Luxury Insider: 2016… READY, SET, GO!

Luxury Insider: 2016… READY, SET, GO!

Luxury Insider: 2016… READY, SET, GO!

Another year. What are we in for this time? Want to make a bet? I will: it will be a good year. Why? Because of 2 good reasons, one based on facts (I’ll get there) and the other one based on needs… My needs. After all, I have a role to play to insure that I fully take advantage of the market conditions, whatever they may be. You do the same. I don’t want to preach psychology 101 but, let’s face it, we are in charge, we are accountable to ourselves (not to mention others) to try hard to win, sometimes against the odds. The market is always good for someone. This one will be great for most. It’s going to be a fun ride.

OK, back to cold business thinking now. 2016 will be good because, first & foremost, there is no good factual reason, today, to think otherwise. We are coming out of a year when unit sales across the 4 regions increased from the previous year, up to nearly 8% in the Northeast. And this happened at a time when the listing inventory was at a level which may very well have been an all-time low.

As far as price appreciation, same “positive” picture (for the sellers that is). When the final 2015 numbers are released, they will show that housing prices rose over 3% nationally. The West, as a whole, led the pack with about 5%. Pretty much what we thought would happen when we posted our prognostic a year ago.

We are in a good place, today, as we start 2016. The economy is strong. Finally. The agonizingly long/slow recovery from the 2007-2009 financial crisis produced stability & growth. We are looking at 2.5-2.8%% growth this year and an unemployment rate down in the neighborhood of 4.7%. Combine that with a strong consumer confidence (steady improvement since 2009)…. And the fact that housing formation (creating needs in the real estate sector) surged with 1.7 million new households in 2015 …. And the fact that vacancy rates in the commercial/business arena are as low as I have seen them since the late 90s (15.6% for offices, 13.2% for retail & 7.1% according to NAR)…. And the fact that there is a backlog of a few hundred IPOs in the pipeline after a disappointing 2015 (tech/internet IPOs were down 53% in number y/y and raised 77% less than in 2014)….. All that bodes well indeed for the US economic outlook.

It is expected that home sales, this year, will be in the neighborhood of 5.5M units. If this comes true, it will be roughly 3.5% better than last year and 30% more than in 2010. Prices will continue their slow and moderate rise, between 3% and 4.5% nationally. Like it. No dark clouds on the 2016 horizon, which does not mean that the sky will be solid-blue. It never is more than a day at a time. So, let’s take a look at the very few & small clouds that we need to keep an eye on this year.

  • Interest rates: The Fed did it; it raised rates for the first time in nearly 10 years. It is not the beginning of the end, just merely the end of the doubt. Frankly it will make no difference to speak of on the real estate activity. The rise should not exceed 1% by year-end. Business as usual.
  • Home ownership: it has dropped and there is a question mark as to whether the decline will continue. Aside from the over 65, all other age groups are down. The Millennials, as we wrote here a few weeks back, are not “doing their part”. They now account for 30% of home sales while they historically were good for 36%. We are counting on them in 2016.
  • Length of home ownership: If we use the CAR stats for California, where the turnover is known to be fast, we notice that from 4 years in 1989, the number of years people owned a home before selling jumped to 8 in 2013 and now stands at 10.
  • Investors: They were slow to buy over the last 2 years. Distressed sales are all but gone and prices have skyrocketed to the point where the cost and the risk are too high. With the economy growing, the picture is likely to improve all year.
  • Cash buyers: their numbers are shrinking. With the cost of mortgage money going up a notch, the downtrend may be reversed in 2016.
  • International buyers: CAR reports that their 2015 share (4% of all sales) was the lowest in 8 years. Don’t worry. Even a strong dollar and a weak global outlook will not stop or even slow wealthy foreign investors from rushing to buy US real estate. Quite the opposite. Will be a good year, thanks particularly to the insatiable appetite of Chines and Indian Nationals for our land & property.
  • Affordability: Not expecting great news for first-time buyers. One suggestion though. If you are one of them, buy now, even if it hurts. It will not get any easier anytime soon.
  • It’s an election year… Whatever that means.

