Over the past few weeks I have begun to get the sense that the San Francisco Bay Area market may be turning a corner. I have very little data to back up my feeling, and I am certainly not a market timing expert, so I wanted to reach out and see if others had a similar sentiment. I am personally interested most in the San Jose and Oakland markets, but I assume that any shift would be affecting the surrounding bay area.
Here's what I have seen:
1. Bay area rents and real estate values have risen at an incredible pace over the last few years, and it can't go up forever.
2. A recent Marcus & Millichap apartment webinar mentioned that the length of the current growth cycle has already exceeded the length of the prior growth cycle.
3. There are interesting discussions on BP questioning if we're in a bubble.
4. The stock market has fallen dramatically in the past two months, partly in response to the news of the Chinese economic slowdown. Walmart reported poor earnings. Oil has plummeted. In the past few months there have been an abundance of "experts" claiming there were many bad omens being exhibited by the market. Some people believe the stock market is a leading indicator for the real estate market.
5. The PropertyRadar CA real property report showed sales and median prices are both down in August.
6. Apartment rents in San Jose and Oakland seem to have dropped significantly in the past few weeks/months. I spoke with one investor with properties in San Jose who said she had to drop asking rents by $300 in the past few months. Another conversation with an investor in Oakland expressed a similar sentiment. I have seen this as well when looking at rents on CraigsList.
Perhaps what I have sensed is merely a cyclical slowdown as we head into winter. All of the points above are up for debate/interpretation, but taken together, it makes me wonder which phase of the cycle we are really in.
Has anyone else sensed the same feeling? Do you have any data that supports your view?
Originally posted by @Chris Jones :
I'm not a market expert either but there's definitely evidence for a slow down. For Santa Clara County the median sale price has gone down 1.5% the past month, the inventory has filled up and DOM has gone up a bit.
One of the explanations is that the interest has gone down to a point where PITI payments became more affordable than rent, and those who had sufficient funds for DP could go above asking price just to lock in the rate. Sellers became more and more greedy seeing they could list the property at a higher price than it's actually worth, and gradually a sort of a gap was formed between what sellers expect and how buyers evaluate the property.
@Chris Jones I think many of us are watching this and have a sense similar to that of what you are feeling. There have also been interesting announcements for cuts (i.e. Twitter and the likes). Only time will tell!
I can't figure out how to paste in a picture, but I have a diagram that I think shows the RE cycle pretty well.
Phase 1 - Volume Up, Price Up - H2'08 though 2009
Phase 2 - Volume Flat, Price Up - 2010 through 2012
Phase 3 - Volume Down, Price Up - 2013 through 2014
Phase 4 - Volume Down, Price Flat - 2015 through ???
Phase 5 - Volume Down, Prices Down
Phase 6 - Volume Flat, Price Down
Phase 7 - Volume Up, Price Down
Phase 8 - Volume Up, Price Flat
Back to Phase 1
Now I don't think this is perfect, but it rhymes with what typically happens. In the dates above, volume has been more flat than down since 2012, and we are only starting to see prices flatten in places like the Bay Area.
In the last cycle I got worried about a bubble at the end of 2005. We were still in phase 3 at that point, and prices didn't peak until May of 2007, even though volume started falling in November 2005 (which combined with the fact every buyer I sold to was using a pay option arm was enough to spook me).
Given that we have not yet seen a similar decline in volume, and since it took 18 months from volume declining in earnest to the market top, I think there is a good chance to think calling a top now >might< be a little premature. Really depends on your risk profile.
My prediction for a flat market this year, was less a prediction then a hope. The more we go up at this point, the more risk of a bubble I feel we face. Nobody needs the aftermath of that (except those of us who do well with foreclosures I suppose).
The other thing to keep in mind is that the Bay Area is behaving a little unusually. It's affordability is abysmal. But that number reflects gentrification as much as it does a market top. As the world's strongest economic engine it is attracting high paid talent that is displacing the families who have been their for generations. So when evaluating the Bay Area, its also important to think about cycles in the tech industry. Though all my vc, and tech exec friends tell me its different this time, it feels more bubbly to me than 1999. Yes there are no pet.coms, but the valuations still seem just as crazy.
Finally, I think there is a larger force at play. IMHO we have primarily grown our economy through decreasing the cost of debt since the early 80's. (as an aside, tech is the only other candidate I see has having driven growth, but I think that's crap. I've been in tech my whole life, and what tech is good at is making things more efficient - thus I think it shifts the economy more then grows it.) The problem is that we've now hit the zero bound on interest rates, so no more growth through cheaper debt. That puts us in a real predicament because we need growth to pay for interest on our debt, entitlements etc. I think that means super low interest rates are here to stay (outside of something going terribly wrong). Look at Japan where the interest rate on a 35 year mortgage is 1.47%. It's an awful outlook for those on a fixed income from their investments. But it could push housing further than we think as peoples mindset change on return on investment - in a world of 1.47% mortgage rates, a 5% ROI on a SFR might look fabulous (though the Bay Area is already well below that).
