SF Bay Area Economic & RE Update (Ongoing)

J. Martin · 2016-02-13T15:29:25-08:00

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 meaningful2) 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?

Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

10y

@David Faulkner - I think the answer is always the same. What we do is try to find opportunities at a discount to the economic environment. In other words, if you think the prime will be 3.25 in 2017, then discount your exiot to accomodate accordingly. If you think the prime will only be 2.5, then discount accordingly...

How we get into deals is a function of how we get out. And how we get out is teed up with a discount to market. All is known more or less...

0 Reply

James Sreewarom

Investor · Buena Park, CA · Member since 2015 · 13 posts · 6 votes

10y

@Account Closed my Econ professor didn't state specifically about real estate. She just told me to be careful about investing whether stock or real estate. She is a stock person, so she usually focus on stocks and economic cycle. "A lot of places have gone negative rate, so who know we might follow the trend or worse case, QE4," that was she said. She said the best thing to do in peak of the economic cycle is to wait and doing nothing. If the history is the indicator(8-11 economic cycle), we should be in peak soon(or are we???). We are in SoCal, but I am interested NorCal market because of well., I got admitted to UC Berkeley this coming srping, but could not afford the cost of living over there. I hope the home price drop by the time I get into Master degree.

"Where does she think interest rate will be headed? up or down during the next recession? Are we currently in an inflationary, deflationary or stagflationary environment?" I think I can ask these two questions, but don't know when she gonna reply; right now she is on vacation during summer. I also already transferred to UC, so only way to contact her is to use email.

Anyway, do you have your own theory about recession or home price drop Minh?

2 Reply

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

10y

so there are several moving parts we're effectively discussing. First, all real estate is local. To that end we've seen the higher end Bay Area RE leveling off. More affordable (i.e. sub $1mil homes) are still selling well. Our employment rate is super low, and most of the recent jobs are well paying ones. Baring global events, (hypothetical of course) we know tech is slowing down a bit and housing (both purchase and rental) is very high. And the stock market is still quite high (jittery as usual, but it hasen't sunk yet.) So at best we can expect to flatten and coast for awhile.

Now to the macro picture, which of course will impact the above scenario. There are global uncertainties like the future of the EU, UK in possible serious recession, China's growth, weird Russia, unstable Middle East, etc., etc. And add to that the nuttiest elections we have had here in a llooonnggg llooonnggg time ;) Any one of these going awry can set off the stock market to a sustained downward spiral. And then the US economy is at risk of stalling. And then unemployment ends it low rein. And then housing starts to go down nationally. All that will effect the Bay Area tech employment, and housing values across all sectors.

The chart J posted above show that unemployment stays the same for at best a year; usually it's either heading up or down. So that is a primary driver effecting housing values, and unfortunately it's mostly unstable. HAI was "saved" by Brexit. It seems unlikely that interest rates will be going up. How could they? That would quickly lead to stagflation, which is the worst of both worlds. No one wants that, but the question is if it becomes unavoidable? So far I'm not seeing why that would be the case. So even with an expected mild to mid size recession in the next 2 years, I'm not seeing why rates would go up. And I'm not sure (by definition) what kind of black swan event would facilitate that (except maybe if trump wins.) With Clinton at the helm I'm pretty sure we will have boring, but predictable, economic policies; more of the same, a possible mild to mid size recession, prime Bay Area RE a little soft, rates still low. And frankly, I'm down with that scenario (over sheer unpredictability). C'est la vie.

4 Reply

J. MartinPro Member

OP

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

10y

Originally posted by @Account Closed:

@James Sreewarom,

I agree with your Econ professor about the timing of 1-2 years till the next recession. I also agree with you that there's no guarantee home prices are going to drop like 2009. I would love for someone to make a case for the depth of the drop in home prices. Like you, I'm here to learn. I'm a data guy so you'd have to convince me with data instead of anecdotal. I'd love for you to ask your Econ prof these questions and report back.

"How much does she think home prices will drop? Where will the supply of homes come from? Where does she think interest rate will be headed? up or down during the next recession? Are we currently in an inflationary, deflationary or stagflationary environment? Where does she think home prices in the Bay Area will be in the next decade or two?" Thanks in advance.

@J. Martin, let me ask you this question. What IF home prices are still relatively out of line when unemployment is at 7-7.5% during the next recession? Think of the early 2000's recession. Look at the HAI between 2001-2005. What are you going to do? Where are you going to push your chips?