To a good year in 2016!


Luxury Insider: Where Are Those Millennials Everyone Is Talking About?

Seems like we’ve been talking about the expected Millennials’ buying tsunami for so many years now that I am both surprised and disappointed that a tsunami… it is not. In fact we can hardly see a wave. Still waiting though. It has got to happen sometime. We cannot disregard the buying potential of 79 million individuals!

To better understand the topic, let’s try to define “Millennials”. According to the experts, the appellation covers those of you (and others) who are in between 18 and 35 years of age. Those who are just now aspiring to a successful professional life and many who are already enjoying it. At the end of this year, they will represent the largest generation in the workforce, slightly ahead of Boomers (76M).

The Millennials, as we have been told, are free-spirits, fast moving, ambitious, mobile, fun lovers, job hoppers, independent, irreverent, relationships activists, social media fanatics, idealists, hedonists… Anything else comes to mind? Frankly, these traits do not look much different from those that characterized this age group through the last decades, except for one thing: now the Millennials have an iPhone, use Facebook, and live in a world that is evolving around the clock.

OK, there is another thing, one that we alluded to in the first paragraph: the Millennials are not exactly waiting in line to buy real estate these days. At least not the way we expected them to, and not the way their predecessors (in the same age group) did in years past. What’s going on?

Last month, as a coincidence, a bunch of docs about Millennials landed on my desk or my computer screen. Well written studies or articles published by serious entities such as NAR (National Association of Realtors), the WAV Group and the San Francisco Magazine. I read them all and learned quite a bit more about why Millennials are not buying homes right and left. Take a look.

  • They don’t have enough money. You cannot argue with that one. Times, they are tough in the Millennials’ world. Many of them, victims of the Great Recession or the slow recovery, are still looking for a job, or looking for better pay. Many of them are still paying for student loans and they cannot come up with a down payment. Many of them have a lousy DTI (debt to income) and consequently too low a credit score. When they qualify for a loan, they get hit with a higher interest rate, which pushes the mortgage payment to painful levels. At a time when property values, from one coast to the other, have skyrocketed, home ownership is a financial challenge many cannot master.
  • They are not necessarily placing home ownership on top of their list of needs & wants. Remember, Millennials are not conventional. Many don’t share the American Dream. Not that they just want to have fun, but they may attach more importance to the moment than to the future. The future will come soon enough. Travelling and partying with friends may have a priority over fighting to get a mortgage and then fighting to pay it.
  • They are not ready to think about “unnecessary” obligations, constraints and responsibilities like, you know, a spouse, a kid, a dog… Life is good, why complicate it. Life in the burbs, as it has been illustrated in Hollywood movies, is not fast enough, exciting enough for lots of Millennials. They want the big city pulse, the busy streets, noise, traffic, eateries, clubs and all other venues that create social opportunities.

With such a state of mind and financial limitations, you may wonder whether greater numbers of Millennials will ever want to buy a home, just like Mummy & Daddy. Wonder no more: they will, and this is why:

  • They are getting richer. The economic recovery, however slow it has been, has replenished many of the Millennials’ bank accounts. More jobs, better jobs, better-paid jobs. What do you do when you have a better income and deeper savings? You buy real estate. That’s what you do. Wasting good money renting no longer makes sense when you can buy your own place, build equity and perhaps end up paying less per month.
  • They are getting older. Wait-Wait-Wait: life goes on and pretty soon you are young no more and your needs are different. You are more accountable to others, professionally and socially. You may even show your ambition to move up in the world. How conventional! You may have a family. You want a house. You want to own your own home. Imagine if 10% (or even only 5%) of the 79 million Millennials were house-hunting next year!… Now you’re talking about a true buying tsunami! Hold your breath!
Senior Vice President, General Manager of Intero Prestigio International

Sellers, Make My Day…And Yours!

by Alain Pinel
General Manager of Intero Prestigio international

Luxury homes stay longer on the market than less pricey homes. Surprised, Anyone? Of course not, it takes money to buy real estate and a heck of a lot of it to buy million-dollar properties. More than half of the buyers can afford an average-priced home most anywhere in the US, but way less than 10% can buy their million dollar dream home.

