Did the SF Bay Area market just turn?

[Chris Jones]

Over the past few weeks I have begun to get the sense that the San Francisco Bay Area market may be turning a corner. I have very little data to back up my feeling, and I am certainly not a market timing expert, so I wanted to reach out and see if others had a similar sentiment. I am personally interested most in the San Jose and Oakland markets, but I assume that any shift would be affecting the surrounding bay area.

Here's what I have seen:

1. Bay area rents and real estate values have risen at an incredible pace over the last few years, and it can't go up forever.

2. A recent Marcus & Millichap apartment webinar mentioned that the length of the current growth cycle has already exceeded the length of the prior growth cycle.

3. There are interesting discussions on BP questioning if we're in a bubble.

4. The stock market has fallen dramatically in the past two months, partly in response to the news of the Chinese economic slowdown. Walmart reported poor earnings. Oil has plummeted. In the past few months there have been an abundance of "experts" claiming there were many bad omens being exhibited by the market. Some people believe the stock market is a leading indicator for the real estate market. 

5. The PropertyRadar CA real property report showed sales and median prices are both down in August.

6. Apartment rents in San Jose and Oakland seem to have dropped significantly in the past few weeks/months. I spoke with one investor with properties in San Jose who said she had to drop asking rents by $300 in the past few months. Another conversation with an investor in Oakland expressed a similar sentiment. I have seen this as well when looking at rents on CraigsList.

Perhaps what I have sensed is merely a cyclical slowdown as we head into winter. All of the points above are up for debate/interpretation, but taken together, it makes me wonder which phase of the cycle we are really in.

Has anyone else sensed the same feeling? Do you have any data that supports your view?

[Sean OToole]

I can't figure out how to paste in a picture, but I have a diagram that I think shows the RE cycle pretty well.

Phase 1 - Volume Up, Price Up - H2'08 though 2009

Phase 2 - Volume Flat, Price Up - 2010 through 2012

Phase 3 - Volume Down, Price Up - 2013 through 2014

Phase 4 - Volume Down, Price Flat - 2015 through ???

Phase 5 - Volume Down, Prices Down

Phase 6 - Volume Flat, Price Down

Phase 7 - Volume Up, Price Down

Phase 8 - Volume Up, Price Flat

Back to Phase 1

Now I don't think this is perfect, but it rhymes with what typically happens. In the dates above, volume has been more flat than down since 2012, and we are only starting to see prices flatten in places like the Bay Area.

In the last cycle I got worried about a bubble at the end of 2005. We were still in phase 3 at that point, and prices didn't peak until May of 2007, even though volume started falling in November 2005 (which combined with the fact every buyer I sold to was using a pay option arm was enough to spook me).

Given that we have not yet seen a similar decline in volume, and  since it took 18 months from volume declining in earnest to the market top, I think there is a good chance to think calling a top now >might< be a little premature. Really depends on your risk profile.

My prediction for a flat market this year, was less a prediction then a hope. The more we go up at this point, the more risk of a bubble I feel we face. Nobody needs the aftermath of that (except those of us who do well with foreclosures I suppose).

The other thing to keep in mind is that the Bay Area is behaving a little unusually. It's affordability is abysmal. But that number reflects gentrification as much as it does a market top. As the world's strongest economic engine it is attracting high paid talent that is displacing the families who have been their for generations. So when evaluating the Bay Area, its also important to think about cycles in the tech industry. Though all my vc, and tech exec friends tell me its different this time, it feels more bubbly to me than 1999. Yes there are no pet.coms, but the valuations still seem just as crazy.

Finally, I think there is a larger force at play. IMHO we have primarily grown our economy through decreasing the cost of debt since the early 80's. (as an aside, tech is the only other candidate I see has having driven growth, but I think that's crap. I've been in tech my whole life, and what tech is good at is making things more efficient - thus I think it shifts the economy more then grows it.) The problem is that we've now hit the zero bound on interest rates, so no more growth through cheaper debt. That puts us in a real predicament because we need growth to pay for interest on our debt, entitlements etc. I think that means super low interest rates are here to stay (outside of something going terribly wrong). Look at Japan where the interest rate on a 35 year mortgage is 1.47%. It's an awful outlook for those on a fixed income from their investments. But it could push housing further than we think as peoples mindset change on return on investment - in a world of 1.47% mortgage rates, a 5% ROI on a SFR might look fabulous (though the Bay Area is already well below that).

Bottom line - if tech stays strong, and if there are no black swans, we may not yet be at the end in the Bay Area. No question risk is increasing at this point though. Certainly will be interesting to watch.