Why appreciation matters in the SF/Bay Area

168 Replies

check out this interpretation of the case-shiller index over the last 30 years. Basically several huge, long run ups, and a few short, minor corrections. Tricky and challenging to get in, but this is how you make the big bucks folks!

http://thefrontsteps.com/2014/06/26/case-shiller-new-jump-in-bay-area-home-prices/

Wheeeeeeeeeeeeeee! 

@Amit M.

So much for the appreciation is "speculation" theory!  Pretty much documents my experience over 40 years.  Properties double in value about every 10 years in Honolulu and the Bay Area.  Why would anyone discount that NUMBER? 

Interesting that none of the immediate "cash flow" advocates haven't chirped in....

@Bob Bowling  I think at least some of them are busy chasing karma, and it's implications on RE investing :)

http://www.biggerpockets.com/renewsblog/2014/06/28/5-12-ways-never-fully-succeed-real-estate-investor/?inf_contact_key=741a6b49cc758f7a7020c0db20a8caaa2dd4677b4441429d60a3bc932c0c1166

I was looking at that very same chart a week or two back. It almost does NOT matter what year you buy. Even if you bought at the very peak, next year price goes down, but the year after price will come back up close to or higher than the previous peak.

Except of course the last bubble. 

But I think the last bubble and the subsequent crash is the 100-year flood kind of scenario that is highly unlikely to happen again in our lifetime. People often make fun of my bullishness saying "Yeah right, because this time is different?" To that I reply, "No, LAST time was different."

Don't wait to buy real estate. Buy real estate and wait. At least in the prime Bay Area.

@Amit M.  ,

I'm with you! I'd like to see the chart for the lower-tier properties too. From my anecdotal analysis, the lower-tier properties have even bigger percentage gains off the lows. And of course, more cyclicality in price. But cash flow on 30yr fixed rate financing, and crazy low entry point way below replacement cost. Thanks for posting it. And see you at BAWB Thursday after next!

@Bob Bowling ,

My refi I was talking about should close in the next week or two. Not getting exactly as much as I wanted out, but more than I put into it.. I got the appraisal back at $510K. All-in for about $400K in Dec 2012. Not too shabby! I think price increases from my properties will mostly come from gentrification, increases in rents, and perhaps an increased demand for owner-occupied multi-unit residential properties.

@Manch Hon  ,

I think @Minh L. was referring to it as a "supercycle." The article appropriately pointed out that it was a loose underwriting standards bubble. Your quote about "it was different last time" is funny. I've read a lot of the financial disaster books, and "it's different this time," leverage, and greed, are always common flaws running through these financial collapses. I hadn't heard anyone point out yet that the appreciation will be fantastic as long as it's not different this time! lol

I definitely wouldn't want to be buying in the non-prime areas during the peak of the cycle, but I agree, not as big of a deal in the prime areas. I don't mind getting into the lower-tier properties when they are still beat down at the bottom of the cycle. But will need to cycle up if the deals don't stay this good...

Manch is correct that it was different last time because it happens only once in a life time. Going forward, I don't expect a severe correction like 2008-2009. 

@Bob Bowling , I noticed that the rate of appreciation has moderated quite a bit since 1990. Therefore, I wouldn't count on 9%-11% in appreciation going forward. If I recalled correctly, home prices in CA quadrupled in value from 1970-1980, doubled in value from 1980-1990, upped 25% from 1990-2000, and upped another 25% from 2000-2010. In my opinion, the days of 9%-11% appreciation are long gone. I'd be happy with an average 4%-5% annual appreciation going forward although some of my properties have doubled in value in 2 to 5 short years. :>)

@Bob Bowling ,

I'm with @Minh L. on the long-term asset appreciation average. One thing that makes a huge impact though is inflation. Note that the huge increases in the periods Minh mentioned above were correspondingly periods with insane amounts of cumulative inflation equal to multiples of the beginning-period dollar. Then the RE topped that high inflation increase..

So if inflation stays around the Fed's target of 1-2%, I think stronger areas like the Bay could be higher at around 4-5%. If you're 3-4X leveraged on average, that's another 12-20% return on equity (IF you're staying leveraged), about 8-15% of which you can tap in equity later (~70% of the change for LTV), in addition to any cash flow.

