SF Bay Area Economic & RE Update (Ongoing)

SF Bay Area Economic & RE Update (Ongoing)

J. MartinPro Member
Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

I have organized what I believe to be some very valuable information and relationships about the economy and real estate, and will be posting updates about the San Francisco Bay Area marketplace here periodically. I studied a lot of economics in school, and they told me you can't predict real estate prices. ********!!!! Let's lay the groundwork... And a big thanks to @Account Closed for his mentorship and economic

There tends to be a strong relationship between changes in employment and changes in real estate prices. Real estate prices in the Bay tend to go up when unemployment is falling. And they tend to flatten or go down when unemployment is rising. This tends to happen in regular cycles.

The relationship between changes in employment and changes in real estate prices becomes more obvious when we look at percent change in employment, and the rate of change (second derivative, but don't get bogged down in the terminology..)

This is interesting because:
1) The relationship appears meaningful
2) You can see a deceleration in employment gains (lower growth rate) while real estate prices are still increasing (at a decreasing rate). In other words, you can see the slow down in growth before real estate prices flatten or drop.

Coming out of a recession, look how job growth goes from it's worst (about 5% job loss in worst year) to 2% job loss the next year, 0% the following year, then 2% gains, then 4-5% gains, then starts lessening again to 3%, 2.5%, and tends to drift back down towards 0% again, before going negative.. But you can also see that home price appreciation

starts slowing (although still appreciating) as job growth slows.

Now what if there were some sort of way to predict how employment was going to change..?

What if there were a more local index that showed the way the economy and employment is and will do? Turns out, there’s one of those too!!!

To me, the picture becomes more clear. In the SF and East Bay Area, employment gains, economic activity, and real estate price appreciation peaked in 2012, and has been on a decline since. If you look at the prior two cycles, you can see each of these indicators reach a peak during the middle of the cycle, then decelerate (grow at a decreasing rate) as the expansionary phase of the economic cycle comes to an end. You can see the leading index for CA, economic conditions for San Francisco – Oakland – Hayward , changes in employment, and real estate price appreciation all grow at decreasing rates, until they approach zero, as we go into a recession…. I’ll post more for Silicon Valley, San Jose, and Santa Clara later.

Do you disagree with me? Is this information valuable? Too little time frame? Meaningless? Stupid for thinking we can predict how real estate prices will change over an economic cycle? If it were this obvious or easy, wouldn’t everyone already have figure it out, and we wouldn’t be talking about efficient market hypothesis? Does this change your perspective on real estate price appreciation and its predictability?

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Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
9y
Originally posted by @David S.:

@Account Closed. Thanks for the summary.

A $3M offer on a 14-unit building in "our market"....Surely, this cannot be located in the San Jose Bay area where you are located....Can you add any additional detail?

David,

I've been living and breathing real estate since 1999 and went all-in in 2009 when I recognized the opportunity. Thankfully my wife was supportive and gave me a thumb up to quit my W2 then. At the time, real estate was so cheap. I told people 2/1 condos in San Jose were being auctioned off at the courthouse steps for $117k-$135k. People looked at me like I was an idiot. These were selling for $400-$425k at the top of the market in 2006. Now, they're selling for $400-$450k a piece.

People have been giving me the same look when I tell them we buy 6 to 8-unit buildings for $1.2M in San Jose. @Johnson H. says I walk for millions. My partner and I hold hands and go for a walk in our market looking for buildings that need help. We write down the addresses, reach out to our agents and tell them to contact the owners. Then we submit our offers. We get deals here and there using this method. In fact, we're negotiating to buy a building with this method. Wife is ready to sell while husband is unsure of what to do with the proceeds.

