Prices Peaking / Market softening in SF Bay Area? What have you seen?

26 Replies

Are things softening in the Bay Area, and if so, are you changing/modifying any of your strategy because of it?

I was up at Bay Area Wealth Builder's RE meetup in Corte Madera (near Marin) last week with @Kathleen L.  and the host, Michael  Morengello (sp?) was talking about the market in the North Bay softening, more days on market, softer prices. He is flipping, and is now only taking on deals that take 3 months or less b/c he doesn't want to get caught with inventory if there's a downturn in prices. He even sold his personal home to downsize, and is keeping a lot of personal cash on the sideline (as stated verbally by him in chatting after the meetup.)

@Minh L. was just talking about the housing affordability index getting nearer past peak levels, indicating we're a lot closer to the top, than to any bottom. Nationwide statistics are softening. Michael thought there may be new waves of inventory from previously-delayed pain from modifications re-setting and some of the institutional buy-to-rent entities like Waypoint or American Homes spinning off inventory.

For those who might be buying at auction, or who are listing their homes, do you see any softening? Even from 20 offers to 10 offers..? $100K above list to $50K above list. I know the market is still healthy/hotter in SF, East Bay, and Peninsula. But do you see some directional movement of softening?

 @David C.

I think there are less multiple offers situations compare to few months ago, and buyers are more selective & demand quality.  At long your flips is high quality and price at market, they should sell quickly.  Just looking at the 94605 zipcode in Oakland, the good quality flips go pending within 7-10 days, the crappy flips stay in the market for weeks with multiple price reductions.   That's tell me buyers are still willing to pay but are very selective & because there are no need to rush, so quality matters.

About the market, it really depends on the locations, if you are flipping in East Palo Alto/East Menlo park, it is on the uptrend, I haven't been there physically lately, but looking at the numbers, those guys are doing very well.  That area is being transformed by very high paying jobs, so I doubt the macro trend would slow them down.  If you look at flips in Tracy, Brentwood, Antioch & Oakley, you probably see price reductions, part of it due to market condition, part of it because schools already started.

About strategy, I agree with Michael Morengello to minimize holding time to less than 3 months, you don't want to buy in one market and entering into a cooler market.  If your flipping strategy depends on riding the wave, you will be caught under it.

Seems as thought the market is slowing down here in Sonoma County- http://realestate.blogs.pressdemocrat.com/13364/sonoma-county-home-sales-slow-in-august/

@J. Martin  I agree - quality does matter.  Cheap flips are the ones that hang around.

(Avg. Sale Price: $1.46, DOM: 10, $818/SF, only 16 active listings) - I think the supply is a huge factor.  If there are good schools, high demand, and low inventory, it will continue to climb.

Originally posted by @Samantha Smith:

Seems as thought the market is slowing down here in Sonoma County- http://realestate.blogs.pressdemocrat.com/13364/so...

That's what he had said. Sonoma, Napa, Marin, Solano counties.. I think @Andrew Eaton and @David C.  are right. Sticking to short flips on just the nicest properties help mitigate this risk..

It sounds like the Peninsula is still hot, but maybe the North Bay slowdown is starting to spill over into the less-prime areas of the Bay. Whether it will spread any further, we will see..

Personally, I'm not seeing it. For example, I just got a client into contract in upper Laurel district against 7 other offers, one of them all cash. We had to go 20% over asking & waive contingencies to get the contract, but we did! I have an ecstatically happy client!

Also, just closed a deal in Lincoln Heights: 4 offers & we won the contract @ 11% over asking, non-contingent. My recent listing in West Oakland garnered 12 offers & sold for 20% over asking to an all-cash buyer and my recent listing in Berkeley got 5 offers & sold for 20% over asking. So no, I'm not seeing it.

If you want current, accurate market data for Oakland, click HERE. Want a different city or Zip? Just ask!

In my area the  trend is slowing down. Tracy, MH, Manteca had rapid price appreciation and  now the inventory is mostly "junk" at the lower end. There are a few 1M+ homes in Tracy that are sitting and mostly due to overpricing. These sellers are way too optimistic IMO

I haven't flipped since late 2013 and sitting on sidelines for now.

If the stock market corrects 20% as some predict  then we will see a price decline in the central valley.

