I think WE ARE in a housing bubble | Bay Area Housing Market 2021 update
What the f*ck? A couple of months ago, I put out a video on YouTube talking about the housing bubble and how I didn’t think we were in one. Now that the new number are in combined with some anecdotes that I want to share with you have me feeling differently today. So, I’ve got two stories and a little bit of data that I want to share with you which I think you will find interesting.
Hopefully, this will be able to help you make a good decision when it comes to buying or selling your home.
Story Number One - A two bed one bath house we listed on the East End
We listed a house here in Alameda. It’s a two bedroom, one bath on the East End. I did a video on it which you can watch HERE.
It’s a really cool home and the staging was amazing, which resulted in a ton of It ended up with NINE offers in total. Now keep in mind, this is a two bed, one bath, great kitchen and all, but it’s still less than 1000 square feet. The majority of the offers were well over a million dollars. And ultimately, we ended up having a very competitive bidding situation that pushed it up to the $1.1M mark.
Though not necessarily unheard of in the Bay Area, it’s still really hard to believe for something under 1000 square feet! It absolutely exceeded everyone’s expectations but not only that, there was also a ton of CASH floating around in that transaction. A lot of our potential bidders had large down payments well in excess of 25%, 30%, and in one case, almost 50%! WOW! The amount that someone was willing to pay just to win and to get into the house really shocked me.
Story number two - A fixer upper that sold for $1.3 Million
On the flip side, same day, but this time, I’m representing a buyer. We wrote an offer on a fixer upper property in Orinda. It’s a 1300 square feet, three bed, two bath home which needed a TOTAL makeover.
The foundation had cracks in it, there was drainage issues all over the property, the kitchen was outdated, and some of the appliances weren’t working. For crying out loud, the skylights weren’t even nailed down to the roof. The inspector said he was able to lift them up with one hand. We’re REALLY talking fixer upper property here.
I initially thought it would sell somewhere, maybe just a little below $1.1 million due to the potential upside on the property. I figured there would be about 10 offers and we would find ourselves towards the top of that.
So they came in at $1,075,000 to start. And all of a sudden I get this call later in the evening from the listing agent and we were ONE of TWENTY-SIX offers and our $1.075M offer was tied for 14th.
14th! Are you kidding me?!
I don’t know the exact number. But what I’m told is the winning offer got real darn close, if not exceeded $1.3 million. That’s insane because that’s the number the house is worth if it’s FIXED UP. Now, someone could do an addition on the back and add another bedroom and bathroom and push it up into the $1.5M world. But still, it’s going to cost an absurd amount of money to build that, relative to what you already spent to buy it. It just really blows my mind.
Definition of a Housing Bubble Recap
So all this got me thinking about the first video that I did about the housing bubble. I put out that video a couple of months back. It was about the market and the bubble and how I didn’t think we were in one at the time. However, recent events made me question that. So I went back and revisited the definition of a housing bubble, and this is what I found:
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.
I think both of the anecdotes I just gave you are great examples of exuberant spending. When that happens, it’s hard to think the new owner will have positive equity in the short term. Though, in the long term, it could. It feels a bit ridiculous. It seems to be really exuberant spending to the point of collapse.
What you need to know if you're going to enter the market as a buyer or a seller
So what’s really happening? How did we get here?
To simplify it, right now, we are just in a really low supply moment. Historically, we’ve had less supply this year than we’ve had over year 2019. In addition to that, houses have been sitting on the market for a much shorter time than they used to. I don’t want to bore you with a lot of charts and graphs so I’m just going to share a couple to share that I think are going to be interesting at a very high level.
Chart no. 1 – Is it a good time to buy or sell?
What the data above is telling us is in general, we’re at that point where buyers think it’s less of a good time to buy, and sellers are increasingly thinking it’s a good time to sell. That would indicate that there is higher inventory and less demand. We haven’t seen that materialize yet. However, at some point that’s going to shift back towards a more equal and balanced market. And that’s when the market will correct.
Chart no. 2 – Price growth is real
As I’ve talked about in that previous video and in others, the inventory is an issue here, especially in the East Bay. In general, there’s just not enough building of new houses that could catch up with the pace that population growth is happening.
Although we’re starting to see this growth rate decline, we still have a huge surplus from 10 years of extreme population growth, that even just a 1% dip this year probably won’t make a huge dent in the overall status of our market. We have such a big surplus of household formation that it will take several years of population decline to reach an equilibrium, relative to how much inventory we have available for people to buy.
So with this inventory issue, what’s happening is the existing inventory is just getting bid up because there’s a high number of people who want to buy that small amount of inventory. And so the value goes up and up until people can’t afford it anymore and the growth stops or declines.
And because there’s so much cash out there, and so many people who are still willing to pay the higher prices, it’s still continuing to push the prices up, hence that exuberant spending thing.
Chart no. 3 – What’s happening with Bay Area’s Inventory
Unsold Inventory Index and Median Days a house stays on the Market have shortened. As of December 2020, unsold inventory index is only at 1.1 months and median days on market is just 13 days. People are just snatching up what’s available.
It’s strange because usually, homes don’t turn over that quickly during December and often linger on the market for a while. Then the early January buyer pool would see those houses that did not sell in December and possibly transact on them. However, the inventory did not linger in December. It moved. So, we are starting off January with an even lower amount of inventory than normal.
Right now, we are also entering the spring market. Historically, this is usually the time when most of the buyer pool comes back. We can definitely expect that it’s going to be the biggest seller’s market, when the highest price records are set, and it’s also probably going to continue until early April.
So we’re in a housing bubble, what can you do?
If you’re a seller now, it’s definitely a good time to sell. You’ll get to really maximize your price and maximize your return.
It’s a different case though if you’re a buyer. For buyers, unless the perfect house for you comes along, that one that you absolutely know that you’re going to be in it for 10 or 15 years, now may not be the best time to buy a home.
To win as a buyer at this time means you are going to have to compete and compete hard for it. And unless you’re unwilling to spend another 10, 20, or even 50 grand over the comps, it could be hard to succeed.
Also, if you’re really thinking about buying in the next few months, you may want to continue waiting until that perfect house for you comes along before really jumping into the market. Perhaps in the next several months, a lot of those cash heavy buyers have duked it out. And hopefully, the rest of the buyers who patiently waited can again have that 20% down and a more comp-driven view of value.
The bottom line?
Do I know what’s going to happen in this market? Absolutely not. However, what I can tell you is it’s going to be really, really competitive for the next two to three months. If you’re getting in the market now, you need to buckle up and prepare.
If you’re unwilling to compete, if you feel you don’t have the means, the resources, or just the fortitude for it, maybe it’s time to just take a step back. For now, just watch for a month and see what happens.
On the other hand, if you know you need a property, if you have cash and you want to put it into the perfect property, now is a good time when you can absolutely succeed. Right now, sellers are going to be paying attention to who has that cash as a way to hedge against financing and appraisal risks. As a buyer, that’s definitely something you need to know to position your offer accordingly.
Bottom line? Just know that if you’re going to transact for the next couple of months, you really need to know that you’re moving into your forever home so that when the market does correct, you’re not in a bad spot with it. Because if you are forced to sell when the house is upside down, you really loose.
Most importantly, you need to know that you can ride that wave out because you’re not going to move for another 10 or 15 years because this house really fits you perfectly.
I hope my update about the Bay Area Housing Market 2021 and why I think WE ARE in a housing bubble has helped you.
Need more tips to help you succeed in the East Bay Real Estate Market?
Sign up for Two Minute Tuesday–market updates and stories about East Bay real estate (with the occasional puppy picture) from Hans and Kristin in two minutes, once a month.