@Bac Nguyen is correct. We only farm in one zip code. That is 95112. Our targeted markets are 2 blocks around SJSU and 1 block radius around Japantown. Anything between SJSU and Japantown is a tweener for us. We have passed on many tweener deals. In hindsight, they're great deals. @Account Closed, it's like direct marketing. You miss 100% shots that you don't take. That's what I remind Johnson. That's why I keep swinging. It's good to know that Wayne Gretzky said it. I like this quote of his just as much "A good player goes where the puck is while a great player goes where the puck will be."

This is MY QUOTE and I don't care who said it first. I came up with it a couple of weeks ago and installed it on my Tesla the day the frame came in. This has essentially been true with my life. Some of my friends believe I should be the "exclusive owner of the plate frame." I've ordered it for a few close friends and would love to give you one if you're interested. It's a good daily reminder IMO. 

Wife's sibling told me I should get DREAMER for my license plate. I may do just that. ;)

See this reply in the discussion

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  • J. MartinPro Member
    OP
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    10y

    COMPARISON: WHICH PARTS OF BAY AREA DID BEST AFTER CRISIS?

    Answer: All of them!

    Whether you were in Silicon Valley, SF area, East Bay, Sacramento, or Stockton/Lodi, you're up at least 50-60%! (asset appreciation) If you bought at a discount or are in a better area, probably 100%! Here's a longer view. Index is set at beginning of 2012 = 100, which was near the bottom in most areas..

    Now let's see that same index when we equalize them all at the top of the market instead of the bottom..

    SAME AREAS - INDEX AT BEGINNING OF 2006 INSTEAD OF 2012

    You can see how much better stronger areas held up during the downturn, even though the percentage returns off the bottom were all about the same. Part of the other trade-off here is cash flow: Many of the lower-end cities produced more cash flow over this period. 10 years of 10% annual returns adds up to at least 100%!

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I think the inverse correlation between cash flow and price volatility (and perhaps long term appreciation) is a key concept to understand ... good to hear your analysis seems to verify. Have any data up your sleeve to illustrate this on one or a few charts? Or better yet, some way to combine and compare total return (cumulative cash flow + appreciation) over a period for various sub-markets in the bay area?

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    Sorry, I meant direct correlation between cash flow and price volatility and cash flow (i.e. high cash flow, high price volatility). Perhaps inverse for cash flow and appreciation ...

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @J. MartinThat last 2006 chart is the story bad vs good areas. I wonder did they cash flow more vs the highest rent growth areas? I think many of these had a 1 infront in 06?

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Ben Leybovich:
    Originally posted by @Account Closed:
    Originally posted by @Matt R.:

    I am with you but where is this recession part going to come from in Bay area specifically? 

    What sectors are getting hit?

    Tech!

    Minh - we both know that there are markets in this country where tech has been drifting to.  Places where $500,000 while buying not quite a shack in SF, buys a very nice 4,000 sq.ft. Are you seeing  SF market taking a hit due in part to this exodus of tech? 

    This is what I am seeing and is the reason I am looking at those markets... I think they are behind SF in the cycle and have 7+ years to run. Thoughts?

    Birds of the same feather flock together. Not to be disrespectful, but when was the last time any kind of tech innovations came out of those markets? Silicon Valley is the hotbed of tech. Everywhere else is just an extension of it.....IMO of course. 

    It seems like we go through cycles of exodus every downturn. The last time I checked, the net immigrant was still positive for CA. The fact that rents went through the roof suggested that we have more people coming to the Silicon Valley than moving out. To me, the people that move out of the Silicon Valley are the average Joe, who couldn't compete in the Bay Area. This is the land where talents are being handsomely rewarded. If people move out to retire, that's another topic.

    With respect to a 4,000 sq. ft house, who really needs a big house in the Bay when you can enjoy the outdoor all year around? The fact that people moved out of the Bay Area so they could afford a big and cheap house elsewhere MIGHT mean they couldn't make it here. I think it's positive. Their moving out frees up housing for newly talented people.

    You can look at other tech markets, but I doubt you will buy anything. Your Midwest mindset will get in the way. I would love for you to prove me wrong.

  • Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes
    10y

    The only real estate I have in the SF bay area is my primary home.

    Since I'll be living in my home for at least 10+ years, I can ride out the ups and downs.

    In the mean time my strategy as a real estate investor is

    #1 Pay down principal

    #2 Ride any appreciation and cash out with refinancing and/or HELOC (multiple times during the time market is up)

    #3 Use extra cash to buy out of state - linear/positive cash flowing properties.

    #4 Ride out any down trends...while keep paying down principal.   When the house appreciates again, you can refinance and pull out more equity to invest.  Rinse and repeat 

    Lastly, this model works only if you have a rock solid job (healthcare) rather than tech or business(much more volatile).  I would not recommend it if you have very cyclical salary or job that can be affected by recession.   

    During the recession you hope that you can get very low rates...then refi.   What if you have recession and high mortgage rates.  Fix your rate before rates go up.

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Ben Leybovich:
    Originally posted by @Account Closed:
    Originally posted by @Matt R.:

    I am with you but where is this recession part going to come from in Bay area specifically? 

    What sectors are getting hit?

    Tech!

    Minh - we both know that there are markets in this country where tech has been drifting to.  Places where $500,000 while buying not quite a shack in SF, buys a very nice 4,000 sq.ft. Are you seeing  SF market taking a hit due in part to this exodus of tech? 

    This is what I am seeing and is the reason I am looking at those markets... I think they are behind SF in the cycle and have 7+ years to run. Thoughts?

    Birds of the same feather flock together. Not to be disrespectful, but when was the last time any kind of tech innovations came out of those markets? Silicon Valley is the hotbed of tech. Everywhere else is just an extension of it.....IMO of course. 

    It seems like we go through cycles of exodus every downturn. The last time I checked, the net immigrant was still positive for CA. The fact that rents went through the roof suggested that we have more people coming to the Silicon Valley than moving out. To me, the people that move out of the Silicon Valley are the average Joe, who couldn't compete in the Bay Area. This is the land where talents are being handsomely rewarded. If people move out to retire, that's another topic.

    With respect to a 4,000 sq. ft house, who really needs a big house in the Bay when you can enjoy the outdoor all year around? The fact that people moved out of the Bay Area so they could afford a big and cheap house elsewhere MIGHT mean they couldn't make it here. I think it's positive. Their moving out frees up housing for newly talented people.

    You can look at other tech markets, but I doubt you will buy anything. Your Midwest mindset will get in the way. I would love for you to prove me wrong.

     Naturally these are outgrowths in support of the valley. Nothing will replace the valley as the driver of tech. But, it's starting to be difficult to argue with the realities of population growth in certain markets outside of CA, all of which seem to be driven by tech.

    And as to proving you wrong - working on it :) Regardless, it looks like I'll be taking my shop to one of these markets soon...

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @J. Martin I know how much you love UCLA forecast:) Here is the lastest for East Bay.

    Published on Jan 28, 2016

    http://www.allenmatkins.com/ucla
    The 2016 Winter/Spring Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey signals continued confidence among developers through 2018–indicating both the probability of new supply and of opportunities for new investment. The Survey, taken by California's commercial real estate industry leaders in December 2015, indicates continued optimism with only a smattering of caution with respect to the continuation of the current run.

  • Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    see, this is the innate dilemma  with these types of threads- lots of thoughtful people presenting data and analysis, but no clear and specific answer, which is what we are all intrinsically seeking!  After reading up to this point, I think the short video @Matt R. posted above sums it up rather bluntly; a dozen people giving you their best 20 second world view projection of what's to come!

    So the key for each individual here is to understand their specific financial situation, investment and risk profile, and how to manage that best going forward. Which is something we do (or should do) on an ongoing basis. 

