What is your predictions for 2015 in Nor California Esp Bay Area/Sacramento

Question

Hi BP Family,

Since we have seen a incline in our prices rapidly I'd say from 2011 it's now 2015 how long do you guys think this will last? I bought a property in the Bay Area in Jan 2011 for $179k there is a flip property a few doors down that just sold for $560k. I'd like to know every ones thoughts if they do not mind sharing. Let's look at economic factors, interest rates, the CRAZY TECH BOOM (Every third start up is being funded millions of dollars just in Alpha or beta stages)..... We've seen prices jump in SF, SJ and Palo Alto side that people are willing to move into Oakland. Some areas in Oakland are selling for $100k over list price. Do you think this will sustain or crash after elections? Do you guys think it's a safe time to be flipping or doing buy/holds? Even if you buy at .70cents ARV with today's comps and lock in a 30yr fixed at 4% do you think that's a safe investment or will we see another 2000 or 2009 in 2017? Thanks BP FAMILY!!

Manch Hon · Answer

You must meant the Harry Dent episode of Bruce Norris' podcast? I just finished listening to the 2nd half of the interview and I rolled my eyes so bad my eyes were sore afterwards. These "hard asset" folks just don't have full grasp of basic economics. To them our economy recovery is somehow not real, government should have done nothing to save the financial system, and we should all suffer Great Depression 2 because that's what God has intended.

100% BS.

Prime age working population in US will soon start rising again. Calculated Risk has been beating that drum for a while now. If you want to talk about demographics let's start from there. These folks will get married, form families, and what do they need? You are right. They need a house to call their own.

You will also notice Bruce didn't really agree with Harry's doom and gloom speech. At the end Bruce kept stressing you should draw your own conclusion. It doesn't help that Harry kept saying he was right and how a genius he has always been. Except all the times he was wrong I guess.

Amit M. · Answer

I also listened to that Harry Dent "interview" and it was ridiculous. I know he's an intelligent guy, but he must have been smoking some bad weed that week!  Everything he claimed is predicated on the boomer generation's buying power diminishing as they age/retire/check out/etc.  the problems with this:

1- Sure this is an important trend, BUT YOU CAN'T predicate all macro economic policy on one demographic trend!

2- this trend will not effect the higher end markets, like costal CA, Bay Area, Manhattan, Hawaii, etc.  Why?  Because they are driven by marginal global economic growth. Every new Chinese millionaire positively effects these markets, as successful people globally are interested in buying RE in markets like these. Sure, parts of middle America may feel the effects more, but that is because they are not driven by global growth, but are more provincial and depend on their local populations.

3- his dire, doom and gloom prediction is unwarranted, even if we accept his boomer demographic trend. Hello, it's not as if there aren't any more people in America!  Gen X is now at its prime, and the Echo boomers are right behind. We're not exactly going from 60 mph to 0.

4- as was mentioned, real estate is extremely local, and every investor has to assess his area for both macro and micro economic variables. As an investor in San Francisco, I loose little sleep over the boomer demographic changes for the reasons I mentioned above. Matter of fact, well off retiring boomers are snapping up $1000 PSF condos in downtown SF, as they down size from McMansions in the burbs. And that's good news for me!

Aaron Norris · Answer

@Manch Hon , good observation. We don't always agree with our guests on that radio show but it doesn't mean we don't check out their work and respect the research. Some of our larger author/economic guests have a more national and global perspective. We all know real estate is very local.

I will say one think about demographics. I do agree that they will eventually jump off the fence. However, as I approach 40, I still have a number of friends, particularly in the Socal area that are just now getting married, starting a family, and just now considering home ownership. They've watched the entire downturn and the attitude has been very "meh" because they seem more attached to their freedom of movement and ability to pick up and go, even out of state on a moment's notice.  They are still young, starting to get into interesting career positions, and not committed to much. Most live in Socal or NYC. They've already been priced out of coastal markets. I just had  a friend move to Las Vegas for that very reason.

