6 Recession Factors That Affect The Bay Area Real Estate Market

Welcome to our July 2022 Bay Area Housing Market Updates! We will be discussing the possible recession and how it would affect the Bay Area real estate market. You can also watch the video recording on our YouTube channel here.

 

 

Let’s get started and first thing first – The news of recession! We hear a lot and we have so many buyers right now saying “we’re going to take a pause on home buying” and most of them said that “Oh! my co-worker told me, you know, the recession is going to last for another year or so” or “we’re just really worried because the internet has been talking a lot about recession.” I’m not saying that they are not true but I’m just saying that there is a lot of negative news on the internet and also among our network, right now. So, let’s do this today and dissect this, what is recession and what is the data on the market? So, we can make some informed decision about whether you should go in or not into the real estate market.

 

Let’s take a look at some factors that can lead to a recession. The following six factors are the ones that most people looked at.

 

1. The first one is two consecutive quarters of economic contractions and most of the time they look at the GDP.

 

2. Then, of course, you can check that there are rises in bankruptcies, defaults, or foreclosures.

 

3. Thirdly, there are high-interest rates.

 

4. Falling asset prices, which include the cost of homes and also the stock market.

 

5. Rise in the unemployment rate.

 

6. Last but not least, lower consumer spending and consumer confidence. 

 

These are not the only six factors but these are the six main factors that can lead to a recession. Let’s take a look at them and see what you guys think. 

 

 

This is actually historic data on our economic expansion by duration and we did have a pretty darn long economic expansion. We had 129 months. It is really the longest in history and which also one of the reasons why a lot of people have been talking about like because we had such a long economic expansion, we’re due for adjustment of our economy and so that’s why we’re going to have a probably a pretty long recession as well. The next longest was 120 months from 1991 to 2001. 

 

But does it mean that we’re going to go into recession? It could be, very well it could be. 

 

 

Let’s look at what other economists say. Here it says that “the group of prestigious economists responsible for declaring official recession takes into account six major factors, such as the health of the labor market as well as household income and spending.” 

 

But I wanted to know who these economists are. These are current members of the National Bureau of Economic Research and they are Business Cycle Dating Committee Members, and they are the ones who make a decision that we are officially in recession. 

 

 

If we look at the GDP annual growth rate, here we see that our annual growth rate at the beginning of 2022 is about 3.6%. The number doesn’t look too bad, but we did have a dip. For sure, we are coming down. We were as high as almost over 12% in 2021 and our numbers actually are still pretty. Compared to the last 7-8 years, we are still pretty high up there, even though we have a dip, just by looking at the growth rate-wise, it doesn’t look too bad. And, of course, we were coming back up from a very, very bad 2020 during the COVID started and then, we pumped it up because there was just so much money in the economy and so our growth rate has shot up quite a bit in 2021 and now, this is the time that when we are starting to slow down. 

 

 

Again, earlier we said that it’s two consecutive quarter growth rate. So, let’s look at the real GDP and the percentage change from the previous quarter. 

 

We’re looking at 2022 Q1 and then the number right now we are having a negative GDP currently compared to the last quarter. Again, it’s only July 20th, probably we don’t have the 2Q 2022 number yet. But this is what everybody’s speculating, are we going to have the second quarter of a negative number? We’re going to have those members to determine whether we’re officially having a recession right now. So, we definitely see that. Q1, we have a negative GDP, but we’re going to see Q2 in a couple of more weeks whether it’s also showing a negative number.

 

 

Now, the second factor that we talked about was the bankruptcy and foreclosure filings. I looked at the United States Courts’ website to see the total bankruptcy filings by chapter, chapter 7, 11, 12, and 13 and then see whether we have a drastic increase in bankruptcy filings. By looking at this, it looks like we are actually way below the previous four years’ numbers, 288,000 for chapter 7 which is the lowest if we look at the last four years, the same thing for chapter 11, chapter 12, and chapter 13. So, it looks like bankruptcy-wise, we are doing okay unless in the last six months we’re going to have a huge increase in the bankruptcy filings, and, of course, that would be a different story but at least right now, just by looking at 2021, we are really way below what the past four years have been doing.