You can make a case for Brexit saving the HAI. To me, the writing has been on the wall. Demand is week so the yield has no where to go but down. Not sure if I mentioned this to you, but I told @Johnson H. and @David C. that the 10-year T-Bill will head to 1% months ago. It's a matter of when. Looks like it may get there sooner I thought. Take a look at the bond yield chart that the texted to you three musketeers on July 5. You're looking at a black swan in the eye without recognizing it. That's the next thesis I'll be working on.

With respect to interest rate, I previously shared with you guys that we can absorb the first 150 bps increase in the Fed funds rate without an increase in mortgage rate because the bank's margin of 2.25-2.5% is still intact. I was hoping for the Fed to get to 150 bps ASAP to help soften the blow going into the next recession. Now that doesn't even look like it. Sigh........Balance sheet recession? Deflation anyone?

Good question Minh. Even better, what if HAI is still low and Fed Funds is still super low (limited ability for Fed to stoke RE market) when unemployment is at its highest..?

(Minh:) What IF home prices are still relatively out of line when unemployment is at 7-7.5% during the next recession? Think of the early 2000's recession. Look at the HAI between 2001-2005. What are you going to do? Where are you going to push your chips?

#1) Risk/Reward. I think the risk/reward for price movements is at its best point when unemployment is high and dropping, so even if we don't get the same 100% price boom we've seen in prior upward cycles, I think it's still an overall good entry point.

#2) Opportunities w/o Big Price Dips. When unemployment is higher and the market is not as hot, there should be more opportunities for investors to get discounts to market price (however overpriced the market is), wholesale deals, maybe a foreclosure or two. In addition, lower-end markets like Richmond and East Oakland tend to have more consistent price dips at the bottom of economic cycles, so I don't mind buying more there.. Great cash flow ;)

#3) Burn that Bridge later. As they say, "I'll burn that bridge when I get there." hehe. I'm not tied to anything specific if circumstances change. Maybe pick up something in a good area near BART or CalTrain that fits my existing furnished business well.. Gotta say, since I've been operating in San Jose, Mountain View, and now Redwood City, I'm liking Silicon Valley more and more ;)

2 Reply

J. MartinPro Member

OP

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

10y

Originally posted by @Amit M.:

so there are several moving parts we're effectively discussing. First, all real estate is local. To that end we've seen the higher end Bay Area RE leveling off. More affordable (i.e. sub $1mil homes) are still selling well. Our employment rate is super low, and most of the recent jobs are well paying ones. Baring global events, (hypothetical of course) we know tech is slowing down a bit and housing (both purchase and rental) is very high. And the stock market is still quite high (jittery as usual, but it hasen't sunk yet.) So at best we can expect to flatten and coast for awhile.

Now to the macro picture, which of course will impact the above scenario. There are global uncertainties like the future of the EU, UK in possible serious recession, China's growth, weird Russia, unstable Middle East, etc., etc. And add to that the nuttiest elections we have had here in a llooonnggg llooonnggg time ;) Any one of these going awry can set off the stock market to a sustained downward spiral. And then the US economy is at risk of stalling. And then unemployment ends it low rein. And then housing starts to go down nationally. All that will effect the Bay Area tech employment, and housing values across all sectors.

The chart J posted above show that unemployment stays the same for at best a year; usually it's either heading up or down. So that is a primary driver effecting housing values, and unfortunately it's mostly unstable. HAI was "saved" by Brexit. It seems unlikely that interest rates will be going up. How could they? That would quickly lead to stagflation, which is the worst of both worlds. No one wants that, but the question is if it becomes unavoidable? So far I'm not seeing why that would be the case. So even with an expected mild to mid size recession in the next 2 years, I'm not seeing why rates would go up. And I'm not sure (by definition) what kind of black swan event would facilitate that (except maybe if trump wins.) With Clinton at the helm I'm pretty sure we will have boring, but predictable, economic policies; more of the same, a possible mild to mid size recession, prime Bay Area RE a little soft, rates still low. And frankly, I'm down with that scenario (over sheer unpredictability). C'est la vie.

This sounds about right Amit. With Germany 10yr bunds now negative, so much in Japan, Europe in negative rates, weak growth, an already-strong US dollar, and nowhere to get yield, it's hard to see the Fed jacking up rates too much - and they're still holding a lot of treasuries. The graph below doesn't even show the 2016 fallout..

Fed is still holding $2.4 Trillion in Treasuries... If/when they can't use Fed Funds in the next recession because its already too low, watch this $2.4T turn into $3T, $4T, $5T.. etc.. Then, in addition to MBS, they can start buying other financial assets like corporate bonds, REIT's, stocks..>>?

I agree it's hard to say which event/"straw" will break the camel's back. I believe it was Yellen that said that economic expansions don't die of old age.

