Forecast of RE market? Thoughts?

Question

I'd be very interested in everyone's thoughts on where the RE market is heading in the next 10 years, primarily in current hot markets.

The SF Bay Area, as well as others, have shown a dramatic increase in both market value and rents in the last 5 years (2x?). With interest rates forecast to raise slowly in the next 10 years & the government GPD forecast to not hit 3% for 10 years I don't think wages are going to be climbing very fast. If this is the case then in areas such as the Bay Area I think SFR rents should probably plateau. Likewise I think SFR market values will plateau.

I think in the long run, since the job growth is still okay in this area I think both rents & MV won't decline but also will not be seeing the record increases of the last 5 years.

Does this scenario seem plausible?

Given the current high values of the area I would then think it is better to hold onto property and bring the rents up to market rather than take on debt to buy additional property.

Thoughts?

Thanks all !

Amit M. · Answer

my 2 cents:

1- WRT affordability, this metric becomes more and more decoupled from housing prices in the Bay Area. First, many buyers are trade up buyers and already have a lot of equity in existing properties. Secondly, many who buy have very high incomes, tech stock success, or both.  basically hardly any blue collar people outside the region decide to move to core Bay Area cities- it's almost only well educated, well paid professionals. And dual income couples are still a potent economic force.

2- it's a very good question if housing prices will simply slow down and flatline in a couple years. We tend to be boom/bust here: lots of money going into all sorts of start ups, good times rolling, home prices on a tear, then boom, the party's over (at least for awhile :). I personally feel San Francisco (the city) has already taken all the gains it could possibly deserve in this cycle. So if fall 2015 thought 2016 show more outsized gains, it is more likely that we will have a housing correction. If we start flat lining (meaning modest 3-5%ish)* price growth, then we stand a better chance of having a smooth correction in a couple years.

* yeah that's how we roll here; double digit appreciation is expected during good times. 3-5% is considered meh, flat ;)

3- as mentioned above, buying marginal deals now has risks!  I was lucky and nabbed a couple of great deals last year, but they were work to find. This year I have seen almost zero good ones in SF (listed deals that is.)  if I buy again this year or next, the bar is set pretty high, as I'm determined not to buy marginal stuff. As mentioned above, why screw up a sweet portfolio with a crappy money pit!  Cashflow (especially in SF!) is a beautiful thing, so I'm keeping my more conservative cap on.

Account Closed · Answer

Brian,

May I offer a different perspective on your buy vs. rent scenario above? At $3,600/month PITI, one is paying approx $23k/year in interest and $9k/year on property tax.  Assuming one is in a 30% combined Federal and CA tax bracket, you're looking at $9,600/year tax refunds, your carrying cost is equivalent to $2,800/month after mortgage interest deduction. Once you factored in $800/month of principal pay down, aka forced savings, your actual carrying cost is $2,000/month.  You can look at the principal pay down as return your down payment, which yields about 7%.

We're living in an inflationary environment where rents will continue to increase over time as to once you bought, you have fixed your housing cost for the next 30 years with the exception of your property taxes going up at 2% annually. That doesn't mean real estate will continue to increase at 10%-15% annually.  If history is any indication, our Bay Area housing market has a high probability of topping out in 2017 so plan accordingly.

Jay Hinrichs · Answer

Account Closed

Very well put... and one thing we outline to first time home buyers looking at our starter houses we show them the big tax breaks and with an FHA loan their payment is much less than rent.. even with PMI.

Also one just needs to look around the country and world..    World Class locations like Silicon Valley SF  Marin County  Berkeley Alamo etc etc will continue to stay strong like rents in Manhattan  or Wrigley  or best parts of LA ... and many other top end locations nationwide.. one can just look what you get in Tokyo  or Geneva  or London ,,, Hong Kong, Singapore to get an example of rents could be.. rents are double what we are in our best locations if not more for the same sq ft.

Account Closed · Answer

I have lived in the Bay Area since 1995 and bought my first home in 1997 so I don't have the super long perspective that @Jay Hinrichs has. But in those 20 years I have bought homes at various point in the cycle. All I know is that if you hold at least 5 years, you will not lose money. I have bought just at the right time (1997), just at the wrong time (2007) and most recently in 2014. All those properties are substantially above their buying price with huge gains in equity. Rents have exploded and I agree that they cannot rise 20% per year indefinitely. But I don't think median income means much when the housing stock and land is so limited. The population would have to decrease substantially for rents to go down a lot and that may happen with a major natural disaster or another huge tech bust but for now shortage of land and buildings in desirable areas combined with increasing population will hold up the market. I say if you have a long enough horizon there is no really "bad" time to buy in some markets.