The problem is not whether or not the sticker-price is relevant, as it can usually be justified based on comparable sales or active listings. The problem is simply that qualified buyers are not legion at the top end of the market. Today, in some of the most exclusive zip codes from one coast to the next, you may have 10,000 homes for sale over $3M with “only” 9,000 possible buyers looking in that price range. Over $10M, you may have 1,000 properties fighting over 800 buyers.

With the prospect of better tomorrows, million dollars homes have been mushrooming all over the land a lot faster than the number of millionaires. At that price level, the demand can only buy a fraction of the supply. Lowering the price is not necessarily the recipe to capture a buyer since, as stated earlier, the price, most of the time, is right on target. We are in a catch 22 dilemma. Only time and effective targeted marketing to connect with the right buyers can help.

Talking about targeted marketing, it is pretty obvious that the pool of luxury buyers is very different today from what it was only 10 years ago. The qualified and interested domestic demand is substantially down as a fraction of the entire demand. The segment which is up and continues climbing is the demand from foreigners originating from Asia, Europe and the Middle East, etc. Thanks to this game changer, the luxury market is remaining active if not steamy, and promises to keep on growing.

As I wrote here a couple of times, the huge appetite that Chinese buyers alone have for US real estate, especially the crown jewels, is the best insurance policy that guarantees a high level of transactions, a robust volume of sales and a growing average price. Last year, the Chinese bought something like $30B worth of real estate here. The US is their N.1 destination, well ahead of Australia, the U.K. and the rest of the world.

The buying frenzy is not likely to slow anytime soon. More and more wealthy Chinese come over as tourists to check the territory with the idea of emigrating someday. Last year alone, about 100 million of them travelled abroad and, here again, the US was top of list.

The supply of high-end properties, as stated earlier, is abundant today, most everywhere in the country. However, not all listings respond to the needs & wants of today’s buyers. They want it all: location, quality, style, size, etc. They know what they are looking for and, given time and a good Realtor, they will find it.

In the Silicon Valley, the land where the word ‘impossible’ does not exist, the supply inventory of relevant homes for sale is barely more than a month. That’s what you call a hot market. But, believe it or not, in spite of it, a massive number of would-be sellers are still waiting for better times to sell. Puzzling. What do they know that I don’t?

I suppose many sellers are waiting for the traditional Silicon Valley IPO bonanza. Well, it’s here, but not quite as juicy as sellers & buyers are hoping for it seems like. Startups are being created in waves but not developing in the valley as much as in the past, during the heydays of the late 90’s. Having said that, I am not the least worried about the future growth of the luxury market in Silicon Valley or elsewhere. The big Mo is here to stay at the top end.

Homeownership & Wealth: The Dynamic Duo

by Alain Pinel

General Manager of Intero Prestigio international

Is homeownership getting out of fashion? Scary thought! Ridiculous actually! Why such a daring and provocative question then? Well, if you believe in stats, you have to be concerned that the rate of homeownership has been dipping of late.

In 2004, the rate reached its peak at 70%. Today, it stands at 64.3%; it’s as low as it has been for the last 20 years. The reason? I bet you already figured out what it is, at least part of it….. Smack in the middle of the 2004 to 2015 stretch, we have been shaken up by the many tremors of a 4 year long financial crisis, the Great Recession to call it by its name.

The New York Times, in its SundayReview, wrote an editorial on the subject matter, partially using the findings of a research by the Joint Center for Housing Studies at Harvard University.  One sentence gives the full flavor of the article: “Since the housing bust, renting has been in and owning a home has been out.”

The declining ownership rate, mentioned above, proves the point. During the period of time when the rate shrunk to the extent of 8%, the number of homes occupied by tenants increased by about 25%.