    I think the general consensus is that we are susceptible to some kind of economic correction in 1-3 years, and that may be a mild correction or possibly more severe. Personally I'm not a doomsday believer, and don't think we will reach anything like the last Great Recession. I'm taking about a national level, because indicators are still mixed. On the good side, unemployment is low, inflation is low, commodity prices have dropped, real estate (nationally both residential and commercial) is still healthy, tech is still creating new product and service categories, etc. On the minus side the dollar is rising in value, stock market has jitters, China's recession is a wild card, the Middle East is still a sh!t storm of unpredictability, and to top it off, we're in uncharted territory with the surreal US presidential elections. You can add more global and national factors, but these are the top ones that came to my mind. 

    Now the next step is to look at your geographic region, in our case the greater Bay Area. Yes there is tons of speculation on tech, unicorns and housing affordability. My belief is that yes tech valuations will continue to get reduced, and there will be some spectacular unicorn failures. But there will many other unicorns that will survive at lower valuations, as well as a few successful IPO's and buy outs in 2016. The googles, apples, FB, etc., will continue to do well and hire. But start up funding will slow down, and overall tech employment will tighten up in the next couple of years. Housing values in prime Bay Area will slow in appreciation or have a mild reduction during the next 1-3 years. 

    At this point I don't feel that there will be a major financial disaster, but that could change going forward. As I said at the beginning, we all innately make these kinds of mental calculations all the time. They are intellectually stimulating and more importantly, make us feel better about an ultimately unknowable future ;)  But in the final analysis we cannot predict the actual outcome, much less its timing. All we can do is hedge our bets, make calculated risks, and hope we don't screw things up royally!

    So I urge everyone to look at their risk tolerance, financial capability, and make the best decisions you can at any given time. Threads like this inevitably do two things at the same time: they help pacify us with intelligent and compelling POV's, while at the same time stir unease given the contradictory and uncertain nature of trying to predict our economic future.  But that is part of the investing game, and threads like this make the process stimulating and enjoyable!

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    SoCal has 8 down trend survey takers. There are many in survey I mean in total sentiment.

    Bay Area one down trend survey takers.

    Who are the survey takers? The biggest developers in the state. 

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    What we know is there is going to be a huge shake up in VC start ups soon world wide. For some this might be their Bay area REI forecast flag pole...apparently the majority of UCLAs surveyed Bay area developers might wonder was that pole placed in quick sand?

    Of course there is a recession coming and perhaps another boom is coming too. One day everyone will be right who posted here.

    @Amit M. agreed. 

  • Investor · San Francisco, CA · Member since 2015 · 15 posts · 21 votes
    10y
    Originally posted by @Matt R.:

    What we know is there is going to be a huge shake up in VC start ups soon world wide. For some this might be their Bay area REI forecast flag pole...apparently the majority of UCLAs surveyed Bay area developers might wonder was that pole placed in quick sand?

    Of course there is a recession coming and perhaps another boom is coming too. One day everyone will be right who posted here.

    @Amit M. agreed. 

    Matt:

    We don't yet know if there will be a big VC backed startup/unicorn shakeout yet... We are at full employment in the Bay Area, supply is tight, and rents have never been higher, so I'm not surprised large developers are bullish. Big tech companies are flush with cash. All appears great.

    However, we just saw the first significant drop in VC investment  (Q4 2015) in a number of years and a few tiny cracks are starting to appear with some of the hottest startups. May be a blip, so I advocate looking at the monthly/quarterly VC investment data as it may be a little bit more predictive than employment data. If startups have a harder time raising money, then startup hiring will slow and layoffs may appear. It may take a year for some startups to start to run out of cash. 1 quarter does not make a trend. I'm looking forward to seeing Q1 2016 VC data

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @Justin Ashton Right on, I should have wrote what I think vs what we know. Perhaps with any VC shake up, the remaining real tech opps in Bay area gain more local talent is the actual end result. One big tech had to poach so much talent for there car idea that the much smaller company had to close their doors/game over. The talent was raided to the point of no return.

  • Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    a comment wrt 2 charts I have seen here (@J. Martin chart showing the rate of appreciation growth and just above @Justin Ashton VC funding chart). Although it's always disconcerting to see these numbers dip, remember that they reflect an increasing rate, so by definition they can't go up forever. It's like there is a new phenomena, and it gets lots of traction, like housing in 2012 or VC spending. And it keeps growing. But at some point it will begin to slow down, of course. The question is if we will have a smooth landing, or will it be all bumpy and destructive. This applies to VC pulling back and RE appreciation growth rates. 

  • J. MartinPro Member
    OP
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    10y
    Originally posted by @Amit M.:

    a comment wrt 2 charts I have seen here (@J. Martin chart showing the rate of appreciation growth and just above @Justin Ashton VC funding chart). Although it's always disconcerting to see these numbers dip, remember that they reflect an increasing rate, so by definition they can't go up forever. It's like there is a new phenomena, and it gets lots of traction, like housing in 2012 or VC spending. And it keeps growing. But at some point it will begin to slow down, of course. The question is if we will have a smooth landing, or will it be all bumpy and destructive. This applies to VC pulling back and RE appreciation growth rates. 

     The billion dollar question... Smooth landing, or bumpy and destructive? I do not know. Sort of in uncharted waters. Lending not as loose for unqualified people. But affordability really be stretched across the spectrum, with the Fed left to do a lot less than they could in the past..

    I just thought it was neat that you could clearly see the rate of growth slowing during the last slowdown also, while RE prices were still increasing (at a slowing rate). And seemingly in every other downturn. Even not knowing what will happen, it allows you to reposition or side-step a good chunk of that "uncertain" part of the cycle, if you should choose to do so..

    I wouldn't say that the parts where real estate slows down (or goes negative) is totally unpredictable!! (at least from a cyclical - not quarterly perspective..) That's valuable information for me, even if I don't know if there's going to be a serious fallout..

    "Everything that is unsustainable must come to an end." (for you Amit! ;)

    I only heard this the first time recently, but thought it was pretty funny.. Seriously though, the leading index for CA makes it look like the beginning of the end of this cycle, historically. We'll see if it continues decelerating the next 2-3 quarters, along with San Francisco - Oakland - Hayward economic conditions, and local job growth deceleration. Takes a year or two to unwind though.. ;)

    San Jose - Sunnyvale - Santa Clara RE Prices w/ local economic conditions, stock market

    I don't know how much the impact, but the stock market dip and volatility can't help, right!? Look at the dropoff in local economic conditions, followed by a slight deceleration in employment growth..

  • Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @J. Martin I think we're essentially saying the same thing- it's hard to predict exactly when, and to want degree, a correction will effect housing prices in any given location. I just think it will take a lot to end up with a "blood on the streets" scenario, where prime Bay Area RE is down 30%. In addition to domestic economic concerns we will need some serious international instability. Which of course is not entirely out of the question, given the nutty elections we're having thus far. But my compass so far is not treading that way. But as most of us agree, backing off the acquisition accelerator is prudent. Hence I'm cautious about buying more property at this point, unless the circumstances of the deal are really solid. 

  • Investor · San Francisco, CA · Member since 2015 · 15 posts · 21 votes
    10y

    Recent Bloomberg article provides another data point on slowdown, from SF commercial office segment: 

    "Office subleasing, an early indicator of past downturns, is at the highest level since 2010."

  • Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    ^ yes that's true. In San Francisco several unicorns got awfully ambitious with leasing extra space, and are scaling that down now. From several sources I have read it looks like it's getting absorbed so far. But like all complex systems, this is another factor in the potential tipping point of a recession. 

  • Real Estate Agent · Mountain View, CA · Member since 2016 · 85 posts · 10 votes
    10y

    Thank you for the local market data!