 

 

In terms of foreclosures, I look at Black Knight (mortgage monitor). We look at April and May and then look at the average day’s delinquency and how many loans have been delinquent. Now, 30-days delinquency, we have about 671,000, 60-days delinquency about 184,000, 193,000, 90-days-plus delinquency about 639,000 versus 595,000 in May and the ones that are actually foreclosed, they’re about 173,000 and 174,000 for the month of May and total non-current that total up to about $1.6 million approximately. 

 

If I look at that and compare prior to the biggest recession we had around 2007, we are actually below that number by quite a bit. As you see that in 2007, 30-day delinquency is $1.4 million and $1.7 million in 2007 and 2008 versus 671,000. This is much less, less than half of what we had before. Same thing for 60-day delinquency. This is 468,000 and 676,000 versus only 184,000 and 193,000. And 90-days delinquency 551,000 and 950,000 in 2008 versus 639,000 and 595,000. And the Foreclosure, we had 393,000 in 2007 and it jumped up to 813,000 in 2008. Where in the month of May, we had about 174,000 here. 

 

By the way, of course, this is we’re talking about the month only but then the number is still much, much, much below the 2007 and 2008 numbers. 

Let’s compare the numbers for pre-COVID. We also have much less compared to just pre-COVID number and for foreclosure, we’ve been talking about this probably since 2020 and I’ve been comparing these numbers quite a bit in the past episodes and I just don’t see a high foreclosure which was the main reason that caused the previous recession. In terms of foreclosure filings and bankruptcy filings, we’re doing okay. 

 

 

But, what about the interest right now? The interest rate we all know that it has been going up, especially the Federal Reserve. They are increasing the Fed fund rates. In 2016 and 2020, as you see that we were actually pretty high and then it was as high as 2.5% and then in 2020, that’s when they just dropped the Fed fund rate because of COVID, our economy shut down so they dropped the interest rate quite a bit. But now they are increasing it quite fast, drastically. We dropped it so fast and we’re increasing it, maybe not as fast as we dropped it but then we are increasing pretty quickly still. Last month, in June, we actually went up about 0.75%. So, going from 1%, we went up to 1.75% and we are expecting in next week Federal Reserve going to announce another Fed fund rate increase. It probably going to go up to 2.5, but I did hear that they might even consider increasing by a full percentage point to 2.75. So, that of course will have some kind of effect on our mortgage rate as well. So, I believe that we should all expect to be about 2.5% to 2.75% by next week.

 

 

Now, then of course about mortgage rates now. We have been seeing an increase in our mortgage rates. We always tracked how they are projecting the mortgage rate and we see Freddie Mac increase their projections quite a bit since October 2021 versus their last projections in April which went 110 basis points. So, again a reminder is that even though these agencies have the best economies or the best analysts to project their mortgage rate, they still adjust it quite frequently. As you see that in 4Q 2022, they adjusted 130 basis points compared to last year’s projections and but then they all projected about 4.8% to 5% until 2Q 2023.

 

Fannie Mae though had adjusted their projections from last month and actually lowered its projections. They thought it was going to be 5.1, now they’re projecting 3Q is going to be just around 5, 4Q 2022 about 5% as well and 1Q 2023 and these they think that it might start to come down slightly in 2Q 2023. Not by a lot but at the same time, as I mentioned that they adjust their projections quite often and Fannie Mae had adjusted their projections from last month and became a little bit more optimistic. As for Mortgage Bankers Association, there’s no adjustment to the projections. They’re staying the same at 5.1% and 5% for 30 years for the next few quarters. National Association Realtors®, projections compared to last year until April and then they have adjusted to about a 5.2 to 5.4 in 2023 2Q. So, the average of all four, because of the adjustments for Fannie Mae, actually had come down a little bit, all right around 5% all the way until 2Q 2023. 

 

Now, Freddie Mac, Fannie Mae, and also Mortgage Bankers Association, did two more quarters after basically 2023 3Q and 2023 4Q. And as you see that it looks like Fannie Mae and Mortgage Bankers Association which they both have the most recent projections, they are both projecting that in 2023 3Q and 4Q, the mortgage rate will be coming down at that point. So, I feel like that’s actually pretty good but then we’ll see if next month they’re going to adjust their projections again. Hopefully, the projections would look better because, right now, I know of the last couple of months our chart here is all “red” because everybody was adjusting, moving up their mortgage rate but now it looks like we actually have some more optimism towards the mortgage rate coming down a little bit by the next year 2023 3Q.