I think we would need to see some higher-than-target inflation levels like we did back in those decades. The reason for the increases were obviously different this time, with the preceding collapse, but I think long-term average real estate increases are strongly influenced by inflation (and with housing costs at about half the gauge, it partially tracks rent and RE price increases)..

Minh's price increases above compared to cumulative inflation:
1970 - 1980: RE: Quadruple; Inflation: Prices doubled
1980-1990: RE: Double; Inflation: 62%
1990 - 2000: RE: 25%; Inflation: 32%
2000-2014: RE: ~40%; Inflation ~35%

Total Inflation By Decade

It looks like during times of higher inflation, real estate prices have increased at about twice the rate of inflation. During less volatile times, the % increases seem to be more in line.. Of course, all sorts of differences in locations, neighborhoods, A/B/C properties, etc..

@Minh L. 

, by my rough estimate, real estate is up about 21X from 1970 to 2014 (if you use a conservative number from 2010 to 2014, although a lot higher in some areas..), while inflation is up about 6X.

The 2 decades in 70's and 80's when RE outpaced inflation by double obviously did a lot for the compounding..

Minh, @Bob Bowling , @Amit M.  do you guys think RE appreciation is mostly going to be based on inflation, with some higher percent increases for good areas? Totally detached and dependent on local activity? Or something in between?

Hopefully history continues to repeat itself for you guys investing in CA.  it is unfortunate for everyday families that just want to buy a home to live in with a normal salary but as long as CA continues to restrict development it will hold prices high and I can't fault anyone for profiting from that.  I find it interesting that CA wants to force affordable housing but makes it so hard to build.  

As far as cash flow properties go, I still favor cash flow investing, To double every 10 years I only need to make 10% after expenses and I have the ability to diversify that and compound it.  I also don't have to invest in California at 100's of thousands of dollars per asset.  Basically I look at at as I can buy an asset, and every 5-10 years it generates enough income to buy another property.  So while your property in CA doubled, my property stayed the same but now I have 2 and my income also doubled.  If things go well I wold actually be purchasing my second property at year 5 and my third by year 10 so I will have tripled my property count, asset value, and income from that one property. 

We will probably be selling one of our Milwaukee properties soon and the cap rate on that should be well north of 10%. If we do seller financing the cash on cash ROI should be north of 20% in year 5 when the loan is paid off.

I don't want to speak down to the CA guys, if what you are doing is working for you thats awesome, do however keep in mind that those of us investing in other places sometimes do OK too.

Full disclosure, I used to live in the Bay Area.

hi all,

First, I agree with the general macro economic picture painted above, wrt CA RE appreciation, market cycles, and inflation. It is hard to seperate the impact of inflation from local market conditions/desireability though. When inflation increases, so do interest rates, which puts an initial downward pressure on RE prices. But if that inflation was a gentle increase (not like what happened in the 70's), then after a time lag RE starts to reflect the added cost of living, as rents go up as a result of inflation. And that starts to effect purchase prices (inspite of the higher interest rates.)  this cycle is slow moving and somewhat predictable, especially if you own stable and manageable properties. It's when we have sudden inflationary changes when things get unpredictable in the short term. 

The other primary driver of CA appreciation is the location/desireability. Better areas are driven by limited product availability and marginal wealth increases. All you need is good job growth in high paying sectors (tech, anyone :) and a few newly minted millionaires, and that sets the appreciation train rolling. And especially in boom times (like now), that phenomena lifts adjacent and less expensive areas as well (the gentrification effect.)  In areas of CA where it is harder to build many new homes, those secondary areas are better insulated from a protracted decline during a market downturn, than say places like Vegas or Phoenix which have much more open land to build out. So the secondary areas in CA may have bigger cycle swings (both up and down), but depending on the specific location (always the most important aspect IMO) YMMV on the net results.  That's my 2c. 

Thanks for posting this @Amit M. . Looks like higher highs and higher lows, pretty much reminds me of charts of the S&P 500 and the Dow. 

@Bob E.   - I think as long as you are comfortable where you are investing, it doesn't matter where you are and how you are doing it. I am a cash flow investor that has several properties Phoenix and I was lucky enough to ride the massive amount of appreciation since 2010 with less than $20k in per some of my properties. Given my circumstances that I was young and didn't have much money to start with, cash flow based investing was where I wanted to be. Now that I want to build wealth, I think the Bay Area is a great place to invest, but I won't be able to leave my day job unless both value and rents increases significantly. Like others have said, cash flow pays the bills, appreciation makes you wealthy. It all depends on what kind of lifestyle you want your investments to help you achieve.