Maybe what she forgot to add is that they get frail as they get old, and any myriad of illness, a fall, or contagions from others could put it in the hospital.. We don't know what that adverse scenario will put it in the hospital, or how bad the event will be, or how long it will have to stay in the hospital. But I think it's a pretty safe bet that we will be there.. You're right that unemployment doesn't stay this low for much more than a year. But the Fed and Congress can try to stretch it longer if they want to.. That usually ends well!!! hahhaaha

1 Reply

J. MartinPro Member

OP

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

9y

*UNEMPLOYMENT RATE UPDATE*

As we lumber through the "4th"/last quadrant of investing in the latter expansionary phase of this economic cycle, I organized some unemployment rate data for some large cities and states in the US to see where they are in the employment cycle, relative to history.

Most of these cities and states are at or near their record low unemployment rate, and we typically see a recession within 1-2 years of hitting these levels (albeit, the start of the recession is not identified until around 6 months later..)

TEXAS
The state of Texas looks like it is already in a recession, based on the increase in the unemployment rate relative to the last 5 economic cyles, over the last 40 years. Given, there are different stories in Houston vs Austin.

CALIFORNIA
California has historically had a recession relatively shortly (1-2 years) after the unemployment rate hits or crosses below 5%, consistent for the last 3 recessions going back to the 1980's. There was a recession after 6% unemployment the time before that. Currently at 4.8% as of Apr 2017.

NEW YORK
New York state shows the same thing as New York, except they get as low as almost 4% in each economic cycle, before reverting into a recession.

Los Angeles County unemployment rate is already better than the last 3 economic peaks, including just before the financial crisis, and the dot com boom. Clock's probably ticking a little faster there..

3 Reply

Lena Wang

Investor · San Mateo, CA · Member since 2016 · 55 posts · 12 votes

9y

Hi, now is near end of 2017, what are some new predictions? are your old predictions in line with what's happening right now? Just wanted to get an update on what you guys think now vs over a yr ago

1 Reply

Andrey Y.

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

9y

Originally posted by @Lena Wang:

Hi, now is near end of 2017, what are some new predictions? are your old predictions in line with what's happening right now? Just wanted to get an update on what you guys think now vs over a yr ago

Bumping this for same reason.

0 Reply

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

9y

"are your old predictions in line with what's happening right now?"

--- --- ---

errrr...

not

really

3words...and3dots

2 Reply

Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

9y

@Lena Wang and @Andrey Y.,

I don't have a crystal ball, don't like to make predictions and this is J's thread. However, I had an epiphany over the weekend looking at some charts from Paragon, and it's like de javu.

Peak unemployment: Looks like we're approaching the top and carving it out. If history is any indication, we'll likely see unemployment going up in the next 12-18 months?

6 Reply

Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

9y

Oops, hit the "Post Reply" button too soon. Boom and bust cycles

1984 - 1990

1995 - 2001

2002 - 2007

2012 - ???

Look at where we are with respect to Housing Affordability (HAI) Index in the core markets. Just remember that the HAI had no business of approaching 2006-2007 levels if it weren't for NINJA loans.

Rents in the prime SF housing market have soften. Look at the slope of the rent drop, not quite the same as the Tech 1.0 boom, but it's quite steep. Rents have also got soften in my San Jose market too. In hindsight, peak rents were summer 2015 for us.

In conclusion, we're much closer to the top than the bottom. Investing is about risk and reward. Right now, the risk seems to outweigh the reward. Be greedy when others are fearful and fearful when everyone wants to be a real estate investor.

Personally, I've been shifting my risk by paying-off my primary residence and other prime SFHs while refinancing my multi-family to at least a 10-year balloon or no balloon with agency loans, and raising liquidity and waiting for a better entry point. I believe 2020-2022 might present a better entry into the Bay Area markets compared to now, but what the heck do I know?

With respect to OOS investing, you'll have to pay me to invest OOS. ;)

7 Reply

Lena Wang

Investor · San Mateo, CA · Member since 2016 · 55 posts · 12 votes

9y

Originally posted by @Account Closed:

@Lena Wang and @Andrey Y.,

I don't have a crystal ball, don't like to make predictions and this is J's thread. However, I had an epiphany over the weekend looking at some charts from Paragon, and it's like de javu.

Peak unemployment: Looks like we're approaching the top and carving it out. If history is any indication, we'll likely see unemployment going up in the next 12-18 months?

So...What you are suggesting is that:

Contrary to what everyone else is saying (that we are on a downward trend in terms of the housing market, the market is depreciating slowly but still making a profit, but will go towards a recession), you are now suggesting that based on this unemployment graph that since unemployment was at an all time low, it will rise, and housing will rise with it, and that we will experience an upswing in the housing market?