Bottom line - if tech stays strong, and if there are no black swans, we may not yet be at the end in the Bay Area. No question risk is increasing at this point though. Certainly will be interesting to watch.
A sample size of one hardly makes a trend but this Google software engineer decided rents are too high and decided to live out of his truck.
sure there is a turn. Prime bay area and SF appreciation instead of being 12+% will *only* be 4-6% going forward for awhile.
I can live with that :)
They had to drop rents $300 from the last tenant or they had to drop rents from the advertised rate that is 30% higher than what the previous tenant was paying?
I am in Sac but keep a little bit of an eye on the Bay and it seems like a lot of sellers were testing the waters with inflated prices to see if they could get it.
Great discussion, gentlemen. I thought I'd offer my two cents as my wife and I have been plugged into the San Jose market for the last 6 months as we have been heavily scouring the area for a primary residence. In addition, we've been in consistent contact with several RE professionals associated with the industry including agents, lenders, etc. Based on our interactions with these professionals, as well as our findings via personal research, we've learned that the market has slowed in the San Jose are more than expected since this past summer. House hunting this past summer has offered us some great learning opportunities about the bay area RE scene. One of which was that during this past summer season (June, specifically) the RE market was hotter than anticipated (referencing the input from our RE associates). In fact, a house we were going to bid on was listed for $599K in San Jose and had over 10 bids on it within 12 hours of being on the market. Each of these bids were $700K+, most of which were all cash, no contingencies. In fact, all of the properties we were watching from June - Aug were traded for higher than asking. All things considered, that's indicative of an inflated market by my opinion. Also, during this past summer our rent (apt complex) increased by $500/month for a year lease. Could these circumstances have been the manifestation of the high water mark for RE in the San Jose area? That's what we've been discussing for the past several weeks.
Fast forward to current market conditions. The current market is cooler than expected. Not only is inventory down, but 100% of the homes listed are no longer being traded for inflated prices. In fact, several properties that we've been watching have sold for considerably less than the original asking price, which was a bit surprising. In addition, our apt. complex is experiencing slightly higher vacancy at this time. Did the increased rents over the summer have an unforeseen negative impact on current vacancy?
The question remains, is this trend just a normal seasonal slow down, or is the bay area RE market in decline overall? Although everyone can offer their own opinions, I think its only fair to compare y-o-y scenarios before we have a true understanding of the pulse of the market, at least in San Jose. In other words, I think we'll need to wait until next summer to draw an accurate conclusion about San Jose RE market trend.
You mentioned you have a diagram regarding this context. Is this diagram available online?
Google was up $50 and Amazon was up $35 on Friday. I don't think we can look at the stock market as a bearish indicator for Bay Area real estate. The tech market is still on fire, albeit with volatility.
Some call that diagram/chart Buyer Phase I, Buyer Phase II, Seller Phase I and Seller Phase II. Some would call it the 4 Quadrants. I like to use this chart. A picture is worth a thousand words.
@Jon Klaus , my partner and I have been debating about this topic in the last 6 months. Although both of us agreed that we have another leg up before this cycle is over, we are cautious in our acquisitions. If there's no adequate margin of safety at the time of purchase, we'll pass. In fact, we have passed many deals this year.
@Gene Hacker , what do you say bud? Am I right or wrong in my thinking? :>)
I have not really studied the data for the bay area specifically. I read the posts above with some data but it is not clear if the declines are adjust for season changes. Obviously going into a historically slow time of the year, this is important to consider.
When it comes to cycles, I have learned a few things studying the past...
1 - No two cycles are the same. They all have their own set of circumstances which make them a bit different than past cycles. I like the quote....History dose not repeat itself, but it rhymes. Ultimately there will be factors which help shape this cycle which may not have been in play in past cycles.
2 - Bubbles and cycles can go on for a lot longer than what one would think. Alan Greenspan gave the Irrational Exuberance speech years before the dot com collapse. And things got much more irrational in that time.
That said, I am personally very weary of any asset after huge recent gains. At times like this I tend to take more of a "contrarian" stance.
It's always good to get your perspective. Others may not know who you are, but I have always valued your opinions.
It's true that history does not repeat itself, but it rhymes. You're correct that Alan Greenspan gave his Irrational Exuberance speech in 1996, and the stock market didn't top out until March 2000.
History has shown that the MY market Santa Clara County tops out at around 15 HAI. In this last cycle, it topped out at 11. We're at 19 now thus the reasoning of another leg up. However, we're playing defense now unless the deal is too good to pass.
Hope all is well.