@Minh L.  The last 40 years I've heard the predictions of the end of California appreciation.  I base my 9-11% on actual properties.  You have to realize the report here is on 5 county "Bay Area" figures.  I like to think I can do better than the bottom 50%.  Each decade my properties have doubled in value.  I only see increasing demand and decreasing supply.  What do you think would cause a >50% decrease in the rate of appreciation?

Originally posted by @J Martin 

 

Minh, @Bob Bowling , @Amit M. do you guys think RE appreciation is mostly going to be based on inflation, with some higher percent increases for good areas? Totally detached and dependent on local activity? Or something in between?

 Inflation tends to "raise all boats" and future inflation will be a part of appreciation.  But it is supply and demand that will account for the above average appreciation that you will see in areas like NYC, Bay Area and Hawaii. 

Here's some statewide appreciation rates. 

http://forecast-chart.com/home-appreciation-rates-nl.html

Of course you'd want to fine tune this to your neighborhood and property type. 

Maximum 10 year appreciation at 76% and minimum at -17%  Why would anyone ignore this metric?

Originally posted by @Bob Estler:

We will probably be selling one of our Milwaukee properties soon and the cap rate on that should be well north of 10%

Full disclosure, I used to live in the Bay Area.

@Bob Estler That's where you lose the $100 a month cash flow (if you ever collect it). All the selling expenses and the market is offering you peanuts for that NOI when you want to get out! When the Bay Area NOI is increasing because of rent growth of 6-7% a year I'll benefit by selling at a 5% cap rate because my market has MORE cash flow over time AND appreciation.

Interesting chart. Wages in general are stagnant throughout much of the US, though San Francisco is one of the exceptions. Does anyone believe that it is possible that housing prices may take a hit if household income can't keep pace with rising housing costs in those areas?

402-965-1853
Originally posted by @Anthony G.:

Interesting chart. Wages in general are stagnant throughout much of the US, though San Francisco is one of the exceptions. Does anyone believe that it is possible that housing prices may take a hit if household income can't keep pace with rising housing costs in those areas?

 Anthony, 

I think this is such a tricky question, because who's income are we talking about? A change in the mix of buyers to more investors and concentrated ownership from those with money and income? More affluent buyers who displace those with slower-growing income, who end up moving out and commuting further into employment centers.. At least, that's what I see.. I'm sure the decreased affordability will catch up eventually. But if the top 15-25% of income and wealth earners can always afford something, I think there's always some bottom on the market, at least in the prime areas.. 

And these affordability indexes aren't fully capturing all the foreign buyers in the Bay Area. I think there are a lot of long-term holders in the Bay also, and with the limited land, I think it still has legs, especially over the long run. Famous last words! lol Time will tell!

There is no winning the cash flow mid west debate and the SF Bay area appreciation game.

Unless you have lots of cash and credit so you can buy 20 to 50 homes in the MId west and manage them like a hawk,,, One or two homes in SF will out perform those in the long run over time... Everyone wants to live on the peninsula... Not everyone wants to live in KC or Indy... JOBS JOBS JOBS and more JOBS  buying power smart people.. it all happens there.... Were else could a painter make a million bucks painting a mural at company headquarters than at Google.. Not going to happen at Angies list in INDY.

The problem most investors get when they think they need to buy a rental or two and they venture out of state.. Is that so many of them end up making little or no cash flow because they just don't understand how dog gone tough those rental markets are.. And if they bought through a marketing company they paid far more than real value they can never sell without a big loss.. I know I  have been there done that.

If you go mid west or east coast you need to find the wholesaler yourself.. and get the true deal.. not a west coast marketer like we see here on BP...

And if CA is too expensive look at Vegas and PHX.. closer and better plays in my mind.

Again personal bias

All I know is I owned 4 primary residence in the SF bay area from 1979 to 2001.. and I enjoyed when I sold each of them individually over 7 figure profit in total .. No way I could have done that in the mid west.. Only in the very top echelon markets of the big cities no way one could do that in any of the So called cash flow markets.

Originally posted by @Jay Hinrichs:

There is no winning the cash flow mid west debate and the SF Bay area appreciation game.