1 Reply

Lena Wang

Investor · San Mateo, CA · Member since 2016 · 55 posts · 12 votes

9y

nm didn't see your further explaination...sorry. Yea what you are saying makes sense...but what do we know..

1 Reply

J. MartinPro Member

OP

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

9y

Originally posted by @J. Martin:

@Account Closed, @Andrey Y, Thank you for calling me out.
I said this about a year ago. My perspective is very similar. (And fortunately, the data is consistent with what I was talking about a year ago I think ;)

**TRENDS ARE CHANGING**

As of May 2016 in my graph above, the CA unemployment rate stood at 5.2% and dropping. I specifically noted that the unemployment rate tended to revert before the last 3 recessions, not long after the unemployment rate hit or went below 5.0%.

So where are we at today?

Aug 2017: 5.1% unemployment rate in CA

15 months after the May 2016 data, we're almost back where we were then. How? After reaching a low of 4.7% - the same as the low of 4.7% last seen in the Dotcom Dec of 2000 - the unemployment rate (gasp!) went up again. This is consistent with my expectation from a year ago. If you look back above at the May 2016 data when I first said this, you don't see any upward spike. It was all pretty much downhill smooth sailing. I based my premise of reversion on history - not any rough patches then. Clearly something has changed in the trend since then.

As Minh likes to say, history doesn't always repeat itself. But it rhymes. (And damn, sometimes it almost seems to sort of repeat itself too..)

Is there some sort of pattern here? Was I expecting that a year ago?
Well, maybe I got lucky, but I think yes. I didn't get out a divining rod orouija board or anything. Just looked at it from a third grader point of view ;) There's some point it doesn't cross for long. Then you get one of those vertical grey lines a bit later..

I'm not necessarily saying that this first reversion to an increase in the CA unemployment rate in about 7 years (look at the 7yr steady decline) is going to cause a recession tomorrow. You can see that it usually bounces around or stays near the bottom for a while, then starts increasing consistently, resulting in a recession - then we "find out" (officially) we are/were in a recession 9-15 months later. There is some minor improvement in the labor force participation rate, but not enough to save all this.

As we've seen from the 2005 - 2007 era, the govt, lending, and the marketplace can push the economy further than it's natural path should go. But it looks to me like the economy is telling us we've just gone past "as good as it gets," for the natural path of the economy. So I would hold by my original statement of 1-2 years, from last year.

I think there should be a recession starting in 2018, which would be officially identified by economists in 2019. Can it go further? Yes. Should it go further? Probably not. But the longer external stimuli try to force the economy beyond it's natural path, the more reckoning I think there will be in the next recession.

San Francisco tells the same story.
Trends are changing.

3.4% Unemployment rate for SF as of July 2017.
Up from 2.9% in my graph above as of May 2016.

Each cycle has a portion at the end where the years of trending improvements flatten out. And it looks like we're about there.

What do you guys think?
Am I crazy here?
Do the graphs tell a story..?

Again, my premise has always been that real estate appreciation in the SF Bay tends to go on a strong multi-year run after the unemployment rate has peaked, and starts to improve - and appreciation tends to be lowest in the years after the unemployment rate has approached or gone below its historical lows.

That's the reward/risk equation I approach with the cycle..

4 Reply

Lena Wang

Investor · San Mateo, CA · Member since 2016 · 55 posts · 12 votes

9y

Originally posted by @Account Closed:

Oops, hit the "Post Reply" button too soon. Boom and bust cycles

1984 - 1990

1995 - 2001

2002 - 2007

2012 - ???

Look at where we are with respect to Housing Affordability (HAI) Index in the core markets. Just remember that the HAI had no business of approaching 2006-2007 levels if it weren't for NINJA loans.

Rents in the prime SF housing market have soften. Look at the slope of the rent drop, not quite the same as the Tech 1.0 boom, but it's quite steep. Rents have also got soften in my San Jose market too. In hindsight, peak rents were summer 2015 for us.

In conclusion, we're much closer to the top than the bottom. Investing is about risk and reward. Right now, the risk seems to outweigh the reward. Be greedy when others are fearful and fearful when everyone wants to be a real estate investor.

Personally, I've been shifting my risk by paying-off my primary residence and other prime SFHs while refinancing my multi-family to at least a 10-year balloon or no balloon with agency loans, and raising liquidity and waiting for a better entry point. I believe 2020-2022 might present a better entry into the Bay Area markets compared to now, but what the heck do I know?

With respect to OOS investing, you'll have to pay me to invest OOS. ;)

1. What's OOS?

2. I agree with what you are saying. But if we go back to that saying: "Be greedy when others are fearful and fearful when everyone wants to be a real estate investor", then doesn't that mean that this is a decent time to buy? because everyone is fearful?

