SF Bay Area Economic & RE Update (Ongoing)

J. Martin · 2016-02-13T15:29:25-08:00

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 meaningful2) 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?

Sandeep S.

Investor · Cupertino, CA · Member since 2012 · 118 posts · 121 votes

9y

Originally posted by @Account Closed:

Originally posted by @Sandeep S.:

Great analysis @Account Closed. I love the effort you and @J. Martin put for compiling and presenting the data!

Looking at these charts, I have always wondered is that the 2001 can be viewed as "a blip" for bay area RE market instead of a recession (like 1991 and 2007). It was only SF and SV market that got affected in 2001. And if we ignore the blip - the expansionary cycle lasted all the way from 1995 to 2007 (13 years!). While it is a risky thought - but what if the current cycle lasts also 10-13 years with one blip on the way. (and that "blip" could be happening right now!).

While a risky thought - but if this alternative theory turns out true - we may not see serious bay area wide correction until after 2022. Just a thought...

Sandeep,

I love your line of thinking. Although I was not a full blown full-time REI at the time, I was living and breathing RE on a regular basis back then so I remember it vividly. I even modeled it out: If it weren't for 9/11, which likely caused the recession, where would the recession have likely started and my conclusion at the time was 2003.

What saved the housing market at the time was that Alan Greenspan cut rates to 1%. Bay Area folks were terrified of the stock market so the money went into real estate. A lot of money that were already made from the Tech 1.0 was still sloshing around looking for yields. Refinancing to lower mortgage payments created another round of liquidity. Then funny lending went into gear around 2004 and took the market to another level.

This time around, it has a very similar feel to the Tech 1.0 time frame so I'm preparing myself for both scenarios, a blip 10-15% correction or a longer 20-25% correction. I'm stress-testing our portfolio for both scenarios, and we're setting aside $500k in case the latter scenario becomes a reality.

If you believe in the 18-year biz cycle theory, we can definitely hit a blip in the next year or so, then resume the uptrend till 2024. I'm listening to the market and preparing for different scenarios.

Minh - completely agree with you that the smart thing to do is to prepare for either scenario: whether a <10% blip or a major correction > 20%.

I am betting more on the blip though :)

2 Reply

Account Closed

Oakland, CA · Member since 2017 · 133 posts · 58 votes

9y

I have the same thought as @Sandeep S., "Bet more on the blip".

2 Reply

Account Closed

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

9y

@Sandeep S. and @Account Closed,

And I'm not going to bet against that. I hope you both are right as we're in the middle of negotiating to buy another building in our market this year. This market is definitely not for newbies without a niche IMO.

The rationalization for 25-30% correction is this. Say rents would drop 10-15%. Also, the cap rate would go up 100 bps or so. When you combine these two factors, you can get a 25-30% discount from today's prices. However, if we can get something with a 20-25% discount now, we're still going to buy. Hope that makes sense, and I don't sound like a hypocrite for saying to wait while I'm still buying. 😁

3 Reply

Robert C.

Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes

9y

@J. Martin, @Account Closed

Follow on question, for the posters here.

What do you think of the folks who are actually selling everything and sitting on the sidelines? Are any of you doing that? I don't completely understand the rationale - but there does seem to be a reasonable number of people choosing that path. Seems to me it's like taking a 15%-20% hit now from taxes for the sake of predictability, and they are banking on being able to enter the market again at a low point from which they can outpace the people who held on.

One thing I've been asking myself is how much cash I would need to have on hand in order to buy my way out of the next recession/dip. So, assuming my existing portfolio takes a 10%-25% hit, how much money would I need to average out my losses by buying into the next up-cycle, and how long will I have to stay liquid for?

0 Reply

David Song

Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes

9y

This is an interesting discussion.

I have thought about this in a similar fashion, with just common sense, no data to backup;

Residential SFR;

Stock, job, house price.

Usually, house price will not fall unless some owner have to sell at a loss, quickly.

REO is such an example. But normal individuals will not sell for a loss easily. But if they lose their job, they have to. Natural disasters might also be.

Job numbers depend on overall economy, which might be related to stock.

Stock must decline first, which means some company will close doors. A few months later, A lot of people lose their job. People without job still have some benefits for a few months. After that, they would be late on mortgage.

In my mind, if I see stock market crash, that is the first warning. Jobless number go up, 2nd warning. Whether that will actually translate into housing price, god knows.

There might be some buying opportunities a few months later. May or may not be. Just a guess.