Some observers may wonder whether this situation can be explained by the economic slowdown, with what it means in terms of jobs & incomes compression, or if it represents more of a trend, a lifestyle change of sort. Is homeownership losing its appeal?

The article is reassuring. Homeownership is as American as apple pie. It has been and still is, as much as ever, central to our ability to amass wealth. Between buying and renting, there is no competition. Even with the substantial decline in wealth due to the housing bust, says the NYT, the net worth of homeowners over time has significantly outpaced that of renters, a group which tends to accumulate little if any wealth.

When analyzing the reasons for the above, the Joint Center for Housing Studies makes the key point that homeownership requires buyers to save money for the down payment, and requires them to keep on saving to pay down the loan balance together with interest.

The alternative, renting a home, not only does not build equity, but does not require the tenants to save any money at all. They can if they are able & willing, but, at the end of the day, most don’t, because they don’t have to.

Of course we cannot downplay the risks involved in purchasing real estate. Prices can go up (as they have in a big way during the last three years or so), but they can also go down, shrinking equity or wiping it off altogether. Does not happen often and does not last long, but it sure hurts when it happens, as it did during the housing bust.

Frankly, I don’t know many people who wish they had rented a home rather than buy one. When in doubt, think about what you paid for the house you live in and what you could sell it for today. You can do the same exercise with all previous homes you bought and sold over the years. Great education to make believers out of the skeptics among us.

Bottom line: unless you are looking to stay in any given place a very short time (between two homes so to speak), there is no good reason to rent rather than buy, create wealth in so doing, and live the American dream.

What’s Next After Labor Day?

fenceSummertime came & went already… Did you go on vacation, got a good rest and got a nice tan to prove it? Hope so for you. It’s good for the mind to go into neutral every so often. Summer 2014, however, has not been exactly quiet and relaxing for everybody and in all businesses. Try real estate for example. No time to smell the roses for the true pros; July & August have been hot in every way.

Some people might argue with the above statement. After all, sales units are actually down year-to-date, in many markets this year, particularly (and paradoxically) in the most buoyant of them. The Silicon Valley is a good illustration of this peculiarity. However, this apparent slow-down is more a mirage than the reality of the marketplace. Let me make my case…

First, the number of sales units does not always tell the story. For one thing, we can only sell what is available to be sold. As you know, we are suffering from the most acute (and often incomprehensible) shortage of inventory that I can remember. Give me more listings and I’ll give you more sales. A lot more.
But, no matter how relevant the number of transactions may be to describe the velocity of the real estate market, it is not, in my view, the N.1 indicator of a hot market. Prices are. And price appreciation during the last two months, in many sought after areas such as the Silicon Valley, has certainly continued at a good tempo, seemingly unaltered by the “slow” season.

I know what you are going to say: that too is all about that supply & demand dichotomy I was referring to earlier. Well, OK, up to a point. Prices don’t go up simply because of listings scarcity. There is a lot more to integrate that the eyes don’t see. The significant fact is that most people believe again in real estate; they believe in the value of purchasing a home, whether to live in or to leverage as an investment. The recession years are now well behind us and, if nothing else, the appetite for real estate has grown after a long diet.

There is more. US real estate is wanted. This is particularly true in the San Francisco Peninsula & the South Bay. Even when the domestic demand shrinks, for all the good reasons we can understand during tough economic times, the international demand makes up for some of the loss and keeps on driving prices higher and higher yet.

For most foreign buyers coming to town, prices are no object. They don’t perceive our real estate prices as being too high. In fact, many of them find local homes to be very affordable compared to what “similar” properties would go for in the countries they come from. Not to mention that in some Asian countries, for example, you stand to lose the property that you paid dearly for upon the expiration of a multi-years lease. Title remains with the State.

Hence a growing migration of international buyers to the US. Hence the upward pressure on prices. Cash deals, multiple offers and wild over-the-asking price offers are the new normal. It is what it is. As a Realtor, I am not complaining, I am just observing.