3. I don't intend to buy in SF ever. I am looking at SJ, Milpitas, Fremont, Pleasanton, Hayward areas...Is my assumption that perhaps these markets are a better buy even now because these areas are much more forgiving/soft than the SF market worth considering?

0 Reply

Matt K.

Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes

9y

Originally posted by @Account Closed:

Oops, hit the "Post Reply" button too soon. Boom and bust cycles

1984 - 1990

1995 - 2001

2002 - 2007

2012 - ???

Look at where we are with respect to Housing Affordability (HAI) Index in the core markets. Just remember that the HAI had no business of approaching 2006-2007 levels if it weren't for NINJA loans.

Rents in the prime SF housing market have soften. Look at the slope of the rent drop, not quite the same as the Tech 1.0 boom, but it's quite steep. Rents have also got soften in my San Jose market too. In hindsight, peak rents were summer 2015 for us.

In conclusion, we're much closer to the top than the bottom. Investing is about risk and reward. Right now, the risk seems to outweigh the reward. Be greedy when others are fearful and fearful when everyone wants to be a real estate investor.

Personally, I've been shifting my risk by paying-off my primary residence and other prime SFHs while refinancing my multi-family to at least a 10-year balloon or no balloon with agency loans, and raising liquidity and waiting for a better entry point. I believe 2020-2022 might present a better entry into the Bay Area markets compared to now, but what the heck do I know?

With respect to OOS investing, you'll have to pay me to invest OOS. ;)

Buy some notes....

0 Reply

Lena Wang

Investor · San Mateo, CA · Member since 2016 · 55 posts · 12 votes

9y

Originally posted by @J. Martin:

@Account Closed, @Andrey Y, Thank you for calling me out.
I said this about a year ago. My perspective is very similar. (And fortunately, the data is consistent with what I was talking about a year ago I think ;)

**TRENDS ARE CHANGING**

As of May 2016 in my graph above, the CA unemployment rate stood at 5.2% and dropping. I specifically noted that the unemployment rate tended to revert before the last 3 recessions, not long after the unemployment rate hit or went below 5.0%.

So where are we at today?

Aug 2017: 5.1% unemployment rate in CA

15 months after the May 2016 data, we're almost back where we were then. How? After reaching a low of 4.7% - the same as the low of 4.7% last seen in the Dotcom Dec of 2000 - the unemployment rate (gasp!) went up again. This is consistent with my expectation from a year ago. If you look back above at the May 2016 data when I first said this, you don't see any upward spike. It was all pretty much downhill smooth sailing. I based my premise of reversion on history - not any rough patches then. Clearly something has changed in the trend since then.

As Minh likes to say, history doesn't always repeat itself. But it rhymes. (And damn, sometimes it almost seems to sort of repeat itself too..)

Is there some sort of pattern here? Was I expecting that a year ago?
Well, maybe I got lucky, but I think yes. I didn't get out a divining rod orouija board or anything. Just looked at it from a third grader point of view ;) There's some point it doesn't cross for long. Then you get one of those vertical grey lines a bit later..

I'm not necessarily saying that this first reversion to an increase in the CA unemployment rate in about 7 years (look at the 7yr steady decline) is going to cause a recession tomorrow. You can see that it usually bounces around or stays near the bottom for a while, then starts increasing consistently, resulting in a recession - then we "find out" (officially) we are/were in a recession 9-15 months later. There is some minor improvement in the labor force participation rate, but not enough to save all this.

As we've seen from the 2005 - 2007 era, the govt, lending, and the marketplace can push the economy further than it's natural path should go. But it looks to me like the economy is telling us we've just gone past "as good as it gets." So I would hold by my original statement of 1-2 years.

I think there should be a recession starting in 2018, which would be officially identified by economists in 2019. Can it go further? Yes. Should it go further? Probably not. But the longer external stimuli try to force the economy beyond it's natural path, the more reckoning I think there will be in the next recession.

San Francisco tells the same story.
Trends are changing.

3.4% Unemployment rate for SF as of July 2017.
Up from 2.9% in my graph above as of May 2016.

Each cycle has a portion at the end where the years of trending improvements flatten out. And it looks like we're about there.

What do you guys think?
Am I crazy here?
Do the graphs tell a story..?

Hi @J. Martin:

Thanks for this. Yea I mean what you are saying def makes sense and the graphs do tell the story and support your theory. But isn't there other factors in play here? Such as the rising of interest rates will tighten funds going into the market, and when banks loosen that grip, isn't that going to spur another round of buying frenzy? Also the bay area's economic status and it's potential should also effect one's decisions on whether or not to invest.