 

 

Housing and stock prices are our third factor that might lead to a recession. Let’s take a look at the stock market, I usually use Wilshire 5000 because they are more of a total market index. They have the most stocks in this index. I know everybody who we work with, our clients, our friends, a lot of them have been telling me that they don’t really want to look at their portfolio because it looks really depressing and that’s also one of the main reasons why especially in our Bay Area Market it does affect our buyer’s decision to purchase real estate or not. Most of our clients and most of their down payment come from their stock portfolio because it has gone down quite a lot since the beginning of the year, so a lot of our clients actually have paused because much of their down payments have gone down in value and they just didn’t really want to pull it out anymore or some of them have pulled up but they just don’t even have enough money anymore to put as down payment. So, this is one of the main reasons for our Bay Area buyers to really pause the decision on home buying.

 

 

So, the housing market, let’s look at the months of inventory. It has gone up from January 0.9, like less than one month of inventory, gone up to 3.6 months of inventory. Now, we have been talking about this last two months as well it’s like, “Oh, it’s still less than two months. It has been going up but still less than 2 months” But in July, it really has gone up quite a bit. Now, actually, we’ve been mentioning in the normal market, it should be right around 4 months of inventory and sure enough, we are getting very close to that and now we start seeing properties staying on the market a lot longer or we see a lot more inventory on the market.

 

 

In terms of days on the market versus sales over list price ratio for all four Counties that mentioned Santa Clara, Alameda, San Mateo, and also Contra Costa Counties, and as you see the days on the market we went from about 9 days, 7 days, a week-long to now 13 days and everybody’s freaking out because it’s “Oh! my gosh, it’s almost 2 weeks of being on the market” and then we don’t see double digits percentage sales price over asking price anymore. We dropped down to 4.2%. I think we are so used to seeing like at least 10% over, 20% over asking price but now we only see 4.2% across 4 counties. So, we definitely see a slowdown in the market. 

 

I find it kind of interesting always think back. We track these numbers a lot. At the beginning of the year, we have been talking about “hey, by the time we hit June, the market is going to slow down. We’re going to have fewer people make offers.” And then remember July and August, this is also one biggest misconception by a lot of buyers or sellers is that they always think July and August is the best time, it has the most buyers on the market and the best time to sell, as a matter of fact, we have the least number of buyers on the market because most families they go on vacation and I think I’m in the same position as a lot of families with young kids is that they are out of school. They have summer camps or they’re at home and it’s just really hard to focus and so a lot of families just like let’s just go and take a vacation instead of going house hunting. So, July and August typically have always been slower but, of course, in addition to all these factors, it really affected the housing market quite a bit. 

 

 

Because of the market changes, now we are looking at how many listings have been withdrawn and canceled. Look at January and February, how few numbers like in Santa Clara County, San Mateo, Alameda and Contra Costa County, they are less than 100 listings, will be withdrawn and canceled because whatever comes out it sells. At the time, the market was really, really, really hot; but as soon as May started, we saw a huge increase in the number of listings being withdrawn or canceled because they realized that “Hey, my property cannot be sold in less than 2 weeks anymore.” Buyers, at the time, still have that psychology like “Well, it would probably stay on the market for more than one weekend, there’s something wrong with a property.” It becomes non-attractive at all to even look at these properties if they stay more than 10 days on the market. But then because the market has slowed down so much, in June we have 400 listings from Santa Clara County, it came down which is a 36% increase from the month of May. 

 

For San Mateo County, now we have 132 listings that are withdrawn and/or canceled compared to May and that’s a 31% increase and then as for Alameda County, 440 versus 332 that’s 33% increase and as for Contra Costa County, it is slightly better. It is 9% more than the month of May. But, if you look at July just for about 20 days, we’re probably going to be on the same track as the month of June where we’re going to see quite a bit of listing being withdrawn or canceled mainly because sellers just can’t sell at the price that they want it from the previous hike. Because of that, we look at also before they withdraw the listings usually they have a price adjustment. 

 

 

At Santa Clara County, we see a huge increase from May it was 292 listings, and then June, it was 236 but just the first 20 days in July, we have 413 listings that have a price decrease and San Mateo County same thing, just the 20 days, we already have more than the entire month of June or month of May, 157 listings dropped their price. As for Alameda County, we have 449 in just 20 days, way higher than the month of June and month of May and lastly, in Contra Costa County same situation 526 listings dropped their prices.

