@Diane G. seems to be getting beat up here when on a macro level (excluding the unemployment rate argument which I think is moot), her train of thought is correct. There are systemic changes coming in the world of finance which present headwinds never seen before by markets. The fed unwinding their balance sheet and normalizing interest rates are clearly going to push asset prices (i.e. real estate) down and drive up interest rates. In Howard Marks' book, The Most Important Thing, he touches on markets like the one we are currently in (incredible book fyi). Compressed cap rates, cheap money and competition has been pushing asset prices higher chasing yield. On any REI podcast you hear the "lack of deals" and extraordinarily low cap rates in markets. Is there an impending crash coming? I tend to think not. But the pendulum is clearly weighted on the overpriced side. Deals financed on sketchy terms (5yr fixed etc) will face a tough period of refinancing in the coming years as a period of historically low interest rates end.

On the same token @Scott Trench is also correct in that you have to be playing in the market to even have a shot at winning in this game.  The key is to reduce risk and be frugal.  My understanding is that Mr Trench cultivates a frugal lifestyle which lends perfectly to successful investing.  All things equal it seems like I tend to agree with both the original poster and Scott.  

Originally posted by @Amit M. :

@Nate Reed was I in diapers? WHAT!?!?  Look kid, I own RE in SF since 1994- and prior, during and after 2008. I've made a lot of money here. You used to live in LA.  you should of invested back then or in 2011-13, but you chickened out. You missed the boat and consequently your anger towards CA is palpable....it sounds like bitter lemons to me.

As for your "answer", of course using high leverage is risky, but it's risky everywhere. And in SF you don't need to use high leverage. The appreciation is so high you can still keep plenty of equity and pull out cash for your next deal. You conveniently ignore the disproportion of up years (5-7) vs 2-3 down years each cycle that chart shows. That's a safe investment environment if I ever saw one. 

Austin has been expanding very fast with too much new construction. I predict it's gonna boom and bust like Phoenix, vegas, Miami, etc. tend to do in the next downturn.  Austin is (finally) a city in TX that has shown actual appreciation, so I see where your cockiness is coming from. But for the last time, appreciation in a well known, highly desirable and impacted market like SF is not speculation; it's an established reality. (It's a tough market to break into; but once you're in it's a great wealth generator.) That chart shows a long history of appreciation, and for many reasons. But if you think for a minute that you can make more money investing for cash flow in TX vs SF, then please pass your pipe over...cause you must be smoking some good sh*t!

 I am too lazy to do the calculation, but Dallas is fairly close to if not ahead of California for real estate price appreciation over the last 5 years.......

I suspect from your comments that you haven't ever been to Austin.  And really do not understand the real growth that is happening all across Texas, especially down the I-35 corridor.

@Helen Zhang  I would have agreed 10 years ago but the areas I'm in have gentrified significantly already. The good thing is I have achieved scale, owning several buildings in a 2 mile radius. This helps me understand which streets are cleaner and attract better tenants. 

My tenant class of hard working, blue collar workers have made tenant management easy: only 1 eviction with over 60 tenants since I started investing here 4 years ago. 

Yes there is a bad apple here or there but nothing that a few dollars can't fix. These areas aren't for everyone, but I'm okay with that :) 

Originally posted by @Bart H. :

I am too lazy to do the calculation, but Dallas is fairly close to if not ahead of California for real estate price appreciation over the last 5 years.......

I suspect from your comments that you haven't ever been to Austin.  And really do not understand the real growth that is happening all across Texas, especially down the I-35 corridor.

Indeed. Dallas is one of the strongest in the nation, with y.o.y. appreciation of 9%, if memory serves correctly. I am too lazy to look up the stats. ;) The Dallas story is Fortune 500 companies relocating, central location, strong infrastructure and logistics hub (headquarters of American Airlines, DFW Airport). As I mentioned earlier, Toyota added 3,000+ employees with high-paying jobs and they are all trying to find housing in an already tight market. 

Central Texas (Austin-San Antonio-San Marcos) also is experiencing supply and demand imbalances. 

I have seen a figure that 150+ people move to Central TX every day. Austin's urban core is supply-constrained, while there is building in the suburbs, but it is still not enough to keep up with the influx of population. Regulations and lack of transportation infrastructure will keep the prices in central neighborhoods very high. I35 will never get fixed because it would require bulldozing large swaths of central Austin.

The prices in some Austin neighborhoods are probably closer to LA & SF prices than most realize.