Disclaimer: I'm by no means an economist or an experienced real estate data person. Just reading and learning at this point still.

0 Reply

Sandeep S.

Investor · Cupertino, CA · Member since 2012 · 118 posts · 121 votes

9y

Great analysis @Account Closed put for compiling and presenting the data!

Looking at these charts, I have always wondered is that the 2001 can be viewed as "a blip" for bay area RE market instead of a recession (like 1991 and 2007). It was only SF and SV market that got affected in 2001. And if we ignore the blip - the expansionary cycle lasted all the way from 1995 to 2007 (13 years!). While it is a risky thought - but what if the current cycle lasts also 10-13 years with one blip on the way. (and that "blip" could be happening right now!).

While a risky thought - but if this alternative theory turns out true - we may not see serious bay area wide correction until after 2022. Just a thought...

3 Reply

J. MartinPro Member

OP

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

9y

Originally posted by @Lena Wang:

Originally posted by @J. Martin:

@Account Closed, @Andrey Y, Thank you for calling me out.
I said this about a year ago. My perspective is very similar. (And fortunately, the data is consistent with what I was talking about a year ago I think ;)

**TRENDS ARE CHANGING**

As of May 2016 in my graph above, the CA unemployment rate stood at 5.2% and dropping. I specifically noted that the unemployment rate tended to revert before the last 3 recessions, not long after the unemployment rate hit or went below 5.0%.

So where are we at today?

Aug 2017: 5.1% unemployment rate in CA

15 months after the May 2016 data, we're almost back where we were then. How? After reaching a low of 4.7% - the same as the low of 4.7% last seen in the Dotcom Dec of 2000 - the unemployment rate (gasp!) went up again. This is consistent with my expectation from a year ago. If you look back above at the May 2016 data when I first said this, you don't see any upward spike. It was all pretty much downhill smooth sailing. I based my premise of reversion on history - not any rough patches then. Clearly something has changed in the trend since then.

As Minh likes to say, history doesn't always repeat itself. But it rhymes. (And damn, sometimes it almost seems to sort of repeat itself too..)

Is there some sort of pattern here? Was I expecting that a year ago?
Well, maybe I got lucky, but I think yes. I didn't get out a divining rod orouija board or anything. Just looked at it from a third grader point of view ;) There's some point it doesn't cross for long. Then you get one of those vertical grey lines a bit later..

I'm not necessarily saying that this first reversion to an increase in the CA unemployment rate in about 7 years (look at the 7yr steady decline) is going to cause a recession tomorrow. You can see that it usually bounces around or stays near the bottom for a while, then starts increasing consistently, resulting in a recession - then we "find out" (officially) we are/were in a recession 9-15 months later. There is some minor improvement in the labor force participation rate, but not enough to save all this.

As we've seen from the 2005 - 2007 era, the govt, lending, and the marketplace can push the economy further than it's natural path should go. But it looks to me like the economy is telling us we've just gone past "as good as it gets." So I would hold by my original statement of 1-2 years.

I think there should be a recession starting in 2018, which would be officially identified by economists in 2019. Can it go further? Yes. Should it go further? Probably not. But the longer external stimuli try to force the economy beyond it's natural path, the more reckoning I think there will be in the next recession.

San Francisco tells the same story.
Trends are changing.

3.4% Unemployment rate for SF as of July 2017.
Up from 2.9% in my graph above as of May 2016.

Each cycle has a portion at the end where the years of trending improvements flatten out. And it looks like we're about there.

What do you guys think?
Am I crazy here?
Do the graphs tell a story..?

Hi @J. Martin:

Thanks for this. Yea I mean what you are saying def makes sense and the graphs do tell the story and support your theory. But isn't there other factors in play here? Such as the rising of interest rates will tighten funds going into the market, and when banks loosen that grip, isn't that going to spur another round of buying frenzy? Also the bay area's economic status and it's potential should also effect one's decisions on whether or not to invest.

Disclaimer: I'm by no means an economist or an experienced real estate data person. Just reading and learning at this point still.

Are there other factors at play?
Certainly. Myriad factors.
But I found some data that seems to be telling a story.
The Bay Area data tells a story also.
Jobs are pretty important.

Could there be another round of buying frenzy? Yes.
Do I think it's a good risk-reward time to jump in, in general, when job growth is slowing after 7 years of boom, and trends are changing? Not really.
Is there maybe a better risk-reward time of the economic cycle? I think so.

Don't get me wrong I love the Bay Area. (And I own a good chunk of property here).
But you could have said the same thing about the Bay Area's economic status before the last recession. If you don't have a property you can clearly transition, and are just buying because things go up..