The thing to always keep in mind in the real estate business is that buyers “make” the market. Not the sellers; not the real estate agents. We have to look at the buyers’ behavior to measure the pulse of the market and understand where it is going. Today, the trends are good. Prices, more than units, are the expression of this optimistic view.

Labor Day is now behind us. We are about to start a “new year” of sort when the fall season pushes summer away. A big wave of buyers is approaching. It would be nice to see more listings hitting the streets. Chances are it will happen. Cross your fingers and stay tuned.

By Alain Pinel
General Manager of Intero Prestigio international
Intero Real Estate Services, Inc.

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Pricing Right: Strategy, Tactics, or Black Magic?

HVThe market, over the last two years, has been so hot (after being so cold) that a good many home-sellers and Realtors got to thinking that price does not matter much nowadays when dozens of anxious buyers are waiting in line with a bid in their hands, hoping to get a house. Well, wake up. Price matters.

Typically, one of the most agonizing questions both sellers and their agents dread the most (aside from the commission issue…) is indeed “What price should we put on the listing to produce the fastest sale at the best price?” Today, this question is very relevant, perhaps more than ever. Depending on the local market, the uniqueness of the property and its price range, you may explore different approaches to maximize your chances.

The choices have always been and will always be the same:

  • Overprice: deliberately or by ignorance
  • Underprice: deliberately or by ignorance
  • Price at what we perceive to be “market value”


Remember that there is no magic recipe that works every time. Again, you need to take the pulse of the market at that very moment and understand that what works at the low-end rarely works at the high-end. Just supply & demand common sense. Let’s look at the three options and briefly analyze the pros & cons of each one.

  1. Overpricing:  Hard to define what is an overpriced listing. As far as I am concerned, an overpriced listing is one that does not sell!  In other words, , a property is not “overpriced” if a buyer buys it, even if we thought it was when we put the For Sale sign on the front lawn. The supply & demand dance can do strange things in a good market. Want an example? Look at what happened in the Silicon Valley over the last 30 months or so: very little inventory, huge pent up demand, cheap mortgage money, reassuring economic news , more stable job market, wave of rich IPO’s, etc. Results: in the mid range of the market, between $1M & $2M, selling prices have jumped, on average, well over 10% per year. Now, before you get too carried away, let’s use a little wisdom that only experience gives us. In the real estate business, the past is not necessarily a good guide to predict the future. It is not because prices have jumped yesterday that we can count on the same thing tomorrow. What we can say, looking backwards, is that if a house in that region has been on the market more than a month and did not sell yet, chances are it is indeed overpriced. Overpricing, in any market, is a dangerous idea. In my book, it is a terrible idea. If the market is slow, it makes no sense. If the market is hot but the house does not move quickly, it will soon grow old and collect dust as Realtors will always prefer showing new listings rather than those which have been aging on the shelves. Your choice.
  2. Underpricing:  Talk about dangerous games!… You must have a strong heart to deal with that option. It can work to the sellers’ advantage. It can hurt just as well. In the hot market we have been enjoying for a while in the Silicon Valley and many other markets throughout the US, underpricing is getting to be as popular (and risky) a sport as bungee jumping. The idea is to tease anxious buyers with a price 5 to 10% lower than what we perceive to be the market price and manufacture a bidding war which may result in multiple offers and an ultimate sales price well over the asking (and presumably over what we the house would normally sell for…). Some agents make a good living advising their clients to take a chance. They may even win more listings using such gimmick with some degree of success. That, of course, is a bit deceptive since it is a strategy that can backfire. Keep in mind that underpricing does not guarantee a higher price. It could go the other way. Do I like this option? No. I just don’t like to play games. Your choice.
  3. Pricing at “market”:  If you, as a home seller or as an agent, think you know at what price a buyer and a seller are likely to come to terms in any market, because you have a bunch of reliable comps (recent local sales of similar properties, active listings…) I suggest you use that option rather than play with a grenade. You may put a tiny cushion on top of the price to allow for possible negotiation. If the price is too high, you will soon know and you will cut some right away. If the price is too low, well, you will benefit from a buyers’ frenzy. If the price is right, you will obtain a quick & easy sale. A win-win. I like that. We all sleep better when we do business that way. Your choice.

