Irrational Decision?

Question

Hello everyone,

I'm a teacher by trade and small time investor in San Francisco. I've been looking for my next deal in the bay area, and while there have been some that might meet the 1% rule at best, I can't get my mind off one thing...the weather patterns in the State.

The drought does not look to be getting any better and states all across the southwest are simply unsustainable. I think I may be on to something. Do you think we may witness an exodus to the Pacific northwest in the next decade? Am I being a little hasty?

I'm seriously considering making my next purchase in the Portland area as a happy medium. I know for a small time investor an out of state investment may be too much. I'd love to hear your thoughts about the out of state piece and any general feedback about the Portland area. I've been reading some good things about the Hillsboro area.

Rami

Steve B. · Answer

Rami,

If your basing your investment decisions based on putative global warming then I think you need to re-evaluate your investment criteria based on more sensical information.  Having said that I do think Portland offers the best price appreciation on the west coast based on purchase price to average salary ratios and growth rate demographics.  However I don't want to come off as the weird SF self-congratulating clique we have here (Amit and bob barker to name a couple)  and blow smoke just because I am personally invested in five houses I own here in Portland.  As you already found out cash flow isn't great here currently, so making an investment play is best done as a diversifying strategy for your investment portfolio unless you are a speculator.  If I wanted to buy property out of state with both cash flow and appreciation than you would be much better off looking at the gulf coast of Florida if you know anything about interpreting statistics and analyzing data.  Of course we all have both systematic and unsystematic risk to account for so this is both an art and a science.

Now if you are still really interested in investing in PDX I don't believe Hillsboro is your best option.  That high tech sprawl area east of the city was the first to go down in 2008 and the last to come up in 2012.  You would be better served closer to the river.  You would also be better served by talking to local experts like Mike Nuss who is on this forum and is a full time real estate guy.

Account Closed · Answer

The SKY has been falling the last 50-100+ years!!  People in ALL of California saw prices Skyrocketing in the 60's and 70's and that is (one of the reasons) why Prop 13 was voted in 1978!  What YEAR were you born?  Values have pretty much DOUBLED in every decade for at least the last five.

Jordan Thibodeau · Answer

@Rami Aweti The problem with Sacramento is that we are anchoring our job growth experiences with the Bay Area, which is an anomaly in job growth. If you compare Sacramento to any other city in the USA, you will see it's on par with growth rates and population.

One of the reasons why I invest in Sacramento is the city is not correlated to how technology business perform in Silicon Valley. Sacramento main economic driver is it's proximity to the state capital, education, and a few other services jobs. The growth rate is slow, and steady, and not accelerated, which evens out the highs and lows and creates a sustainable economic situation.

Also, you find more investors in Sacramento. You don't have to complete with emotional families, with excess capital, who are willing to bid housing prices to astronomical levels.

Account Closed · Answer

Two DECADES!  Prop 13 was voted in 1978!  Prices/taxes were unsustainable then?  How much did you pay for water AND sewage last year?  Me, less than $200 for a 3/2/2.  Now I bought in Vegas in 1994 under the premise that water would control the supply of housing.  How many starts this year twenty years later?

Chicken Little?

Jordan Thibodeau · Answer

The future is at best uncertain.

I would say, at least make sure your investment breaks even on current standards. If you're going to make a play on a property that is losing money and you hope the water crisis will eventually force rents/appreciation up, that's speculation. So long as you know the risks associated with your decision, then feel free to go for it.

Keep in mind, cities are adaptable when it pertains to ecological or economic disasters. If water ever reached a point that caused mass exodus, I would definitely shoot holes in that premise being that it would mean water would reach a price where it's more economically viable to flee your area than pay the high price for water. If that's the case, it would make desalinization, water efficiency measures, and water rationing more economically viable which would force the prices down.

Think of oil a decade ago, we were all crying peak oil, now we are awash in fracking due to the increase in price, and now price per barrel is going back to a more economical viable rate.

As far as the market already pricing in a possible drought, I doubt that thesis. The market is efficient in the short term, but as for unforseen issues by the main stream, it's extremely inefficient. If the market was efficient, their wouldn't be a point of a market because everyone would know the future, there would be no risk, and no reason to invest because everyone already knows the future.