I don't think I'm a good example because I lived in New York for so long in 100 square feet. I actually don't want a big house. I have no great desire to move up, at least at the moment. When I do, I can't imagine I'm going to ever want a McMansion.

That being said, I'll be watching to see how demographics plays into longer-term trends locally and nationally. Will we have a huge gap in the move-up market in the next decade? Particularly in coastal regions? Is Gen X and Y more interested in urban and walkable communities than past generations? Have we gotten so used to smaller housing or living with parents that we don't mind smaller houses? Will the new emphasis on green and sustainability (not to mention higher utility costs) mean the death of McMansions?

There are a few newer communities and I am going to be watching carefully here in the Riverside area. KB is building right now by an area that borders Grand Terrace. At least one of the tracts is marketed as a multi-generational home and I can't wait to see how they perform this Spring. The area has room for 1,500 homes. God I love this stuff. #nerdalert

J. Martin · Answer

I apologize for my distasteful joke in advance, but I’ll share it anyway:

“A real estate bubble is like an orgasm: It feels the best right before it’s over.”

And I don’t think it feels quite that good yet.. lol

@Raj Pat , - “Economic factors, interest rates, crazy tech boom”

US is chugging along. World slowing down – namely China & Europe. We’ve been talking about interest rates going up forever, but many international buyers now as safe haven too.. If tech boom goes bust, I think the lowest-grade properties in the highest-increase areas on the Peninsula will take a hit as the remaining buyers get more selective. When that may happen, I have no idea..

@Amit M.  M. , - moderation in prices & worldwide growth

How’s it going?! I totally agree that a moderation in prices is good for the market to avoid too steep an increase then correction – but I’d rather see the latter. More fun! (& profitable?...) China already IS slowing down. Eastern European political & economic issues. Western Europe in economic turmoil. Japan still in lost 3 decades now.. Germany, Nordic, & Japanese 5yr rates going negative recently… The bonus in gas prices for consumers in US is a fall in income for resource-rich countries in latin America, Africa, & Australia facing lower commodity prices across the board. That feeds into worldwide growth.. This is part of why I think rates could stay low for a while, but who knows..

@Alexis Schreier  Schreier , - lending environment – tighter than peak, looser than trough

I agree, inventory is still relatively low. Incomes are still here. Lending is tighter than the last peak (as it should be), but much looser than trough. There are stated income loans creeping back. Lots of non-conventional products. Fannie & Freddie starting to compete w/ FHA in low-downpayment (3%) loans. NACA (as David Cheung has been saying) providing 0% downpayment loans for first-time homebuyers. Banks offering 10% down owner-occ loans w/ 10% piggy-backs. Non-bank lenders jumping into the rental market, and big boys like Blackstone rolling out B2R for the investor market & FirstKey. They all add support to the market as people cash out and invest more, or stretch to buy that bigger place..

@Manch Hon on , I thought the most significant inventories in Sac, Phoenix, & LV had already dried up? From what I hear, Joe Metz has some Sac deals for sale..

@Brandon Foken  , higher prices do bring sellers out of the woodwork to some extent, but I don’t think there’s enough people willing to get their *ss out of their house and move out of a great area where they live, play, and work for big bucks. I graduated w/ an econ degree (so I’m DEFINITELY no expert – just stupid enough to think I might know something), and I remember something about a supply and demand chart. I think you’re right. But harder to predict how long the “animal spirits” of bright-eyed tech workers and greedy investors will last ;)Longer I think though..

@David Cheung  ,

Both buyers and investors are just realizing that Oakland has a good commute to most places, good weather, GREAT value relative to prices in other places, and **GASP** they may not get shot in the head just driving through the neighborhood! I think that value proposition and the “spillover” effect I’m playing with all my properties can continue for quite a while.. Just be careful how much of my Oakland Kool-Aid you drink! lol

@Matt Rosas  ,

Housing Affordability Index isn’t nearly as high as it was at the last peak and hard to see interest rates skyrocketing with worldwide low growth and rock bottom interest rates in almost all developed countries. Especially with a stronger dollar and some of the highest (of the very low) sovereign bond interest rates around.. I agree..