By Alain Pinel
General Manager of Intero Prestigio international
Intero Real Estate Services, Inc.


What Bubble?

By Alain Pinel
General Manager of Intero Prestigio international
Intero Real Estate Services, Inc.

Are we spoiled, or are we bored, or are we blind? Is the Silicon Valley the eternal land of plenty or just a Fools’ Paradise?

I don’t know about you but I feel like I caught a virus that makes me a bit gloomy these days. No matter what business paper I read, I feel like being brainwashed about new impending dotcom slide. The word “bubble” is coming back in fashion. Every decent brain has a theory on the matter and they are ruining my days preaching tougher times in the tech industry and whatever business (like real estate) that benefits from it.

What are we talking about? The hi-tech euphoria which caused some IPO’s to reach stratospheric levels over the last two years, is dissipating. Valuations are being challenged, especially in the social media arena and biotech. Balance sheets do not support stocks performance. By the time employees of most new tech IPO’s can sell their shares, the median value shrinks substantially. The tech-heavy Nasdaq is down so far this year. Warning signs?

Anything can happen. I have not forgotten the tech boom of the 90’s in the Silicon Valley and the brutal wake-up call that followed in late 2000 & 2001. But what I see from my window, today, is that too many people believe way too much in Murphy’s Law. It is a good conversation topic around a dining table to predict a slowdown, just like we predict the next big quake can happen anytime, but the fact is that today’s “bubble” has no similarity to that of 2001.

Back in those days, the giants of the industry were still young and financially unsecure. Their market was, for the most part, limited to the country boundaries. IPO’s were mushrooming right & left, fueled by plenty of VC money looking for a quick return.

Today, the giants of the tech sector are loaded with cash. They are doing as well if not better overseas. They are grabbing new innovative tech companies at record prices without feeling any pain. Investors are in for the long term. VC people are hot about growth revenues prospects and are investing billions in the Valley, particularly in San Francisco, which appears to be the new destination. The returns sure beat other investment opportunities in this anemic economy.

Of course those same people complaining about overvalued tech stocks about to fizzle, are announcing the same prospect for the local real estate activity which depends so much on the tech sector in the Silicon Valley. The market, however, is behaving just fine. The only negative is that the so-called Spring market has not, so far, brought the thousands of new listings that we expected and we so badly need to satisfy a steady demand.

Most of the uncertainty regarding the regional residential market is not related to a tech slowdown; it is just a new normal here and everywhere else in the US given a sluggish economic recovery. NAR, the National Association of Realtors, was remarking a couple of weeks ago on the fact that the current sales activity in underperforming by historical standards. “In contrast, price growth is rising faster than historical norms because on inventory shortages.”

Last year, the Silicon Valley has fared quite well compared to most other areas. In the “money-towns” of the Mid-Peninsula, such as Atherton, Woodside, Portola Valley, Menlo Park, Los Altos, Los Altos Hills & Palo Alto, the dollar volume of sales exploded year over year, up to 28% in Woodside and 22% in Palo Alto. Unit sales also jumped to new highs, except in Menlo Park, Los Altos & Palo Alto where the inventory of active listings was particularly low.

When you compute the price appreciation over a 5 year period, homeowners did pretty well: Atherton jumped 28%, Woodside 29%, Portola Valley 38%, same for Menlo Park and Los Altos, Los Altos Hills 15%, and Palo Alto…57%! Is that enough to talk about a bubble? Not in my book since it is mostly a function of the dichotomy between supply & demand. Yes, 2014, so far, has been a bit weak, but you give me a lot more listings and I’ll give you a lot more sales without inflationary prices. The Silicon Valley is OK. Keep the faith. Thank you.