DELETED

Originally posted by @Gus Ross :

@Diane G. ...Deals financed on sketchy terms (5yr fixed etc) will face a tough period of refinancing in the coming years as a period of historically low interest rates end.   

Most commercial debt is short-term. Should commercial multi-family investors be worried? 

That isn't necessarily true, commercial debt can balloon 7-10 years at fixed rates. We are in a 10 year fixed non recourse at the moment. 

Anything on 5 year balloons financed in the last year or two seems rather risky for my taste.   Refinancing may be a challenge on those deals. 

This has turned into one entertaining and informative thread. Its been time consuming but I have enjoyed reading almost all comments.

It seems every few months @Diane G.  posts about some data-points leading to the inevitable downturn. These kinds of posts usually results in a lot of replies and the thread evolves into the classic no need to worry, just go to the markets where there is cash flow vs. “buying (on spec) for appreciation...This debate could go on forever.

I am sure there are a lot of ways to make money in real estate, in any cycle. As an investor in Bay area real estate and the stock market, I share the view that we are due for a correction. While there still seems to be plenty of buyers in our markets, I think the risk at this point is to the downside. Its certainly not the time to be aggressive. When interest rates rise, VC funding dries up and corporations and consumers start defaulting, there will be plenty of opportunities to invest in the Bay area.

I am thankful for the graph posted by @Amit M.  I will be waiting for the time when the market steps down and provides higher yielding opportunities. I am a believer that rents in the Bay Area will continue to be more sticky then prices.

@Nate Reed

It seems that you are also benefitting from appreciation. I agree that without appreciation, REI is mediocre at best. It is a lot of work and time to get into REI.

Austin is a great place for the right balance between cash flow and appreciation. 

Any investment comes with risk and reward. Higher risk, higher reward.

Lower cash flow means higher risk, higher reward. 

It takes a while to realize that. 

For any person, I think the balance needs to be individualized based on your financial situation and risk tolerance. There is no right or wrong, just a good or bad speculation. It is a speculation either way.

While this thread quickly morphed into a California vs. Texas debate (which I bluntly think is apples vs. oranges debate) I do think that the crux of this thread which was to question the upside in the market given historically low unemployment and interest rates is a very valid.

There was also a chart from case schiller that was flashed on this thread earlier which showed home price appreciation in the bay area. Essentially it shows how home prices move up versus how they fall. The interesting thing about that chart is that all expansion cycles have been 5 - 7 years at max and we should assuming that the expansion started in 2011, think that we are coming in to the tail end of that 5 - 7 year bull run in home prices but given the depths of where we started this bull run, it is quite possible that this market has more room to run.

Are there deals in this market, yes.  I just closed on a property in a very sought after area in SF 10% below Zillow and comps. Turns out the seller was in a rush to sell (he was moving up market) and was open to off load if I put in a clean offer which I did. To me it is a deal with + cash flow in San Francisco. Do I think these pop up frequently, No. They don't but they might some times although they are very few and far in between.  Would I make another deal like this if it came up, yes, but knowing fully well that I will get burnt if I try to flip but I will make gold and diamonds if I buy and hold which makes the whole point of discussing the economy pointless to me.

@David 

Lower cash flow means higher risk, higher reward. 

Sounds like oxymoron to me.

Originally posted by @Jake Knight :

@Diane G. I get keyword alerts for some of the cities you post about and have also noticed a doomsday mentality that isn't always supported by data. If you saw data that indicated positive market factors, would you ignore it?

I'm of the opinion that if you know how to buy, you can buy in any market cycle. I will PM you some examples. I have colleagues on the Peninsula, some who post here and some who do not, that are doing much much better than I am. If you saw what they were doing you might change your mind. 

Don't waste your time Jake.

Originally posted by @Diane G. :

I googled the unemployment history of US, and here is the chart... Out of the past 65 years, maybe 10 saw unemployment at around 4%....All other 55 years were higher.... If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....

As a matter of fact, RE in the Bay Area is slowing down already, in my observation... My favorite example - Redwood City listing prices is now 15% ish lower than what properties have been selling at in the last 6 months... Big signal to me...

 OMG. You know nothing about the Redwood City market. You're like the BP forum equivalent of a Russian Twitter bot. 

@Jeff Pollack in just a few weeks @Diane G. will be claiming that if Halloween candy purchases drops by 20% then we are surely headed for a recession because if kids aren't eating enough candy then surely job losses are coming and real estate prices will plummet nationwide

Originally posted by @Diane G. :

I googled the unemployment history of US, and here is the chart... Out of the past 65 years, maybe 10 saw unemployment at around 4%....All other 55 years were higher.... If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....

