Stockton & Lodi To Be #4 Housing Market In 2018

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Well, well, well... whaddaya know... my sweet little hometown of Stockton, California has some big things planned for 2018:

Much in the same way that I boasted about Sacramento last year when it was the #4 spot, in this post I shall make my case for why you (yes, YOU Mr. Bay Area Investor), should consider making an investment in Stockton this year.

TO ALL THE NAY-SAYERS:

My oh my, would I be amiss if I didn't first erase your overwhelming doubt and skepticism to allow you to hear clearly what I am about to say. Last year, I heard sooooooo many people poo-poo on the idea of investing in Sacramento for all sorts of reasons. But the end-all-be-all argument most used was that we were at the peak of the market and buying now was a stupid decision, blah, blah, blah, etc., etc.

Yes, the best time to buy was 2010-2012, and the best time to plant a tree was 20 years ago. The second best time is now.

For a personal anecdote to illustrate that we've still got plenty of room to grow, in October of last year I purchased a home in Sacramento for $260k, and right now my next door neighbor who is a model-match and the near-perfect comp is set to close on selling his house for $320k :-D 

That's a whopping 23.07693% yearly appreciation my dear friend. If only more of those nay-sayers had listened. 

Stockton will be a much tougher sell for most of you than Sacramento, for all the reasons I listed here in my guide on how/where to invest in Stockton (still highly relevant):

https://www.biggerpockets.com/forums/627/topics/424510-how-to-invest-in-stockton-ca---a-detailed-overview

A large part of the reason most investors turn their nose up on Stockton is because of all the bad headlines. That's all most people know Stockton for. Here are some of the greatest hits from the past decade:

No wonder most of you think Stockton plays out like a video calculating Arnold Schwarzenegger's Movie Kill Count. (As a side note, I much more prefer Arnold's 160 Greatest One-Liners, definitely worth the watch.)

A NEW BEGINNING

But recently, Stockton has seemingly turned a new leaf, and suddenly found itself making headlines for all the right reasons:

And the list goes on and on... but pay particular attention to that last one...

If you read in my article above about investing in Stockton I wrote nearly a year ago, I predicted that Stockton would really need to focus on its downtown area to attract Bay Area millennials who are trying to flee the expensive *** housing market there where only 25% of homes are priced under $500,000

And it seems Mayor Michael Tubbs must've stumbled onto my post and read it (or at least I like to think so) because big moves are happening with Stockton's Open Window Project.

From the first page of the report (pay special attention to sections I emphasized):

"The ‘Open Window Project’ (OWP) Master Development Plan (MDP) for Downtown Stockton proposes to create the framework, urban design standards and guidelines for the urban regeneration of the heart of the City transforming it into a vibrant, mixed use, mixed-income, pedestrian friendly neighborhood.

The MDP envisions transforming 11.884 net acres on 51 individual parcels over 15 city blocks into a dense urban environment with as many as 1,400 new dwellings together with retail stores, live/work lofts, and work spaces. A range of housing types are envisioned including low and mid-rise stacked flats, townhouses, lofts and microunits offering a variety of choices to cater to different lifestyles and household sizes

The MDP proposes to take advantage of the proximity to transit to reduce the need for car ownership and to create opportunities for a walkable neighborhood. Design guidelines are intended to create permeable blocks and to encourage the creation of a network of privately owned pedestrian alleys, mid-block lanes and courtyards. Streets are to be designed to promote traffic calming and bicycle use together with the design of shared space for activities such as a farmers’ market. The MDP also proposes to create a sustainable urban environment that is responsive to climate change, storm-water management and can encourage programs such as urban farming, green roofs and bioswales."

Let me run some of those phrases through my nifty Millennial Translator 5000 and tell you what they mean...

"Dense Urban Environment" = Come get the big city feel without the big city price, because we know you're broke

"Pedestrian Friendly Neighborhood" = Why own a car when you can just Uber or be extra cool and ride a bike?

"Farmer's Markets" = Farmer's Markets?!? DEFINITELY! I'll bike on over as soon as I finish combing my ironic hipster mustache.

Whoever is in charge of this development is VERY smart, and knows they will attract millennials by the truckload migrating from the Bay Area seeking out more affordable pastures. Kudos to the new Stockton leadership. Big things ahead.

MY BOLD PREDICTION FOR 2018

Last year, Sacramento held the #4 spot predicted by Realtor.com, and Stockton/Lodi has now jumped up from #28 predicting 4.55% sales growth and 6.43% appreciation. 

The reason for Sacramento's growth last year was that it was a much cheaper alternative to the Bay Area, and it had a new bustling downtown/midtown scene.

Hmmm... why does that sound so familiar? What other Central Valley City could be brewing the same recipe for massive growth?

I'm telling you, as soon as Bay Area millennials catch wind that they can come to Downtown Stockton and do all the hipster **** they loved to do back in the Bay Area like go to the local farmer's market and check out the new gastropub, and then find out that 89.71% of homes are priced under $500k compared to the Bay Area where only 25% are, they will be moving here in droves.

JUST LIKE THEY DID TO SACRAMENTO LAST YEAR!

Here's the thing folks... you're watching history repeat itself, and it just happens to be happening so rapidly that you can actually do something about it this time and capitalize. Very rare opportunity indeed.

And sure, some will come in here and poo-poo all over this idea once again, talking about how Stockton is a tertiary market, we're at the top of the market, the bubble is about to burst, and so on and so on...