@Raj Pat

Alexi Schreier · Answer

Hi Raj,

You may find this article interesting:

http://kalw.org/post/bay-area-housing-bubble-or-ho...

The appreciation we're seeing in today's market is different from the pre-2009 days. As @Amit M. said, "lending is tight". We aren't seeing nearly as many low income households buying properties they can't afford. SF real estate is estimated to be only 12% over-valued in the current heated market while it reached a 50% overvaluation during the last housing bubble.

The issue is with supply and affordability. Since the supply is too low, prices are being bid up and making it difficult for the middle-class to buy. We need more development in the Bay Area but it's tricky because construction regulators are strict here. Hopefully the high appreciation we've been experiencing and influx of foreign investors parking their money in the Bay Area (SF, Oakland, San Jose) will encourage development.

I'd be curious to hear what @J. Martin has to say about all of this.

Amit M. · Answer

that depends. If appreciation rates moderate over the next couple of years then a future correction will be soft.  If prices escalate in the double digits, like they did in 2012-13, then a tech dip will hit RE prices harder. 2014 was telling, as appreciation continued but was more moderate than 2012-13, which is a good thing IMO.  There are a lot of good things in this current market like low interest rates, lots of cash looking for a home, tech boom, recovering USA economy, etc.  But I don't think things will get too heated on a global level as lending is still tight, Europe is still in a financial quagmire and China may be slowing down too. As long as the USA chugs along with its recovery, and we benefit from unexpected bonuses like the gulf states willing to kill oil prices, we should be good here in the Bay Area for the next 2-3 years.  Also keep in mind my perspective is from the apex, as San Francisco RE prices behave differently than more outlying areas, so YMMV.

Manch Hon · Answer

This is the Calculated Risk article I alluded to. Bill has been beating that drum consistently in the last 12 mo or so:

http://www.calculatedriskblog.com/2014/09/update-p...

Some excerpts:

Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the "baby boomer" generation, the movement of younger cohorts into the prime working age is another key story in coming years.

The prime working age population peaked in 2007, and appears to have bottomed at the end of 2012.  The good news is the prime working age group has started to grow again, and should be growing solidly by 2020 - and this should boost economic activity in the years ahead.

To look at demographics one needs to look at the full picture. We may have a lot of baby boomers retiring, but on the other hand we have tons of people coming into prime working age and forming families and buying houses. Also, I suspect baby boomers are increasingly staying put and not moving anywhere, esp in the Bay Area and other warm parts of the country. Anyone has data on that?

Matt R. · Answer

I was listening to a podcast last night and the gentlemen was convinced we were heading for a massive correction. I don't know how that can happen with inventories so low. The buyers this time are well qualified too. It did not add up. His thoughts were interest rates rising, affordability crisis and China imploding would make the prices go lower than the last bubble. He was convinced this cycle was coming 2015/16. He threw in commodity colaspse cycles as part of it. Thoughts?

David C. · Answer

Yes, definitely more buyers compare to last quarter of 2014.  I saw a flip in Maxwell Park in Oakland listed for $499K and relisted for $560K after 1 weeks, lots of showings.

Brandon Foken · Answer

To further @Alexis Schreier 's point. Housing inventory in Oakland for December 2014 was .8 months. Fremont was .4 months. My feeling is that the low supply is what is currently driving most of the appreciation. I took Econ 101 in college so I'm an expert on this (Hint: that was sarcasm!). Demand has stayed constant over the last year, but supply has fallen. That means only one thing: prices have to rise. I don't see how we get out of this low inventory hole in 2015. Hopefully 2016 we see a return to a more normal, stable RE market here in the Bay.

What is your predictions for 2015 in Nor California Esp Bay Area/Sacramento

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