It's obvious that the Bay Area market wasn't as red hot as it was 2-3 years ago. There's a ceiling there somewhere and the slow down tells me we are close to it. To me, I look at it from 2 basic perspectives; supply and demand, and value of the property based on the income it can generate.
If the income in the area is there to support the mortgages or rent and there is supply, there will be those willing to pay $900K or $4K in rent for a 2/1 SFH on the Peninsula as an example.
From an investor's perspective, I look at the income the property will generate. I won't pay more for a home if it doesn't support the income or cash flow model I expect from it. An owner occupant won't have the same view and therefore would be more willing to pay more for a home than an investor would.
Is there a slow down in the Bay Area market? IMO, yes. Is this the sign of a bubble that will burst in the short to mid term? IMO, no. I don't see a catalyst (something similar to the events of 2008-2010) that will lead to this. I don't see the job market and hence, the healthy techie incomes disappearing anytime soon. This is my crystal ball talking here...
Thanks for the kind words Minh.
At the bottom of the market all the data was pointing in one direction so it was relatively easy to call the change. But now the data is mixed. The only thing we can do is follow the data and be prepared to move very quick when the data suggests its time.
Here's a new blog by Mark Hanson (Mr. Mortgage) , who also mentions SF several times
Thanks everyone for the thoughts. Great information here. It seems the general consensus is that we're not quite at the top yet, but we're close enough that it's wise to be much more conservative in the deals we're doing.
Today I saw an article about rising unemployment in the tech sector.
I also saw that the September PropertyRadar report is out, showing CA sales down 4.3% and median prices down 2.4%, though it states that "home prices in the Silicon Valley corridor, consisting of San Francisco, San Mateo and Santa Clara counties, continue to buck statewide trends and are experiencing double digit price appreciation." BTW, @Sean OToole , I'm a big fan of your service. If you do find a way to post the chart you mentioned, I'm sure many here would find it useful.
I'm still curious if anyone has also noticed a drop in rents within the last few months in the San Jose / Oakland areas. It could simply be seasonal, but it was swift enough to surprise me when I noticed it.
Love the info here. I don't know about rents, but I do feel like the market is slowing. Not sure how much of this is due to seasonal dips. I think a really important thing to keep track of is how tech is doing in particular the outlook of the Unicorns.
Here's the diagram. Note that "sides" is an agent term as there are 2 sides on which to make commission on each sale (buyer / seller). Simply substitute the word sales for sides, it means the same thing here.
There are lots of variations on this like Bruce Norris's 4 quadrants, etc. I'm not particularly in love with this one, but it does a good job of illustrating a key point...
Price follows volume, but not immediately.
I've applied this to past cycles and find that it holds true, though it typically takes a lot longer from slowing sales to price declines, then from rising sales to price increases. That inherently make sense as sellers are more reluctant to lower prices then raise them.
Great information on the bay area market. I just purchased a 4 plex in North Oakland in August so I hope the market doesn't take a turn but I am in it for the long haul and know there will be ups and downs. I am pretty excited about the Oakland market after Uber purchased the old Sears building and hope other tech companies follow. I am a bit concerned about the Fed raising interest rates in Jan and the impact on a slowing RE market.
I am curious what resources folks are using to evaluate the bay area market? It looks like property radar is one. Any other ones?
Here is an interesting take for those who are focued on rental properties...
There may be some softening and a plateau in rents for a bit...but pressure is going to keep it going...
great post chris! lots of quality responses!
For those who haven't yet seen the news about Apple, this is a good sign: Silicon Valley Business Journal: Apple
Apple is the largest tech company in the world, and growth for them is growth for Silicon Valley, and growth for the housing market in the Bay Area. Follow that article up with this analysis on the homes Apple employees own from Zillow for complete reading: Zillow on Apple Neighborhoods
I'm not an economist, but as a San Francisco bay area market expert and agent, I see that news as good news for homeowners, sellers, and investors who value appreciation.
I am very curious to where you think we are at now 6 months later on this post. I notice the market is still hot along with lots of cash buyers. DOM has raised slightly but prices still seem to continue to rise. I have not talked with any local RE agents to see if properties are going over asking but interested to see now what you savy investors now think.
@Account Closed Can you guys please explain where I can find these optimal sources of data points you refer to, for future purposes when the market does peak and begin to reset, I would like to be ready
@Account Closed , Getting reliable data will be different for different areas. For my small rural area, the only reasonably decent data source is the local MLS. Access requires membership which can be pretty pricey if you are not using the MLS for other purposes. NOD's and NOTS can be sourced through the county recorder or a local legal classified publication. I think Property Radar could also be a good data source but I don't have personal experience with the sight, but I have heard tons of good stuff about them. For macro nationwide factors, I like the Federal Reserve Bank of St. Louis website.
I think this is a good read for those who want to better understand some of the pressures facing Silicon Valley. I don't expect it to crash, but the party is probably over... http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/.