 

I know it looks scary. It is scary, I guess, for sellers, unfortunately. I got a message from a friend the other day, and she was asking me because her friend is trying to sell her house and the buyer makes an appointment to see the house and then later canceled without even notifying the seller and they’re fairly frustrated because seller at this time they cannot sell their products easily, especially if they’re still living in the property. They have to stay there and then clean up every time they have an appointment or have a showing. When the buyers or buyer’s agents don’t notify them, they’re not going to come, they actually put up all this effort. They get really stressed out. They coordinated with everybody’s schedule and then nobody show up. They felt like is it me, I’m just having bad luck and I told my friend like please let your friend know it’s not them. It is the market. The market right now is just really slow. Buyers have a lot more options. They just feel like “Hey, I saw your property, I liked it and then maybe 15 minutes later, they see another property online or a day later, they see another property online and they like that one better and they forgot to cancel yours. So, I just want to give that words of encouragement to sellers. One is that it’s not really you having bad luck, it’s really the market, right now, is just a bit slow so just be patient.

 

 

In terms of median sales price, we talked about that one of the factors is a housing price dip. So, as you see that’s starting in June and July, the median sales price has been coming down a bit, it’s not 10% yet but then we’re definitely getting close to that. If we continue to go down but we have gone up significantly starting from January 2022 all the way to May 2022 and then now June and July, we’re starting to see that the prices have come down. So, in Santa Clara County, the median sales price for July, the first 20 days, is 1.755, San Mateo County is $1.96 million in July 2022 and Alameda County is 1.35 as of July 2022 and Contra Costa County is $900,000.

 

 

We looked at the stock price, we looked at housing price, and now let’s look at the unemployment rate real quick. We know that our employment rate actually is still doing pretty good, as of June of 2022, it is 3.6%. So, it doesn’t look too bad compared to all the way to 2002, in the last 20 years. We are actually doing pretty well with the unemployment rate, although I know that we started hearing a lot more layoffs in the Bay Area. It’s still in the hundreds right now for some companies, the overall unemployment rate is still doing pretty good.

 

In terms of consumer confidence, retail sales rose more than expected in June as consumers remain resilient despite inflation. This is really interesting. This is from Morning Consult and they did this research. Basically, if you look at people who make less than $50,000 versus people who make more than $50,000. So, people who would make less than $50,000 is a lot more price sensitive during this inflation pressure while people who make more than $50,000 are not as sensitive towards this inflation pressure. Then, if we break it down to the different type of purchasing, you see, for example, trips and vacations 29% in price but the net purchase and purchasing intentions is only down 3%. It is really not too bad. I mean I just came back from Nashville, like I mentioned, I had to take this trip, it’s a business conference but the price I had to pay was over a $1000 just for the plane ticket and that was crazy. I don’t think I’ve ever paid more than $1000 for a domestic flight. I remember back then I would fly to Asia and I paid only $500-$600 or maybe $800 would be the average and now flying domestic is over a $1000 and I didn’t even get to get free stacks on the plane. And, of course, we look at the car and furniture, they went up 13%. There is more significant changes in the purchasing intention for new cars or new furniture, something more expensive people do reduce their purchasing intention a lot more compared to something smaller in the hundreds of dollars or a $1000 or $2000, they are not as sensitive. So, consumer confidence look like is still doing pretty good.

 

In conclusion, we looked at those six factors now. I think we might have another negative GDP, doesn’t look that great. In terms of bankruptcy defaults and foreclosure, looks like we’re doing okay. And, what about high-interest rate, well, high-interest rate definitely is going up but it looks like it’s going to come down in the next few quarters. So, the interest rate, it doesn’t look like they’re projecting is going very high or very fast but then it’s pretty as much stable and about 5% to 5.1%. Falling asset prices, definitely we are seeing that quite a bit. The prices definitely coming down but unemployment looks like we’re doing good and we are actually doing good with consumer spending and consumer confidence. 

How do smaller, independent investors tap into the benefits of institutional-grade commercial real estate? A Delaware Statutory Trust (DST) is an increasingly popular option. For this month’s Bay Area Housing Market Townhall, our guest speaker Peter Fisher discusses what a DST is and what are its pros and cons as an alternative 1031 exchange solution. Check out the recording here.