But remember, they said the same thing about Sacramento, too...

If it were me, I would take the gamble on Downtown Stockton, develop some millennial bait with some cool lofts or something and maybe a few high tech features in the home, and ride this development wave out and watch the property values skyrocket.

Or you could always just buy that turn-key property you've never seen in some far away state and hope you don't get screwed over by the developer like a reader of my weekly newsletter just did... but that wouldn't be very wise now would it?

The choice is yours... but the educated choice would be to look at what just happened in Sacramento last year and use it as a blueprint for what's about to happen in Stockton. Hopefully you'll listen.

For I'd hate to be the one to say "I told you so..." ;-)

Sacramento is in top 10 nationally for total returns (cash flow + equity) since 2000. Investors might want to know at least that part. Stockton idk but I imagine there is some rub off. Stockton had largest increase in Calif but it is usually lagging CA market I think. Sometimes areas are last to go up and first to go down. Long term still should be fine. 

Good luck!

@Sam Josh

I knew the bubble skepticism was coming, but perhaps rightly so... 

Here are the main things about the California Marketplace that are making it quite different than the housing market in the early-mid 2000's:

1) Lending Regulations: No more strippers and McDonald's employees owning 3 houses because they didn't have to verify their income. Long gone are the days of the NINJA Loan and underwriting is as strict as ever. So the demand isn't artificial, it's legit.

2) Low Inventory: After the recession building stopped. And to this day we still haven't caught up with the demand. Plus with Trump deporting  a large portion of illegal construction workers in the Southwest States bordering Mexico construction companies don't have the manpower either. Anybody who bought during the recession got the deal of a lifetime and to trade up now would mean a much higher price and higher interest rate, so boomers are electing to die in their house rather than sell. This isn't like 2004 were we were building 15,000+ houses per year, we're often at 40-60% of that lately.

3) Millennials Coming Of Age: The biggest portion of Millennials isn't turning 30 until 2020, so the demand is going to continue to grow. Gen X'ers were already in their mid 30's by 2004, so there is a big difference in the continued demand that will be coming as Millennials finally meet the perfect match on Tinder and decide to settle down, have kids and buy their first home.

The housing boom in the early-mid 2000's was driven by speculation and lax regulation. The housing boom we're experiencing now is driven solely by supply and demand. That's the key difference.

@Matt R.

Stockton is now the cheaper alternative to Sacramento. Those that can't afford the average home in Sacramento are now forced to choose Stockton instead if they wish to flee the Bay Area. Plus those who lived in Sacramento and now can't afford due to increased rents and home values and being forced to make the move down to Stockton and make the commute back up to Sac as well. Sacramento was #4 last year, experienced a ton of growth, and some of those that waited too long to make the move are now forced to settle for a cheaper alternative in Stockton. That's a big part of the reason I believe Stockton will be #4 this year. It's becoming the only feasible option left for most.

Wes how do you feel about north of Sacramento, I know a lot of people moving out of sac into yuba county where rent is cheaper, and its only 25 min to sac, I think the Plumas lake area is going to be a sought after market, how do you feel?

@James Rogers

I think it certainly has potential, just not to the degree that the metro areas like Sacramento and Stockton will have. People will always choose to live close to work if possible, and will only seek outskirt areas like Plumas Lake, Yuba City, etc. if that's their only option.

But in general, people will be moving inward from the coast line to the Central Valley and beyond, and people who can't afford to major bumps in rent and housing prices in the metro areas will move to the outskirt areas and commute, causing secondary bumps in markets like Plumas Lake and Yuba City.

It's a little harder to predict the outcome for smaller markets like that because it's not even on the radar of any major research efforts to give you some solid stats. 

But, I think if you've found the right deal it can definitely work and is a safe bet. People may be leaving California, but not nearly enough to make a dent in the high housing demand.

Thank you @Wes Blackwell . Roughly what proportion of these homes are owner occupied?  I know its a difficult stat, but  I have a feeling that the outlying areas of the bay area (and Sac included) are simply benefiting from Bay Area investors who cannot find an entry and then a deal in the bay area and are speculating on Sac and now on the likes of Stockton or Lodi as up and coming areas. Sorry for being a skeptic and please consider me to be just asking tough questions. I enjoyed reading your first and very detailed response.

@Sam Josh

The 2015 American Community Survey estimates 48.5% owner occupancy for Stockton, up from 45.1% in 2014. It's probably even higher now, but only by 2-3%.

Stockton was the foreclosure capital of the nation back during the Great Recession, with short sale after short sale after short sale. It was pretty much all investors back then, and now a lot are slowly starting to cash out and that's why you're seeing the growth in homeownership. 

I think that number will continue to grow as we see more and more millennial migration heading inland away from the coast. Sure, you've got some investors still, but a lot will be homeowners looking to plant roots. If you only qualify for a $250k home loan, the number of places you can live is running out. Stockton / Lodi tops the list though, especially for folks from the Bay.

I''m invested in Plumas Lake and prices are going up. Several factors make it a solid place to invest for the right price:

-Attractive price point for builders,buyers and renters.

-Solid School system

-Only 25 miles from Sac/Air Port and  Lincoln/Rocklin/Roseville.

-Yuba City and Marysville are trying to grow and upgrade infrastructure.

-Close to Air Force Base

-New Gas station and businesses being built. Commecial lots ready. Possible Casino being built 5 miles away  

Question is how fast will it grow? Prepare to invest for the long haul in PL. Good luck!