, but it’s not even really a 3-BD, 2-BA with its two half-bathrooms.

It’s just wild. You normally can’t exceed the $1,000 a square foot range until you get into a smaller house, something around 1,000 square feet, plus or minus. Homes of that size usually sell for around $1M-$1.1M especially if it is in a great location. However, as size goes up, generally, the price per square foot goes down. However, this property defied that. I mean, it even killed the top comp with a price of $939 per square foot by over $70 a square foot.

What I think is really happening

I know what some of you guys are thinking, “Really, Hans, these are probably some of the best houses. They’re really great, and they’re in killer locations. They got all the boxes checked. And so, of course, they sold beyond the comps.”  I don’t think so. I really don’t. I think it’s more of a lack of inventory. After all, everything looks better when there’s nothing to compare it to. To me, however, those houses wouldn’t have even dreamed of getting to those prices in our normal market, a year and a half ago.

I see this happening over and over and over again too. Houses that have funk on them, have weird floor plans, are in locations that wouldn’t traditionally transact at high levels have started to exceed $1,000 a square foot over and over again. In fact, I’ve seen a lot of people who were coming over from San Francisco or somewhere else in the Peninsula go back and start to shop there because the price per square foot they thought they could get here turned out to be not that good of a deal. They probably thought, “If I’m going to pay the $1,000 a foot, I want to be where I want to be” so they’re going back to looking for homes in that side of the Peninsula instead.

So what’s really happening here, ultimately, what I’m seeing is twofold:

1. People are shopping based on payment.

What I mean by that is people are taking a look at what the interest rate is, what their downpayment is, and then what the loan balance is going to be plus the taxes and insurance–what is that number that they have to pay monthly.

2.  The very low interest rates is a factor.

Because interest rates are so stinking low, even in the low 3% right now, if you have a decent-sized downpayment, that becomes incredibly affordable to you. You can compete at a very high level and really push the price up, as a result. And it probably doesn’t really matter to you if you’re planning on being in this home for 10,15, or 20 years and you can afford the payment today, you can tack on another $30,000 to $50,000.

Here’s a sample computation:

For 30 years at 3% interest rate, $10,000 more equates to just about $42 a month for the whole 30 years. On the other hand, another $50,000 is around $200 a month. It’s pretty insane when you break it down like that.

In addition, when you’re talking about someone who has a large down payment, maybe someone who has two incomes, who really just wants to be in the location, wants to get a house and doesn’t care, and not looking at the comps, that’s what’s going to happen. People have a lot of cash they’re pulling out of the stock market or wherever, coupled with low-interest rates so that their payments are locked in at a low number. Of course, there’s also all the other factors that go into affordability and income and that sort of thing but, that’s what I’m seeing happening out here right now.

What can you do about it?

So that begs the question, what can you do about it?

Well, ultimately, you have to be smart. You have to focus really sincerely on what it is that you want to buy—that has never been clearer than it is right now. Because if you’re going to compete, you’re going to have to compete really hard. And so, what does that entail?

1. Get really clear on your financing

Know what you can pay, figure out how you can get your interest rate so that you can have a payment that you’re comfortable with, and then figure out what’s that maximum number;

2. Leverage the cash that you have. Put cash down if you have it.

This is probably the most important, most valuable thing you can do if you don’t have a lot of cash to compete with. I’ve done a ton of other videos on doing diligence and getting teed up to succeed in this market and what I can tell you is that the people who are leaning in really hard know exactly what they’re buying.

3. Get really, really clear on what you’re buying.

They know its condition. They’ve had contractors, they’ve had inspectors go through it, they’ve read the disclosures, they’ve called everyone who needs to be called. And they’re really really clear on what they want and can therefore make a very confident bid. Then, if they overpay, that’s okay with them because they’re not going to get hit with that surprise, unlike if they’re someone who haven’t done that due diligence. So that is exactly what you need to focus on if you’re choosing to jump into this market today.

I hope my market update for exuberant spending on the second quarter of 2021 has helped you.

If I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below. 

Here’s to all your success!

Exuberant Spending | Bay Area Housing Market Update Q2 2021

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Exuberant Spending | Bay Area Housing Market Update Q2 2021

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