Famous last words are:
"It's different this time."

3 Reply

Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

9y

@J. Martin,

You always make real estate sounds like sex. LOL! It feels best before it's over. Gasp, went up again... It usually bounces around or stays near the bottom for a while.... As good as it gets. You've really contaminated my mind J. ;)

That was the reason why I got a Tesla. It's fast; it's wild; and it's hard to tame. Wait, I think they say that about the Mustang or Ferrari, not a Tesla. Never mind although I think the Tesla does the same thing. LOL!

I remember you and @Johnson H. were skeptical when you guys first met me at the meet-up and didn't believe we could predict the future with some certainties. I've shared my journey with you guys through out these years and thankfully those calculated predictions/bets have been right, and I have been rewarded for believing in my thesis.

Another indicator is that the Fed tends to raise interest rates into a recession, and it will likely be the same this time around. Human behaviors don't change be it now or 100 years ago. That's why history tends to repeat or rhymes itself. @David C. had an epiphany this morning and told us that "successful people are student of history." No crap! ;)

@Lena Wang, I didn't spell it out b/c I didn't want to attract the sharks to this thread with their keyword. OOS = Out-of-State. By the way, SF is a very lucrative market if you can figure out your niche. You can make your money very quickly in that market. Don't overlook it.

2 Reply

J. MartinPro Member

OP

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

9y

Originally posted by @Sandeep S.:

Great analysis @Account Closed

Looking at these charts, I have always wondered is that the 2001 can be viewed as "a blip" for bay area RE market instead of a recession (like 1991 and 2007). It was only SF and SV market that got affected in 2001. And if we ignore the blip - the expansionary cycle lasted all the way from 1995 to 2007 (13 years!). While it is a risky thought - but what if the current cycle lasts also 10-13 years with one blip on the way. (and that "blip" could be happening right now!).

While a risky thought - but if this alternative theory turns out true - we may not see serious bay area wide correction until after 2022. Just a thought...

Sandeep,
Great point. Could happen. But we're not at/past that blip yet. We haven't seen the temporary drop in prices yet. Just in rents in some areas. And we haven't seen job losses like the end of the dot com boom. The unemployment rate is just flattening out now. The job loss part is the riskier part, IMHO.

We are basically back where we were in 1990, 2000, and lower unemployment than in 2006. What happened after those years?

Sometimes they were flat. One slightly up. One way down.
And all of the no-fun parts start just after we get to the best unemployment numbers. As compared to the multi-year boom in prices you see after unemployment rates peak and start improving.

And as Minh's graphs from Paragon's Patrick Carlisle show (couldn't get him to come out to the Summit :( ), there is more rent risk in the latter part of the economic cycle.

For all those finding deal that work for them, given the rent or potential price risk, I say go for it. Especially if transitioning the property.

But for those just buying for rents and prices to continue going up, I think it's not a great risk/reward bet, IMHO.

4 Reply

Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

9y

Originally posted by @Sandeep S.:

Great analysis @Account Closed. I love the effort you and @J. Martin put for compiling and presenting the data!

Looking at these charts, I have always wondered is that the 2001 can be viewed as "a blip" for bay area RE market instead of a recession (like 1991 and 2007). It was only SF and SV market that got affected in 2001. And if we ignore the blip - the expansionary cycle lasted all the way from 1995 to 2007 (13 years!). While it is a risky thought - but what if the current cycle lasts also 10-13 years with one blip on the way. (and that "blip" could be happening right now!).

While a risky thought - but if this alternative theory turns out true - we may not see serious bay area wide correction until after 2022. Just a thought...

Sandeep,

I love your line of thinking. Although I was not a full blown full-time REI at the time, I was living and breathing RE on a regular basis back then so I remember it vividly. I even modeled it out: If it weren't for 9/11, which likely caused the recession, where would the recession have likely started and my conclusion at the time was 2003.

What saved the housing market at the time was that Alan Greenspan cut rates to 1%. Bay Area folks were terrified of the stock market so the money went into real estate. A lot of money that were already made from the Tech 1.0 was still sloshing around looking for yields. Refinancing to lower mortgage payments created another round of liquidity. Then funny lending went into gear around 2004 and took the market to another level.

This time around, it has a very similar feel to the Tech 1.0 time frame so I'm preparing myself for both scenarios, a blip 10-15% correction or a longer 20-25% correction. I'm stress-testing our portfolio for both scenarios, and we're setting aside $500k in case the latter scenario becomes a reality.

If you believe in the 18-year biz cycle theory, we can definitely hit a blip in the next year or so, then resume the uptrend till 2024. I'm listening to the market and preparing for different scenarios.

4 Reply

Andrey Y.