    Kind regards,

    Arpad

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y

    @J. Martin,

    It's mid year, let's have an update.  I thought it would be two to three quarter points increase in 2016.  As I previously told you, I believe we would head into a recession when the Fed funds rate is at 1.5%.  We're no where near that, and they haven't even raised a quarter point YTD.  Will the Fed funds rate get to 1.5% this time around?  In the meantime, mortgage rate has been drifting lower.  

    The HAI for CA and the 3 counties I've been tracking actually went up from 4th quarter 2015 to 1st quarter 2016.  Below are the numbers in the orders of 1st quarter 2015, 4th quarter 2015 and 1st quarter 2016 for comparison purposes.  The numbers in parentheses are previous peaks of the housing market.

    California - 34, 30, 34 (17)

    San Francisco County - 12, 11, 13 (9)

    San Mateo County - 14, 14, 16 (11)

    Santa Clara County - 22, 20, 22 (15)

    We're no where near the peak of the housing market for CA as a whole.  This suggests a divergence between the coastal and inland markets.  Instead of being in the 8th inning, looks like we're back to the 7th inning.  Two factors that likely contributed to this are lower interest rate and people are actually making more money.  Or could it be that we have passed the peak and on our way down?  Or could it be that the market is taking a breather before making a final run?  What did you say J?  It feels best before it's over?  :>)

    Share with us your thoughts!

  • Investor · Buena Park, CA · Member since 2015 · 13 posts · 6 votes
    10y

    @Account Closed I'm just a college student, so correct me if I'm wrong. HAI is Housing affordability index right? So higher HAI means that the houses are more affordable than the last quarter correct?

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @James Sreewarom:

    @Account Closed I'm just a college student, so correct me if I'm wrong. HAI is Housing affordability index right? So higher HAI means that the houses are more affordable than the last quarter correct?

    Hi James,

    You're correct.  The higher the HAI, the more affordable housing. To put things in perspective, Here are some HAI numbers of the peaks and troughs in the last 27 years:

    Year................CA.................San Fran..................San Mateo...................Santa Clara

    1989...............18.......................(9)..............................(9).................................13........

    1993...............42.......................27..............................30.................................43........

    00-01..............30.......................9................................13.................................16........

    2005................18.......................9...............................11.................................18........

    2007................11.......................8................................8...................................11.......

    09-12...............55.......................29.............................33..................................44.......

    2016................34.......................13..............................16..................................22......

    Here are some highlights:

    1.  I only have numbers for San Francisco and San Mateo Counties going back to 1991 so extrapolated them.  That was why I put them in parenthesis.  They shouldn't be off more than 1% point.

    2. Real estate remained expensive between 2000-2005 although the HAI approved a bit due to Alan Greenspan cut interest rate aggressively after September 11, 2001 and people went back to work after 2001-2002 recession.  Higher income coupled with lower interest rate meant higher HAI.

    3. I chose 2005 as a cut off year because it somewhat matched the previous housing cycle.

    4. I included 2007 to show what loose lending did to our housing market especially the CA HAI number.  This means a lot of stupid money likely chased tertiary and low-end markets and drove them up to ridiculous numbers.  Historical data has shown that the low-end markets tend to appreciate the most towards the end of the housing cycle. 

    5.  The San Francisco and San Mateo markets have always been expensive and will likely remain expensive for my lifetime.  

    If we go into a recession in the near future, one can make a case that the correction will likely not going to be very severe as we haven't pushed the upper bound like previous cycles.  However, the Fed doesn't have 500 basis points to soften up the price drop like previous recessions.  Does this mean the correction will mimic previous cycles?  I ran through some scenarios and have my theory, but it's only one man's opinion.  

    @Johnson H., I'm more than happy to share my theory with you when we meet this Friday.  Also, remind me about the rent chart, I'll share with you my interpretation on it.  You may not like what I have to say as it's not what you expect.  

