Stockton: The Last Bastion of Housing Affordability in California

112 Replies

@Wes Blackwell I would love if Sac and the Bay Area got connected! But, I just don’t know how realistic it is unless Sac and BART come to an agreement to fund it along with other cities it runs through. Seems like a lot of working pieces to fit together

Frankly what I am reading here is a red flag in the form of  "This time it is different". I recall at the turn of the century, people were flocking to areas like the coyote valley in south san jose or Gilroy or Morgan hill etc,  because Cisco was thinking of expanding to that area. I think a lot had to do with the fact that prices in that area were much cheaper vis a vis the center of the bay area. Well to me it seemed foolish to buy speculate on properties in the outskirts, but hey what did I know. Cisco never really did much and started losing steam as a high growth company. The dot com bubble burst and I don't know what happened to the speculators. Lets say I can speculate on what might have happened.

Then in 2006/2007 there was hue and cry to invest in Merced and Fresno and San Bernardino. The wave was to buy remote because again it was too expensive to buy anything in the center of the bay area.

Well then the housing bubble burst and then these remote areas suddenly became ghost towns until now which is 2018.  Look who is making a comeback in 2018, apparently Stockton. I hear "this time it is different", yup millennials are getting married, building families and uber is coming out with a flying car or whatever excuse we have.

To me this talk is just signs of a top. In a downturn, all markets get hurt but these out lying areas don't get hurt, I repeat they don't get hurt, they get decimated. The ones in the center of the economic activity will get hurt but they wont get decimated. I think the only reason to invest in Stockton is because it is "cheap". It is cheap for a reason and if its getting expensive, as I said before I am getting nervous and not optimistic.

@Sam Josh

That's a totally natural response, and completely understandable coming from anyone with a pulse who was around these parts just a short ten years ago. We all remember the hype... and we all remember the crash too.

But things really are different this time... with the prime difference being regulation of the loan industry. Specifically, no more NINJA loans. The only people purchasing property are people that should actually be purchasing property. And they're only purchasing property they can actually afford. So the demand is genuine, not inflated.

That being said, there are still a few concerns on the horizon that could impact the housing market... Low/No Down Payment mortgage programs, automated / hybrid appraisals, North Korea nuking the west coast, etc. But these together don't pose nearly as much of a threat as we faced last time.

Here's my Top 4 Reasons Why The Housing Market Isn't Going To Crash:

#1) In 2005, subprime loans totaled more than $620 billion and made up 20% of the mortgage market. In 2015, they totaled $56 billion and comprised 5% of the market.

#2) Banks have raised lending standards. According to CoreLogic’s Housing Credit Index, loans originated in 2016 were among the highest quality originated in the last 15 years. In October 2009, the average FICO score was 686, according to Fair Isaac. In 2001, the average score was 490-510.

#3) Homeowners are not taking as much equity out of their homes. Home equity rose to $85 billion in 2006. It collapsed to less than $10 billion in 2010, and remained there until 2015. By 2017, it had only risen to $14 billion. Obamacare is one reason for that. Bankruptcy filings have fallen 50 percent since the ACA was passed. In 2010, 1.5 million people filed. In 2016, only 770,846 did.

#4) In the last housing bubble, homebuilders submitted permits for new construction. That was less than 1 million in 1990 during the recession. It gradually rose throughout the 1990s, exceeding 1 million in 1998. It remained at that level until 2002, when it surpassed 1.5 million. It hit a new record of 2 million in 2004 and 2005. In 2006, housing prices began falling. Homebuilders sought more than 1.5 million permits. That fell to less than 1 million in 2007. By 2009, it had collapsed to 500,000. They've only gradually recovered to 1.3 million in 2017. They are expected to drift lower, to 1.1 million by 2020. 

If you believe anything about the 18 year cycle, the next crash is set to happen in 2026. The only thing that could really speed it up is if Wall Street starts their risky shenanigans again and if so this time we must hang them all. But outside of that happening, I just don't see any reason why we'd be facing impending doom.

For the all the bullet train lovers...

https://sf.curbed.com/2018/1/29/16946576/san-jose-mercury-high-speed-rail-budget

@Matt K. It’s better than spending it on a Wall that will do nothing. Big projects like this always go over budget. But when people look back they can’t imagine how we did things without them.

Can you imagine the Bay Area without BART? LA is racing to catch up to BART with Metro. Eventually, more in more people in LA will start using their cars less, it’ll just take time.

The same goes for high speed rail, I would gladly take Rail versus driving all the way driving down to LA to visit family. Or taking an airplane which is much worse for the environment. If we just abandon the project the contractors already get a guaranteed amount that is significant.

Meh. LA public transit always has always had the problem in that there is no there there. Most people commute for work, and there isn't a "job central" in LA - industry is spread out across the whole LA basin.  Heck, I'd take LOW speed rail if I could take my car with me at a reasonable price so I can get where I'm going once I get to LA.