Unless you have lots of cash and credit so you can buy 20 to 50 homes in the MId west and manage them like a hawk,,, One or two homes in SF will out perform those in the long run over time... Everyone wants to live on the peninsula... Not everyone wants to live in KC or Indy... JOBS JOBS JOBS and more JOBS  buying power smart people.. it all happens there.... Were else could a painter make a million bucks painting a mural at company headquarters than at Google.. Not going to happen at Angies list in INDY.

The problem most investors get when they think they need to buy a rental or two and they venture out of state.. Is that so many of them end up making little or no cash flow because they just don't understand how dog gone tough those rental markets are.. And if they bought through a marketing company they paid far more than real value they can never sell without a big loss.. I know I  have been there done that.

If you go mid west or east coast you need to find the wholesaler yourself.. and get the true deal.. not a west coast marketer like we see here on BP...

And if CA is too expensive look at Vegas and PHX.. closer and better plays in my mind.

Again personal bias

All I know is I owned 4 primary residence in the SF bay area from 1979 to 2001.. and I enjoyed when I sold each of them individually over 7 figure profit in total .. No way I could have done that in the mid west.. Only in the very top echelon markets of the big cities no way one could do that in any of the So called cash flow markets.

 I'm from Kansas City and I will tell you that on a primary residence like you stated those #'s are definitely doable. Not only do I live in KC but i have in nesting here for over 10 years . This is the show e state , invest right and e will how you how to grow rich . Don't count out Kansas City Missouri

Originally posted by @Bob Estler:

Hopefully history continues to repeat itself for you guys investing in CA.  it is unfortunate for everyday families that just want to buy a home to live in with a normal salary but as long as CA continues to restrict development it will hold prices high and I can't fault anyone for profiting from that.  I find it interesting that CA wants to force affordable housing but makes it so hard to build.  

Full disclosure, I used to live in the Bay Area.

 Bob, it sure is unfortunate for everyday families.  It seems like one has to be in Hi-Tech, or the odds are against them.  I see my "A" tenants doing very well while my "C" tenants are trying to make ends meet.  

Like anywhere else, politicians only look out for their best interests, not the people.  This reminds me of the saying...do I what I say, not what I do. 

Did you own when you were living in the Bay Area, or were you renting?  Do you mind sharing which city you used to live in, and why you decided to pack your bags and got out the here?

Originally posted by @Bob Bowling:

Here's some statewide appreciation rates. 

http://forecast-chart.com/home-appreciation-rates-nl.html

Of course you'd want to fine tune this to your neighborhood and property type. 

Maximum 10 year appreciation at 76% and minimum at -17%  Why would anyone ignore this metric?

 Bob, your link shows a maximum appreciation of 76% and a minimum of -17%.  So the average appreciation is about 30% in 10 years.  That's a simple 3% annual appreciation, not compounding.  Therefore, even my 4%-5% appreciation estimates seem optimistic. 

Below is the data that I wanted to share with respect to the appreciation in CA since 1970.  My point is that the days of 9%-11% annual appreciation are behind us.  I will gladly take it, but I'd be happy with just an average of 4%-5% annual appreciation.

 


Below is the data that I wanted to share with respect to the appreciation in CA since 1970.  My point is that the days of 9%-11% annual appreciation are behind us.  I will gladly take it, but I'd be happy with just an average of 4%-5% annual appreciation.

 

 @Minh L. , 

I'm only "counting" on about long-term Fed inflation target (2%) or a point or 2 higher. But I would be more than happy with 4-5% asset price increases, meaning about 12-20% ROI JUST from appreciation, when "properly" leveraged.. Picking up 10%+ CF in the meantime I think is actually the icing on the cake for me. Not the other way around lol It looks to me like inflation not only increases RE prices, but the volatility of inflation and very high inflation cause it to go disproportionately parabolic.. Can only pray! lol

And even then, we'll probably be complaining that our asset yield is too low because the value has spiked so astronomically.. Spoiled brats! lol

But @Bob Bowling I hope you're right, and I will fly out to Hawaii and buy you dinner if it averages 9-11% in the next decade even, from now. Because if that's the case, I'll have plenty of cash and time to fly out and buy it for you! :) Let's wish us all luck..

@J. Martin  and his significant other on a cruise. It's a promise. 

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