As a matter of fact, RE in the Bay Area is slowing down already, in my observation... My favorite example - Redwood City listing prices is now 15% ish lower than what properties have been selling at in the last 6 months... Big signal to me...

I think you're painting the picture with a broad brush. I have an 80 unit that's comprised of low income tenants. Most receive some type of government assistance to pay their rent (disability, social security, section 8, SSI etc.). It's hard for the unemployment rate to impact vacancies if your tenants are already structurally unemployed.

Also, a trickle down affect seems to occur when unemployment rises. If a tenant paying $2K/month loses their job, they won't become homeless, they'll rent a cheaper place. Vacancies may rise, but they're replaced by new tenants who were previously economically superior. Keep in mind newly unemployed homeowners may lose their home, creating a new renter.

In my opinion, the Redwood City example is an anomaly. We can all find cities with noticeable variances in asking price, but to pinpoint one city and use it as a representation of an entire market is inaccurate. If an investors strategy is to wait for the market to fall, then buy, they're not very adept. I'm closing on a condo tomorrow that I purchased in 2012. I put $15K down, did not materially improve the property, and will net $75k. The same crowd that told me I was going to get wiped out back then is still telling me I'm going to get wiped out today.

After reading the last sentence of @Kyle 

@Kyle R. , 

“The same crowd that told me I was going to get wiped out back then (year 2012) is still telling me i’m going to get wiped out today.”  

It made me laughs.  LOL.  

It reminds me, a few days ago, I read a very old BP discussion topic that was posted in year 2011.  one BP member asks for opinion to invest $800k cash in real estate market.  90% of the BP people told him how dangerous it is to invest in real estate...  tell him it is not the time to do it now.  

I’m new to BP.  I’m glad that I didn’t know BP in year 2011; otherwise, I might have follow their suggestions not to buy any properties in year 2011.  

Nobody told me anything in year 2011, I bought more than 10 houses in year 2011.  I’m glad that I that I did it and still holding it.  

Originally posted by @David Song :

@Nate Reed

It seems that you are also benefitting from appreciation. I agree that without appreciation, REI is mediocre at best. It is a lot of work and time to get into REI.

Austin is a great place for the right balance between cash flow and appreciation. 

Any investment comes with risk and reward. Higher risk, higher reward.

Lower cash flow means higher risk, higher reward. 

It takes a while to realize that. 

For any person, I think the balance needs to be individualized based on your financial situation and risk tolerance. There is no right or wrong, just a good or bad speculation. It is a speculation either way.

 Its not clear to me that higher risk with regard to valuations in California vs other areas at this point in time indicate higher expected returns.  It could just mean they are overvalued.

We arent talking the difference between a blue chip and a growth stock where the earnings streams are fairly well known on a Blue chip vs growth opportunity in California.

What are the drivers in each state?  In California its mainly been the entertainment, importing and hi tech industries.  Of late California has benefited mightily from the growth of Apple, Google, Facebook, and other social media companies.  Similar to how they benefited during the Dot com bubble at the turn of the century. 

Texas just went thru its downturn with oil moving from $110-120/BBL oil down to 35, and now $50 oil.

Does California see a hit employment if one or more of those companies catch a cold?  Not everyone has $200-300K jobs for developers.  Not saying tech jobs disappear, but if you see a slow down, do you end up seeing CA real estate flatten or make a huge drop?

@Bart H.

In terms of economical driver, for sf Bay Area, we have 

1. Silicon Valley, almost all major tech companies that is driving the innovation and new tech.

2. Biotech, Genentech and hundreds of small to mid sized biotech companies (south San Francisco)

3. Financial institutions

4. Education, Stanford, USC Berkeley, and dozens of other higher educations

5. Medical research, UCSF and others

6. Tourism

I used to work in NJ, Boston, and Philadelphia. The competitive advantage of SF Bay Area is its culture and tolerance. Anyone with any crazy idea may get funded. People are willing to take risks and accept unorthodox crazy ideas.

Also, millions of new immigrants came to CA, with new and innovative ideas.

It appears to me that CA is becoming the innovation center for the whole world, not just US.

Therefore, I am bullish on SF Bay Area and its future leadership role in us economy.

Texas, also has quite a few tech centers, which should help driving the new economy.

In the future, in order for US to keep its dominant position in the world, new tech and education are the keys.