J, 

I agree with Andrew's and David's assessment above.  I see the same thing in Santa Clara County.  Activity has definitely picked up in the last 4 weeks or so.  Things were quite slow between May and mid August.  

The fact that we are closer to the top than the bottom doesn't mean that the market will not keep on going up.  In fact, it will continue to go up, but at what pace.  The faster we go up, the quicker we will top out.  Please note that the housing affordability index (HAI) for Santa Clara County currently stands at 19. It was at 11 in 2007 and 13 in 1989. 

I don't have a crystal ball.  I just follow data.  Just remember that IT'S NEVER DIFFERENT THIS TIME so tread carefully.  You have been warned.  :0)

Interesting in the last few weeks or so I've been seeing a lot of price reductions on MLS properties in Fresno, Tulare and Visalia area. DOM is another # to watch.

@Jeff Weissman  ,

Always appreciate feedback from an agent who's down in the trenches... I agree, Oakland has remained hot, along with the prime areas of the peninsula. West Oakland has been on fire for the last 2-3 years it seems like. We were lucky to be able to snag that ever-elusive off-market deal from a wholesaler for $20K, and bought a 2500sqft Victorian duplex near 32nd & Chestnut, up by the Emeryville Target for $280K. Needs some work, but plan to make some good money on it over the next couple years. Care to share the W Oakland address you sold?

Now Jeff, second question: Given the softening in the periphery areas, any implications for the core areas for the future?

@David Mamsa  , I think you're picking up on the same phenomena that's happening in other periphery areas. North Bay, "Far" East Bay (as I call it) in Tracy, and further out in Manteca, Stockton, etc..

@Minh Le  ,

Thanks for the words of caution. So do you read anything into the softening in many of the periphery areas for the future or the more "core"/prime part of the Bay Area market?

PS> I love your quote: "IT'S NEVER DIFFERENT THIS TIME."

In another posting about financial disasters, I had identified this as one of the common themes in financial disasters. In addition to leverage, everyone justifies in their head why "It's different this time." Tulip bulbs (international trade!), tech (internet!), RE ("new era of low inflation/low rates/wealth...)

Great topic J! From what I am seeing the market in the East Bay has cooled off some from a year ago, but most of the bay area is slower than last summer, that was crazy and unsustainable. I know that all the listed properties we offer on have multiple offers and generally go for over asking. 

When looking at comps to determine ARV, most nice homes are going for over asking, anywhere from 5-15%.

I agree with @David C. , if you deliver a quality product at a fair price you should be just fine. 

My thought is that the market will hover around this level for a while, which is great for fix and flip. Even if the market starts to decline our hold time is so short that we will be fine given the profit built in profit margin. 

@Denise Alberto  

@JMartin My recent West Oakland listing was at 1414-14th St. And I just got a client into contract on a condo a block away at 1460-14th.

I don't know if I can provide advice that tops anything that those with deep real estate investment experience in the area might be able to provide, but I've been an interested observer of the Bay Area housing market since the tech economy began rebounding in the early aughts.

My take is that property value within San Francisco itself will continue to teeter at an elevated rate for the foreseeable future (this is somewhat of a given considering how small the city itself is, and how fierce the demand for property remains). Even if we have hit peak pricing in the region, this could feasibly sustain for 2-3 years in the high-demand parts of Marin and the East Bay in addition to the northern Peninsula near San Francisco. There are a lot of young people being compensated handsomely through tech employment, and many of them are looking to settle down permanently and buy.

This is also coupled with the fact that the region continues to draw young, out-of-state workers who move to the Bay specifically because of promising tech employment. The influx of 20 and 30-something buyers (especially the latter) could buoy prices for a while even if they've peaked. I personally wouldn't expect there to be too drastic of a market softening throughout the remainder of this decade, which isn't to say that prices will escalate too sharply either. Just my two cents.

Originally posted by @Harrison Stowe:

.... There are a lot of young people being compensated handsomely through tech employment, and many of them are looking to settle down permanently and buy.

This is also coupled with the fact that the region continues to draw young, out-of-state workers who move to the Bay specifically because of promising tech employment. The influx of 20 and 30-something buyers (especially the latter) could buoy prices for a while even if they've peaked. I personally wouldn't expect there to be too drastic of a market softening throughout the remainder of this decade, which isn't to say that prices will escalate too sharply either. Just my two cents.

