Anatomy of a Crazy Hot Real Estate Market That Is Getting a Little Cooler: Stay Out Of Costco

A few months ago, my son bought a home in the Peninsula area of San Francisco, home of the priciest real estate in the country.  I assumed they were getting a shack, but paying for a mansion. The equivalent of our M Streets homes or 1950’s mid century moderns go for $800,000 plus on the Peninsula. He bought in Redwood City, just a few blocks from Palo Alto. That geography saved him a bundle: you cannot get much under $1,000,000 in Palo Alto, and a million there is the price of a starter home.

The home they bought is a “remodeled” 1950’s ranch, but it’s mostly new. The slab was kept intact because in California, regulations make it impossible (and more expensive) to build a new home. So builders retain a part of the original structure, enough to pass as a remodel. My kids’ home is, from the slab up, fresh, new and adorable. Seriously, this is better than a new baby! I absolutely adore it because now I have a bedroom in Cali and when I’m there, I happily vacuum the coffee stained floors as much as I can because I love those floors so much I could eat them. They are reclaimed from an Atherton mansion, hand-scraped, wide wood perfection. And there is a lemon tree right in the front yard!

Buying this home was a frenzied pace and exhausting, and I was back here in Dallas! The day my kids went to look at the home, the first day it was open, was a mad house. Fifty people converged, found an open door, and within moments were crawling over every molecule of the 1600 square feet. Some were sparring. My son says he almost called the police until he learned this was just a typical California open house. This was last February, before things got really nuts. Buying it was tricky: there were multiple offers and they had to reach over the asking price. My son was so happy to have a Realtor who had a strong relationship with the seller’s agent. In tight markets, you need agents more than ever.

After all that, I found this article entertaining: word that the California market is cooling  a bit from the madness that began right after the new year. I know this madness; my children were a part of it. All the crazy stuff you’ve heard about the California markets are true — homes have been selling for more than asking, there are bidding wars, multiple offers, throngs fighting each other to be the first inside a listing, cash offers, deals on commissions. This swing to a seller’s market happened first in California and Arizona, then spread to other parts of the country. Now, the inventory crunch is upon us: some homeowners hesitate to sell for fear they won’t be able to find a place to buy. Cali Realtors cannot throw a simple cheese and wine sip and see for homes — they’d have to buy five cases. Buyers cannot even go to Costco:  “Some of our buyers don’t even like to go into a Costco for too long if it will block the cell signal they need to get instant (real estate listing) alerts.”

But now, Glenn Kelman, CEO of Redfin, a technology-powered real estate broker backed by Madrona Venture Group and Greylock Partners, says that market is cooling. And while we live in Dallas, where foreclosures are down by 40%, it’s worth a minute to see WHY it’s cooling and if that trend will venture our way:

Bidding wars, says Kelman, are still common, “with Redfin agents facing competition on 95 percent of all homes in May 2013, the highest of any of the 21 markets Redfin serves. For example, Redfin Silicon Valley agent Brad Le reports that this nice-enough $2 million Cupertino listing got 12 offers, and likely went under contract in June for well above $2.4 million. But fewer bidders are competing.”

Agents believe demand is waning not because buyers no longer want a home but because they’ve despaired of ever being able to get one — maybe tired of the craziness.

“About one in four of our Bay Area homebuyers have told us at some point in the last three months that they’re taking a break from their search out of sheer frustration,” says Kelman.”

The four reasons he outlines for the slowdown —

The inventory problemo: “Bay Area real estate is again becoming a free market, where the only people selling are the ones who want to sell. As any East German will tell you, this transition is hard. It’s almost as if homeowners have forgotten how to sell. We expect the supply of homes for sale to increase by the Super Bowl, but if it doesn’t increase a lot, we’re going to have a silent spring, with meager sales gains.”

Sellers monopolize: “…there’s an enormous difference between competition of any kind and no competition whatsoever; it’s like the difference when raising venture capital between having one term sheet or two.”

Flash Sales, Thank You Twitter: “With so many home-buyers across the Bay Area now getting alerts instantly rather than nightly, the whole home-buying cycle here is becoming more like a flash sale, with properties lasting a day rather than a week.”

Crazy-ass offers: “People just get tired of losing, and say, ‘Screw it.’” In just the past few days, a $1.8-million listing in Silicon Valley attracted six offers clustered around a price of $1.95 million, which was at the high end of what recent comparable sales could justify. This kind of competition was familiar to us. But the seventh offer came in half a million dollars higher, at $2.45 million, with no contingencies for an inspection or an appraisal. The seller’s agent was flabbergasted. These are the kinds of shots that send a shiver down the market’s spine.”

Folks cashing out 401K etc. to pay cash for homes: “As the U.S. government approached a fiscal cliff, plenty of folks in Silicon Valley with stock in their own companies became worried that capital gains would be taxed at a higher rate, and so rushed to sell their shares by December 31.”

What we deal with in Texas: more sensible home prices, but this scenario could easily apply to piping hot areas like Lakewood, Park Cities, etc. We have the jobs and everyone is moving here, relocating from economically dismal states. So fasten your seat belts: market trends happening in northern Cali could well be heading our way, along with the population.