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?

[Account Closed]

Originally posted by @David S.:

@Account Closed. Thanks for the summary.

A $3M offer on a 14-unit building in "our market"....Surely, this cannot be located in the San Jose Bay area where you are located....Can you add any additional detail?

David,

I've been living and breathing real estate since 1999 and went all-in in 2009 when I recognized the opportunity. Thankfully my wife was supportive and gave me a thumb up to quit my W2 then. At the time, real estate was so cheap. I told people 2/1 condos in San Jose were being auctioned off at the courthouse steps for $117k-$135k. People looked at me like I was an idiot. These were selling for $400-$425k at the top of the market in 2006. Now, they're selling for $400-$450k a piece.

People have been giving me the same look when I tell them we buy 6 to 8-unit buildings for $1.2M in San Jose. @Johnson H. says I walk for millions. My partner and I hold hands and go for a walk in our market looking for buildings that need help. We write down the addresses, reach out to our agents and tell them to contact the owners. Then we submit our offers. We get deals here and there using this method. In fact, we're negotiating to buy a building with this method. Wife is ready to sell while husband is unsure of what to do with the proceeds.

@Bac Nguyen is correct. We only farm in one zip code. That is 95112. Our targeted markets are 2 blocks around SJSU and 1 block radius around Japantown. Anything between SJSU and Japantown is a tweener for us. We have passed on many tweener deals. In hindsight, they're great deals. @Account Closed, it's like direct marketing. You miss 100% shots that you don't take. That's what I remind Johnson. That's why I keep swinging. It's good to know that Wayne Gretzky said it. I like this quote of his just as much "A good player goes where the puck is while a great player goes where the puck will be."

This is MY QUOTE and I don't care who said it first. I came up with it a couple of weeks ago and installed it on my Tesla the day the frame came in. This has essentially been true with my life. Some of my friends believe I should be the "exclusive owner of the plate frame." I've ordered it for a few close friends and would love to give you one if you're interested. It's a good daily reminder IMO. 

Wife's sibling told me I should get DREAMER for my license plate. I may do just that. ;)