 I went with a colleague to happy hour at Twitter Headquarters at 6th & Market a couple weeks ago. It was amazing to be in a room full of hundreds of early 20's to 30-somethings each making hundreds of thousands of dollars/yr plus stock options, walking out onto a grassy rooftop deck overlooking San Francisco, and watching a beer pong game lol A lot of them are renting in towers nearby for $4-5K/mo for 2br. But most living paycheck to (enormous) paycheck. And YES. There are a lot of them all over.. If they are start buying more in any decent percentage, it could be huge support.

One or two might even start buying income properties.. hmmm...

@J. Martin  

Yes, it's insane how well compensated these early 20 something software engineers are getting paid. For our recently acquired townhouse purchase, we got an application and the guy attached his job offer... Even without factoring stock/bonuses, his base salary was about double what my partners and I make at our day jobs... He's only 27!

"That's not right!", my buddy uttered out in disbelief. Had it not been for the laughter, we would have all wanted to cry... but if you can't beat em...

I say software engineers are still grossly underpaid compared to traders and investment bankers on Wall Street. And we are the ones who contribute to society! :)

I suspect SF Bay Area is on a very strong secular uptrend right now. That phrase from @pmarca "Software is eating the world" gets a lot of hype around here, but there is a lot of truth in it. Many problems have turned to software solutions and that allows Bay Area to grab a huge chunk of value.

Some examples:

1. Transportation: Uber

2. Car: Tesla

3. Banking: Lending Club

4. Logistics: Instacart

Tesla is particularly interesting. An article on the journal a month back talks about how Tesla is pulling in a lot of car design studios and parts suppliers into Fremont. It's shaping up to be a modern Detroit down there. 

I do a market update at Capital City Wealth Builders. A bunch of people from SF always come since they get better cash flow in Sac and can still enjoy the Cali appreciation without the barrier to entry that Bay Area has !

Bay Area has gone down considerably since last year and ALSO since July 2014. Here is a small clipping I used to illustrate my point. http://imgur.com/4XeayuS

HTH,

Tapan Trivedi

www.sacramentorealestateclub.com

Sacramento - Where the Bay Area comes to cash flow !

in SF the market is stil muy caliente!  Basically, it was nutso double digit appreciation in 2012 and 13, and this year is only (sic) 5-7%. So it appears to be slowing, but it's relative. Yeah sales numbers and inventory are down from 12-13, but prices are up. Summer is always slow, so take that into account.  More action so far this fall.  Good mid level homes and condos now regularly run $1000-1200 PSF. 

Personally I'm glad it's slowed, as it gives me better chance of getting back in, once I stablize my current project :)

@Tapan Trivedi  , how are you finding Sacramento real estate?  The increases just don't seem sustainable given average income / wage growth is so low. 

I do like the development (arco/mlb/etc.) going on out there though. 

Jered,

We are finding deals but less frequently than before. Used to be the offer to deal ratio was 30:1 now its about 45-50:` 1. 

Tapan

@Minh Le   @David C. I was trying to add J. Martin but would not allow me to for some odd reason. I wanted to see how you gentleman feel about the market in it's current condition. 

Off the record I wanted to share some feed back... I've seen a random upswing in multiple counter situations all over again this past two weeks on both the south/east bay. Inventory was low in Dec 14 and Jan 15, now it has picked up a bit..... The beauty is we also run a full servcie brokerage out side of the investment side, so seeing what our buyers/seller clients are going through is pretty interesting, so I thought I'd share the wealth with our BP family......