Joel Owens · Answer

There are still good deals today that make sense.

What you DO NOT want to do is buy for the sake of buying. Some people get on a roll and feel invincible in a cycle like it will never end. They then go from 5 million to 1.5 and run with their tail between their legs for awhile to lick their wounds before they jump on the next cycle again.

Another mistake is to tell yourself you have some good properties throwing off cash and then it makes sense to gamble on a marginal deal that might work out. What happens is when that deal tanks you have taken a highly successful cash positive portfolio to negative or neutral. Worse yet if you have a personal guarantee on it you can't dump it and shed it off without some collateral damage.

The key is too always be looking for deals. There are just times in the market where you can buy a bunch and other cases where you have to wait it out to find maybe 1 or 2 a year to add to the portfolio. In this way you keep the portfolio strong over time.

I talked to a future version of my self today on the phone. A commercial broker scaling back who is 75 years old. The knowledge is amazing. I love listening to others who have been doing this 40,50 years etc.

Before the last downturn the younger guys were trying to get him to invest on "can't lose" properties. He politely declined and now has their building portfolio and parcels of land to list from the bank OREO. That is how I talked to him when I was inquiring about the package he had.

I have to say no many times and look for months or longer to find the right properties. It's work to do well in this business. Anybody in it for a quick buck might get lucky once to twice but will flame out sooner rather than later.

California is one of those unusual appreciation driven states. I can see an investor putting some no cash flow but big equity growth plays there and cashing out.

Brian Tremaine · Answer

Minh

Very good point on the tax savings. I thought about that as I was doing the calculations but left it off thinking it was not consequential.. it is :) I end up calculating about a $2100/mo effective expenses. For homeowners who can afford the monthly cash flow it is well worth it if they plan to stay there for than ~7 years.

I agree on the topping out in 2017 given our recent run-up and the upcoming election cycle. The timing is about right. I do think though the fundamentals indicate a plateau in prices and not a crash like 2007.

Brian Tremaine · Answer

This link is from Aug 2014 but it is interesting looking at median household incomes in the Bay Area and where the economy fits relative to the rest of the US. Bay Area highest GDP per capita

Jay Hinrichs · Answer

my experience in the Bay Area is like yours.. we see 10 year cycles pretty regularly.

with different reasons for downward trends or falling prices.. And massive run up.

coming out of the 70's when you could buy a nice home for 25 to 50k

we had the first run up mid 80's.. then the earthquake and war set off  regional recession. and values crashed hard from 90 to 93  then plateaued  .. High end got clobbered as you will recall 50% in some cases.. my brother in law bought a home in LA hills that was worth 2.5 in the mid to late 80's and he got it for 1.2 in 1993.. it bounced back to 2.5 by end of 90's then shot up to 4 mil... then 08 it probably came back a little but I am sure its right back up to 4 to 5 mil..

the dot com created spike in value late 90's then the dot com bust dropped prices then they came roaring back and by 2006 to 2007 made new high... then the 08 09 crash.. and it retreated again only to come storming back as you said with the google facebook and all other manner of high tech expansion and profitability.. to make new highs..

Anthony Gayden · Answer

If i am reading you correctly, there is a large build up of multifamily right now which will mean lowering rents, increased vacancy, and decreased values in the future. That would be followed by a huge decrease in building, and lowering of prices. If that is the case, why not wait it out for a few years and buy when these properties are cheaper?

Brian Tremaine · Answer

In the South Bay Area a modest SFR costs $700K and at 4.1% interest with 20% down a buyers monthly PITI would be $3563. The same home could rent for $3000. It seems like this is a disincentive for renters to buy. Also, that $3563 is 56% of the median household income. So if they do buy they are house rich / cash poor. If rates go to 4.5% the expense goes to 58% of median household income. It seems like we are in a condition where renters can't afford to buy yet are already spending a high 47% of their income on rent. This is why I see a plateau until wages start increasing.

Forecast of RE market? Thoughts?

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