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

9y

Originally posted by @Account Closed:

Originally posted by @Sandeep S.:

Great analysis @Account Closed. I love the effort you and @J. Martin put for compiling and presenting the data!

Looking at these charts, I have always wondered is that the 2001 can be viewed as "a blip" for bay area RE market instead of a recession (like 1991 and 2007). It was only SF and SV market that got affected in 2001. And if we ignore the blip - the expansionary cycle lasted all the way from 1995 to 2007 (13 years!). While it is a risky thought - but what if the current cycle lasts also 10-13 years with one blip on the way. (and that "blip" could be happening right now!).

While a risky thought - but if this alternative theory turns out true - we may not see serious bay area wide correction until after 2022. Just a thought...

Sandeep,

I love your line of thinking. Although I was not a full blown full-time REI at the time, I was living and breathing RE on a regular basis back then so I remember it vividly. I even modeled it out: If it weren't for 9/11, which likely caused the recession, where would the recession have likely started and my conclusion at the time was 2003.

What saved the housing market at the time was that Alan Greenspan cut rates to 1%. Bay Area folks were terrified of the stock market so the money went into real estate. A lot of money that were already made from the Tech 1.0 was still sloshing around looking for yields. Refinancing to lower mortgage payments created another round of liquidity. Then funny lending went into gear around 2004 and took the market to another level.

This time around, it has a very similar feel to the Tech 1.0 time frame so I'm preparing myself for both scenarios, a blip 10-15% correction or a longer 20-25% correction. I'm stress-testing our portfolio for both scenarios, and we're setting aside $500k in case the latter scenario becomes a reality.

If you believe in the 18-year biz cycle theory, we can definitely hit a blip in the next year or so, then resume the uptrend till 2024. I'm listening to the market and preparing for different scenarios.

Thank you for your comments. It looks like you are predicting a correction 2020-2022, being a good time to get into the Bay Area? I have been putting some cash into large apartment syndications and agriculture, but it seems like I should start stockpiling some cash so I'll be ready.. I've been daydreaming on buying my first property in the Bay/SF.. a 2-3 unit sounds pretty nice. I would love a 10-15%+ correction!

2 Reply

Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

9y

@Andrey Y.,

You can also say the best time to buy is when unemployment is at around 7-8% during the next recession, and now it's the best time to sell when unemployment is at its lowest.

Based on history, the housing market tends to bottom out 3-5 years from the peak. Thus, my guess of 2020-2022. It's a probability game to me. I'll keep monitoring the indicators and let the market tells me when to get back in. Just like when I decided to quit my W2 and went all-in into real estate full-time in 2009. I recognized it was an opportunity once in a lifetime and convinced my wife to let me quit my job and try real estate for 3-5 year. She got tricked. It's been 8+ years and I don't see myself ever going back to a W2. ;)

Keep dreaming. It'll become a reality although 10-15% is not that much of a correction if you're looking to buy IMO. Don't be too hurry putting all that cash to work and looking for yields. Sometimes, the best thing to do is doing nothing.

I was running through different scenarios with my partner on Monday. I was "hoping or rationalizing" for a 25-30% correction this time around, but would be happy with 20%. The catch about this cycle is that home sales are supposed to accelerate/increasing into the peak of the market. However, sales volume has been relatively low during this whole recovery. Where will the inventory come from in the coming recession? Less inventory = likely less discount on pricing. If it turns out to be a "blip" like Sandeep believes, then a 10% is about right. I'll let the market tell me what to do rather than guessing.

Cheers.

6 Reply

Hersh M.

Engineer · Carlsbad/San Diego · Member since 2014 · 285 posts · 97 votes

9y

Some interesting regional data in this article - http://www.mercurynews.com/2017/09/15/job-losses-j...

"

The Bay Area lost 4,700 jobs last month — the worst month for employment losses in seven years, according to seasonally adjusted figures from the Employment Development Department.

Santa Clara County’s strongest industry in August was the technology sector, which added 600 positions. The weakest industries in the South Bay were hotels and restaurants, which lost 1,800 jobs; construction, which eliminated 600; and retail, which shed 400 positions, the Beacon analysis showed.

The East Bay’s strongest sector was health care, which added 2,400 jobs. The most feeble industry in Alameda and Contra Costa counties was construction, which chopped 1,500 jobs.

But in the San Francisco-San Mateo region, construction was the strongest industry in August, adding 1,600 jobs. That region’s weakest industries were technology, which slashed 2,100 jobs, and health care, which lost 1,200 positions, Beacon estimated.

"

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SF Bay Area Economic & RE Update (Ongoing)

SF Bay Area Economic & RE Update (Ongoing)

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