@Deanna Opgenort Metro is get a lotttt better in LA. They’re spending so much money it. In 5-10 years it will be fantastic!

Bart extending into Tracy, Lathrop, and Stockton in the near future. Will this increase market value in the Central Valley?  What are your thoughts about this lady’s and gentlemen? 

@Antonio Sanchez

Saw article recent article connect ACE and BART and Tracy, and that could be a game changer. Looks like building new rail to connect the existing trains and BART. It is not 100% BART, but a combination. It's a good idea, but still have to see how a public agency can handle a project like this at $1.6B, and might double to $3B. 

Still wait for that bullet train connecting nor cal and southern cal.

@Antonio Sanchez

Anything that can connect the high-paying jobs of the Bay Area into cheaper housing markets and allow workers an easier commute than driving 2-3 hours into the city every day will do wonders for home prices.

I do a lot of deals in Stockton and Sacramento, and Bay Area migrants and investors get an almost reverse-sticker-shock as they can't believe how cheap the housing is compared to the Bay Area. 

But as @Terry Lao said, it will probably take twice as long and cost twice as much as projected, so plan accordingly. Ultimately, I think it's inevitable, so if your plan is long-term then you're probably good to go. 

@Wes Blackwell

You always have amazing responses, really dig deep down into the numbers and the details, and rationalize your talking points very logically. I love it.

As far as Stockton goes, that's new on the radar for me. I'm a millenial, and at that 28 year old age where I'm starting to think about family and living in a larger house. You and I have talked a little bit personally about my situation, but minus the pregnant girlfriend (her and I are making sure that doesnt happen until we want it to), I have had several thoughts going back and forth whether or not to invest in Sacramento, or leave it behind for something more affordable. Both my gf and I started school in our mid-20s, and that's the one thing keeping us tied to the city. She has transferred colleges several times in the past few years, and would love to stay with ARC in Sac.

However, you are right. Its definitely not affordable, and I can only afford around a 300k house with the way my finances are right now.

Finding a house that fits my criteria for $350k in Sacramento is hard enough, let alone 50k less. (Looking for small multi-family. I know I could maybe find a better deal in SFR, but that's not my niche ) and all of the "good" deals dry up quickly in this city anyways. At least from my perspective.

Anyways, just wanted to say thank you Wes for your thoughtful and well balanced posts and replies, as always. And also share a little bit of my thoughts.

Stockton was not on my radar, but now it definitely is once both my gf and I are out of school.

Thank you for the informative posts.

@Keith Torsen

Thanks for the compliments! More than happy to help! As you stated, there is A LOT more than just the numbers when it comes to investing, and I understand that every buyer is a person, not a paycheck. The more informed you are, the better investing decisions you can make, and the better off you'll be. Happy my information has helped you.

You're not the only one in your situation, which is why many people are leaving California in droves. We're seeing a lot move from Stockton or Sacramento to the Phoenix, AZ area. And even more coming from Los Angeles or Southern California.

Just look at the difference in median home price according to Zillow

Los Angeles: $686k

Sacramento: $327k

Stockton: $301k

Phoenix: $242k

That $85k difference between Sacramento and Phoenix equates to roughly $581/mo saved on your mortgage every month. That's insanely huge. And can be the make-or-break amount for most deals or investments.

Not suggesting you move to AZ, but as others in the San Francisco Bay Area are already experiencing, perhaps the local market is getting too expensive for your strategy at your income level.

I get messaged by people from the Bay all the time who want to invest, but realize the numbers don't make sense locally, and want to see if they can make it work in Sacramento.

And I have the same kind of people from Sacramento who want to see if they can make the numbers work in Stockton instead, saving a little bit of dough or having more options to choose from.

Then I get investors who realize none of it makes sense for their budget or strategy, and that's when they consider looking out of state. 

Arizona is a good option because it's only one state away and less than a 2 hour flight. Easy to get to in case you need to visit the property or something goes wrong. 

Plus way more landlord friendly, huge growth projections (double the population by 2050), and simply way more affordable for Middle Class Americans.

So, just something to consider. Real estate in Sacramento and Stockton is only getting more expensive as the Bay Area investors and buyers come in seeking relief from the crushingly expensive housing market in the Bay.

@Wes Blackwell

Funny enough, I moved from Arizona to California for college. I never planned on moving back, but the Cottonwood/Sedona/Verde Valley area is my old stomping grounds as a kid and teenager. About an hour and a half north of Phoenix. I thought it was a terrible place, but as an adult, I now see the appeal, and that area is exploding too. My little hometown of Cottonwood has seen huge population growth from when I was a baby until now. Phoenix has never been anything special to me, but I've had several people mention it, saying it's a great market right now. I dont wish to move back, but when the time is right for my situation, AZ is looking promising if I ever go out of state.

Benefits are definitely good there.

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