SF Bay Area Economic & RE Update (Ongoing)

[J. Martin]

I have organized what I believe to be some very valuable information and relationships about the economy and real estate, and will be posting updates about the San Francisco Bay Area marketplace here periodically. I studied a lot of economics in school, and they told me you can't predict real estate prices. ********!!!! Let's lay the groundwork... And a big thanks to @Account Closed for his mentorship and economic

There tends to be a strong relationship between changes in employment and changes in real estate prices. Real estate prices in the Bay tend to go up when unemployment is falling. And they tend to flatten or go down when unemployment is rising. This tends to happen in regular cycles.

The relationship between changes in employment and changes in real estate prices becomes more obvious when we look at percent change in employment, and the rate of change (second derivative, but don't get bogged down in the terminology..)

This is interesting because:
1) The relationship appears meaningful
2) You can see a deceleration in employment gains (lower growth rate) while real estate prices are still increasing (at a decreasing rate). In other words, you can see the slow down in growth before real estate prices flatten or drop.

Coming out of a recession, look how job growth goes from it's worst (about 5% job loss in worst year) to 2% job loss the next year, 0% the following year, then 2% gains, then 4-5% gains, then starts lessening again to 3%, 2.5%, and tends to drift back down towards 0% again, before going negative.. But you can also see that home price appreciation

starts slowing (although still appreciating) as job growth slows.

Now what if there were some sort of way to predict how employment was going to change..?

What if there were a more local index that showed the way the economy and employment is and will do? Turns out, there’s one of those too!!!

To me, the picture becomes more clear. In the SF and East Bay Area, employment gains, economic activity, and real estate price appreciation peaked in 2012, and has been on a decline since. If you look at the prior two cycles, you can see each of these indicators reach a peak during the middle of the cycle, then decelerate (grow at a decreasing rate) as the expansionary phase of the economic cycle comes to an end. You can see the leading index for CA, economic conditions for San Francisco – Oakland – Hayward , changes in employment, and real estate price appreciation all grow at decreasing rates, until they approach zero, as we go into a recession…. I’ll post more for Silicon Valley, San Jose, and Santa Clara later.

Do you disagree with me? Is this information valuable? Too little time frame? Meaningless? Stupid for thinking we can predict how real estate prices will change over an economic cycle? If it were this obvious or easy, wouldn’t everyone already have figure it out, and we wouldn’t be talking about efficient market hypothesis? Does this change your perspective on real estate price appreciation and its predictability?