We always advise our buyers to purchase only what they're comfortable with and can afford. On the listing side we present a clear analytic picture to our seller clients on what is going on in their local community more so what the REAL value of their home is worth... Sellers get so excited when a rehab home closes on their street so they automatically think they're going to get the same price. For example if a rehabbed home sells for $650k, seller clients will say I want $675k or can we sell for higher then that? In some cases this is true if they have done major updates similar to the $650k sale I'm using as an example of course we can achieve a similar sales price or even higher..... Now if their home is not updated and it's in original condition that's a whole different conversation we must have...Presenting a seller with a full market analytic package is key. Walking them through each prior sale and current actives. I always say take it a step forward and drive the seller to the homes if possible....... The challenge is the emotional attachment sellers have with their property and sometimes their home is actually their life savings. This is what differentiates a regular listing agent from a "subject matter expert" listing agent. I tell all my listing agents to actually take our seller clients to the rehabbed home, compare it and if they do not understand the difference educate them in greater depth. Educating sellers is an important key role for listing agents this is were building value comes in, being a subject matter expert not just listing properties to make a dam commission check.... What I am seeing is exactly this! Listing agents just take on these listings blindly, they will not stand tall behind the facts they present, when a seller is saying no I want $650k or higher otherwise we're not selling, the listing agent ends up saying you know what let's do it. For what just to make a commission check? Now what these agents do know think about is this effects not only the local community, themselves and of course the seller. Once they list that property (Oh btw they will use photo shop to make the property look as clean as possible) buyers come to preview and they are totally turned off, local buyers agents know it's over priced do not take buyers to preview, if someone offers under the seller rejects or counters at the same overpriced number, days on the market starts to exceed, all the investors are totally rejected, then one buyer comes in at full asking price which is probably an FHA buyer, the appraisal is conducted, comes in under by $75k and the properties back on the market. Now you have a pissed off seller who thinks his house is really worth $650k but in real life it's worth $500k or less, they go back on the market play this game a few times and they decide not too sell. Now this listing agent not only wasted all his or her time but local residents will know he or she could not sell that property so there goes his or her farm and future in Real Estate. LOL......... Oh mind you the buyers who were eager to purchase a home now decided to wait another year because of this type of crap!

Now switching hats...When we're looking at properties to acquire for our investment vertical of the business for both revitalization projects and buy/hold, no deals as of right now make any sense at least on the MLS. This is because we have agents and sellers who're gambling with the current market and trying to attain REHABBED property sales numbers. It's almost like the term bandwagon when people follow sports team just because everyone else is following the hype. I really do not blame the sellers for this because majority of them are not in Real Estate but I do blame our professional RE agents not all of them but just those who take on listing just to try an make a buck. As investors we sould not be too stressed out as I'm sure everyone is seeing this across the entire bay area..... Do not fall for these bogus list prices.... We're seeing a ton of back on the market and price reductions. In fact one of my agents said he wrote an offer for a buyer client of ours, he asked the listing agent how many offers they had in hand, she said 60 offers!!! This was a clear BS because she ended up sending out a multiple counter and in the body of her email she said we had a total of 20 offers. I am not sure why some agents have an issue of holding a level of integrity and honesty. BTW: The property needed at least $70k in just simple updates and was listed at .98 cents on the dollar ARV. I think it's time for us to change our game plan on the MLS deal flow outlet or call these agents out!!! What do you guys think? Mind you this message is being written at 2:05am after a long days of work but I do feel as if it's very important.

@Raj Pat  ,

There's nothing new about over-priced listings. In an uptrend market, the property will be sold eventually. We have seen this in 2012 and 2013. As much as I believe we're in the 8th inning of the housing cycle, prices would likely keep on going up, but at a slower pace, due to the lack of supply. It's economic 101. Unfortunately, we don't get to make the rules. 

Have you noticed that every time the housing market slows down, interest rates drop shortly after? Although the first wave of lay-off has started since 3rd quarter of last year, the lack of inventory will keep home prices elevated IMO. 

I see 30-year fixed mortgage has a high probability of approaching 2.75% in the next down turn. We are in a balance sheet recession. If history is any indication, I believe we will not see interest rates above 5% for next couple of decades.

Now getting back to the original topic, do you see prices peaking for our area anytime soon? 

Do we see more inventory compared to 2014? I am betting on more inventory coming online in 2015 compared to 14. Many people call me nuts. We will see. Mathematically it can't go down every year or else we will reach 0. So it has to go up at some point. 

I don't think price will go down in 15 though. Not sure about 16. Inventory number will give us ample warning months in advance. So watch it like a hawk.

Hey @Raj Pat  ,  isn't it a lot easier to sell flips instead of regular sales? :)  It is tough to be on the buyer side especially when he listing agent gave you some BS numbers or ignore you, but I have seen WORST.  There are listing agents out there who would steer buyer agents away only to double end.  They put "Exclusive" instead of "Exclusive right to sell".  I doubt that the intention of the sellers.  

Sounds like you or your agent wasted a lot of time for nothing, hope you don't run into this situation again.

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