1 Reply

Account Closed

Oakland, CA · Member since 2017 · 133 posts · 58 votes

9y

In my local market, from time to time, I saw investors dump their portfolio. Around end of 2015, I saw an investor dumped all of his 70 properties. I bought 2 properties from him. Have had 35% appreciation on those 2 properties after bought from him. Around end of 2016, another investor sold all of his 50 properties, I bought 1 property from him, have had 20% appreciation on the one property after bought from him. Two months ago, another investor dump all of her 30 properties, I bought 1 property from her. Two month ago, another investor need to dump his 15 properties, asked me if I'm interested. I'm the type of person who like to plant all my rentals at my backyard within 5 minutes to 20 minutes distance. His properties are 45 minutes from my backyard, back and forth round trip would cost me 90 minutes. Too far away for me. I didn't buy any. He had it on MLS listing, 80% have been contingent in a short period of time. He told me he need cash to buy a large apartment buildings. To be honest with you, I'm holding all of my properties very tight; but it doesn't mean I won't sell it. I am currently looking for an apartment building within a short distance from my backyard. Once I found something I'm interested in, I will sell at least 10 of my properties to cash out trade for an apartment building. When an investor sold all of their properties, holding the cash is one option, but not necessarily the same option for all sellers. Some investors dump their portfolio, because they see a better opportunity somewhere else to park their money such as buying a larger size of an apartment building. :)

2 Reply

Account Closed

Oakland, CA · Member since 2017 · 133 posts · 58 votes

9y

Yes, I'm still buying today. Currently, I have two deals in escrow, in the process of negotiating a 3rd property. :)

0 Reply

J. MartinPro Member

OP

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

9y

Originally posted by @Robert C.:

@J. Martin, @Account Closed

Follow on question, for the posters here.

What do you think of the folks who are actually selling everything and sitting on the sidelines? Are any of you doing that? I don't completely understand the rationale - but there does seem to be a reasonable number of people choosing that path. Seems to me it's like taking a 15%-20% hit now from taxes for the sake of predictability, and they are banking on being able to enter the market again at a low point from which they can outpace the people who held on.

One thing I've been asking myself is how much cash I would need to have on hand in order to buy my way out of the next recession/dip. So, assuming my existing portfolio takes a 10%-25% hit, how much money would I need to average out my losses by buying into the next up-cycle, and how long will I have to stay liquid for?

I hear you on not selling everything and sitting on the sidelines.
I don't think we're anywhere near that stretched.

I have not sold any of my properties I own in the SF Bay Area. If I do think about selling, I look at the potential net proceeds, minus any prop-13 tax basis loss, as a proxy for the net value of what I might sell. If I would buy it for that much today, then I don't sell it. There are some other influences. But I agree that taking a 15%+ tax hit today, to try to deploy it again at exactly the right time, is a rough strategy. Maybe it goes up another 15% before it drops back to today's level.

It's hard to call the TIMING of an exact top or bottom.
But I don't think it's as difficult to tell if we're in the early or late stages of an economic expansion. I'm not trying to pick the right day or week. But maybe the right season.

Nice to have a large bucket on hand if it starts raining a bit ;)

6 Reply

Sandeep S.

Investor · Cupertino, CA · Member since 2012 · 118 posts · 121 votes

9y

Originally posted by @J. Martin:

Originally posted by @Robert C.:

@J. Martin, @Account Closed

Follow on question, for the posters here.

What do you think of the folks who are actually selling everything and sitting on the sidelines? Are any of you doing that? I don't completely understand the rationale - but there does seem to be a reasonable number of people choosing that path. Seems to me it's like taking a 15%-20% hit now from taxes for the sake of predictability, and they are banking on being able to enter the market again at a low point from which they can outpace the people who held on.

One thing I've been asking myself is how much cash I would need to have on hand in order to buy my way out of the next recession/dip. So, assuming my existing portfolio takes a 10%-25% hit, how much money would I need to average out my losses by buying into the next up-cycle, and how long will I have to stay liquid for?

I hear you on not selling everything and sitting on the sidelines.
I don't think we're anywhere near that stretched.

I have not sold any of my properties I own in the SF Bay Area. If I do think about selling, I look at the potential net proceeds, minus any prop-13 tax basis loss, as a proxy for the net value of what I might sell. If I would buy it for that much today, then I don't sell it. There are some other influences. But I agree that taking a 15%+ tax hit today, to try to deploy it again at exactly the right time, is a rough strategy. Maybe it goes up another 15% before it drops back to today's level.

It's hard to call the TIMING of an exact top or bottom.
But I don't think it's as difficult to tell if we're in the early or late stages of an economic expansion. I'm not trying to pick the right day or week. But maybe the right season.

Nice to have a large bucket on hand if it starts raining a bit ;)

Given that I am expecting only a blip - I haven't sold anything (at least not yet). Paying income taxes, losing prop 13 basis, paying commissions - all of it doesn't make sense if it is going to be a small correction (that too difficult to time). My current plan is to ride it out (unless prices get to crazier levels). And just like Minh and others - I am still adding to my portfolio if I can buy at DISCOUNT. And of course cash flowing. Incidentally - I was able to buy 2 deals this month!

The one change I have done while buying now is that I have reduced my expectation of price growth in the next 5 years compared to before. And if a deal IRR can still meet my threshold - I would buy.

I think I should now start accumulating some extra cash for the rough times :)

5 Reply