Rami Aweti · Answer

@Robert Warren I completely agree about the way everything gets factored into the price. My only concern is when that will begin to happen in areas effected by climate change.

@Steve B. I really appreciate your thorough response. Perhaps the jury is still out on the long-term effects of climate change/global warming but I don't like what I see and states in the Southwest including California do appear to be at great risk in the long-term if the climate continues to heat up. Nevertheless, the Bay Area market is unsustainable for other reasons and purchase price to salary rates and growth demographics is a huge consideration for me as well. The next destination is on everyone's mind over here...and while I have deep roots and the potential to continue expanding into relatively nearby markets, I can't help but think Portland has a great working template for the next destination. The San Francisco I was born and raised in is no longer the place it used to be and Portland offers something I miss about this place. All numbers aside, it offers a nostalgic quality for me that I appreciate!

Thanks again!

I'll try to connect with Mike Nuss.

Rami Aweti · Answer

Jordan Thibodeau Thank you!

This was a well thought out response. In terms of the market pricing in drought, I think we see eye to eye. The market is very short-term. Developers and government officials work on shorter time frames than the masses and inevitably pass the buck to the not so distant future. This is assumed in my argument. There will be a time when the public realizes that government can't solve our problem of water. I don't think people have fully wrapped their head around that reality.

I sincerely do hope our region can adapt to the challenges of water. But, that is assuming that there are viable solutions available. Of course, we are far from becoming the Sahara dessert. But, I am left with a great sense of uncertainty about the sustainability of this area for those living here and as a deterrent for future growth in the area. Nevertheless, even if this place becomes a less favorable destination for transplants, we do have a population that will need to expand with natural growth and that will sustain real estate prices for a while. Perhaps my problem is something a little longer term and may not be worth reading into now. Nonetheless, I am interested in finding that next place that has all the elements for growth but has not taken off. The Portland area seems to fit this description though it has been a bit overheated.

I've been looking in Sacramento on and off for a couple years. I was super close to buying a few times but found myself back in the immediate bay area. Something seems to be missing from the area. It is not quite taking off the way I anticipate. There are developments coming down the pipeline and there are very interesting pockets. But, the region as a whole seems to be weighed down by poor job growth. Do you see something better on the horizon? What do you think about West Sacramento?

Thanks again!

Rami

Robert Warren · Answer

@Rami Aweti

Global climate change is real.  The data shows that the planet warmed during our last up tic up in sun spot numbers and peaked with the El Nino event in 1997.  The number of sun spots is a good proxy for the amount of energy transferred from the sun to the earth.

As is typical with the sun spot cycle the number once they peak then the number of sun spots declines and with it we have recorded a pause in rising global temperatures.  Many top scientists are forecasting that we are entering into a very quiet period on the sun with very few or no sun spots.  Just like the Maunder minimum it is a time when far less energy will be transferred to earth.  So, in the next two decades or so we are likely to see a dramatic shift toward colder temperatures and far worse storms, failed crops etc.  This could last 100 years or so.

Andy Collins · Answer

Investing is long term, but let's be reasonable, we need to be worried about what will happen in the next 3 or 4 years, anything beyond that is purely speculation.

The amount of money spent on water is such a small percentage of the cost of ownership, it isn't something to spend too much time worrying about.

Now, if the economy is a certain area is based on a certain industry, and that industry requires a lot of water, and they might consider moving closer to the water source that might be something to consider, but those situations would be if your looking at a particular  small area, not on more global view.

We can't be too worried about what will happen in 20 years,,,who knows what will happen to an area/economy/industry in that amount of time

andy

Rami Aweti · Answer

@Bob Bowling Thanks for the response. While I'm not sure what you meant by Chicken Little (lol), I do think the large run up in prices happened in the last two decades. While it is all relative, people from the Bay Area viewed property prices as more or less flat until the 90's. I am sure there were notable increases that rank high among other regions in the nation, but things didn't really get out of control until the late 90's to early 2000's and we are not going back to those days (short of some serious changes).

Irrational Decision?

Most Popular Reply