  • Investor · Buena Park, CA · Member since 2015 · 13 posts · 6 votes
    10y

    @Account Closed thank you for replying. My Econ prof. also told me that business cycle usually last for 8-11 years. The last recession was 2007, so the next one should be 2017-2018. She also told me to be cautious investing in real estate right now. She said she is waiting for something next year. Thing doesn't look good; Globally, she meant. 

    Anyway, recession doesn't mean that the house price gonna drop like 2009 right? Since right now inventory is so low( I don't really understand why we have low inventory though) I don't think there are a lot of subprime behind the payment like last 2006, which caused real estate to crash and there are a lot of cash buyer from foreigner. Only way, the house price gonna drop is someone suddenly dumping shadow inventory in the market increasing supply.... I'm trying to learn here. Correctly me if I'm wrong!

  • J. MartinPro Member
    OP
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    10y

    @Account Closed,

    Like some magical romantic moments...
    "It feels the best right before it's over."

    You're right that unaffordability in the rest of CA hasn't gotten as bad as the SF Bay Area (or as close to the peak - largely because inland areas are still back at prices from 2004 or earlier.) Interestingly, the jobs situation in the rest of CA is just about as relatively good as the SF Bay Area (unemployment near record lows.) It doesn't typically get much better for long.. Is there still a year or two in there..? Maybe.. But anything below 5.0%, and I think the clock is really ticking..

    In San Francisco, the only time unemployment was lower than May's 2.9% over the last 25 years, was briefly during the dot com boom in 2000, before unemployment went over 7%. Didn't even get to 3% pre-GFC. Historically, there is a slow down/flat or decline in SF Bay Area prices just after the end of a long decline in unemployment. Then one of those gray things..

    I'll be pushing in more chips when the unemployment line is closer to the top left, but moving towards the bottom right ;)  - rather than when it's at the bottom right, and eventually moving towards the upper right.

    It's not exactly a rocket science strategy. But the data is what it is!! ;)

    HAI has really been saved by Brexit, worldwide low/negative rates, and the continued low and declining mortgage rates.
    WOW. Who would've thought we'd be near record low mortgage rates AGAIN, this far into the economic cycle (well, maybe you Minh ;)

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y

    @James Sreewarom,

    I agree with your Econ professor about the timing of 1-2 years till the next recession.  I also agree with you that there's no guarantee home prices are going to drop like 2009.  I would love for someone to make a case for the depth of the drop in home prices.  Like you, I'm here to learn.  I'm a data guy so you'd have to convince me with data instead of anecdotal.  I'd love for you to ask your Econ prof these questions and report back.  

    "How much does she think home prices will drop?  Where will the supply of homes come from?  Where does she think interest rate will be headed? up or down during the next recession?  Are we currently in an inflationary, deflationary or stagflationary environment?  Where does she think home prices in the Bay Area will be in the next decade or two?"  Thanks in advance.

    @J. Martin, let me ask you this question.  What IF home prices are still relatively out of line when unemployment is at 7-7.5% during the next recession?  Think of the early 2000's recession.  Look at the HAI between 2001-2005.  What are you going to do?  Where are you going to push your chips?

    You can make a case for Brexit saving the HAI.  To me, the writing has been on the wall.  Demand is week so the yield has no where to go but down.  Not sure if I mentioned this to you, but I told @Johnson H. and @David C. that the 10-year T-Bill will head to 1% months ago.  It's a matter of when.  Looks like it may get there sooner I thought.  Take a look at the bond yield chart that the texted to you three musketeers on July 5.  You're looking at a black swan in the eye without recognizing it.  That's the next thesis I'll be working on.  

    With respect to interest rate, I previously shared with you guys that we can absorb the first 150 bps increase in the Fed funds rate without an increase in mortgage rate because the bank's margin of 2.25-2.5% is still intact.  I was hoping for the Fed to get to 150 bps ASAP to help soften the blow going into the next recession.  Now that doesn't even look like it.  Sigh........Balance sheet recession? Deflation anyone?

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