All Forum Posts by: Brent Seehusen

Alex I would like to see your stats because as recently as 2010 none of the Bay Area cities made the Top 20 list for appreciation.  I think you are confusing recent appreciation, which has been fueled by a tech bubble and unprecedented foreign investment, with long term historical rates of appreciation, which haven't been nearly as good for the Bay Area.

This was a study conducted by Zillow in 2010 and eight of the top 20 cities for appreciation were in SoCal, none were in NorCal:  http://www.zillow.com/blog/top-20-best-performing-...

Case Shiller also confirms this over the long term by showing that Los Angeles slightly outperformed San Francisco from January 1980 to the bottom of the recent housing bust in Spring 2009.  That's a 29-year period where San Francisco was not the top market.

https://us.spindices.com/indices/real-estate/sp-ca...

It's only been in the past 5 years that San Francisco has massively outperformed other markets and that's why some of us are skeptical and think a reversion to fundamentals is coming.  If San Francisco reverts to its historical rate of appreciation at some point in the future, that means it will need to suffer through several years of lackluster appreciation to get back to the mean trend line, which makes it a risky bet in my book.  Hopefully, it doesn't overshoot the trend line to the downside.

When I see people posting fluffy stuff like San Francisco is a world class city, an international destination, and they ain't making any more land, it reminds me of the exact same arguments that people were making in 2005-06 to justify speculative investment decisions.

Hi @Tim VandenToorn,

Funny you should ask..I've been analyzing different out of state markets and Grand Rapids is one that I'm honing in on.  Currently, I'm only invested in California, but Grand Rapids looks like a market with some growth potential that also offers good cash flow.  Maybe you can answer some questions... 

What is the housing stock like? Are there any multi-family opportunities or is it mainly SFR investing? Are there any areas or property types one should avoid?

Thanks in advance-

Brent

@Alex Vidal  Do you think the current rent will triple in another 10 years to $12,675 per month?  That would make rent twice as much as the current SF median income.

Your numbers about the past are interesting.  Sure, they would have gained equity through amortization, but the owners would have paid the early amortization out of pocket due to how badly these investments cash flowed.  I'm estimating a minimum of -$4,000 per month eating the owners alive back in 2005 for the median priced SF home.  With current rents having tripled since then, they are still negative cash flowing and haven't seen any appreciation (just a bust and a recovery), but the renters are covering most of the costs now.  The owners still haven't recovered the early years of negative cash flow though. Net/net the 2005 buyer is still in the red 10 years later.

San Francisco is beyond scary right now.  You have multiple bubbles going on simultaneously... The tech bubble with startups getting funded that are losing money at a rate faster than the late 90's, on average.  Then you have the financial sector being fueled by a stock market that is the 3rd most expensive in history according to the CAPE 10 measure of value.  Finally, you have the real estate market being fueled by these other two frothy markets, plus foreign money that may dry up courtesy of the Chinese economy that looks like a bubble in the process of imploding.  I would not want to be buying SF property at 13x median income.

Since this is a new member introduction, my advice would be to avoid SF until the pain has run its course.  This is way too much risk for a newbie to take on.

According to Case Shiller, San Francisco hasn't gone anywhere in 10 years.  No appreciation.  I wonder how many of the people claiming San Francisco is a can't-miss investment today were thinking the same thing in 2005?  Not only that but anybody buying from 2001 to 2007 had to wait at least 10 years to see a gain on their investment.  Some of them still haven't.

The moral of the story is to buy assets when they can be had for a discount, like from 2009-2012, and avoid overpaying when things are frothy, like they are now. You can see that the current market is way above the long term trend line for San Francisco.  Eventually mean reversion is going to run its ugly course, and prices are either going to fall or there will be a long period of stagnation.  Combine that with a lack of cash flow and this is a losing proposition.

The price-to-income ratio is already in excess of 13 so you have to ask yourself how are prices going to triple or quadruple in 20 years?  Incomes just aren't rising that fast.  Will the price-to-income ratio really hit 25 or 30?  That would far exceed the prior bubble if it does.

@Dhiren Mistry

San Francisco has proven to be very cyclical over the past 35 years.  Currently the median household income is $76,000 while the median home price just hit $1,000,000 for the first time. That by definition is a bubble with price-to-income ratio exceeding 13x.  

My advice to newbies reading this thread is to avoid San Francisco until the next bust occurs.  Not only is real estate cyclical but the tech sector itself is very cyclical.  Don't get caught being the next bag holder.  Wait for the market cycle to come to you and buy when there is blood in the streets and there are an abundance of motivated sellers and good deals to be had. Now is not that time.

In the California market, Bruce Norris is considered an expert on this.  The leading indicator that he found to be most predictive was housing affordability (i.e. the percent of median income earners that can afford the median priced home).  Once this number dips to 17% for the state as a whole, it's time to sell.   California is very boom/bust so his technique has proven itself over the course of 3 real estate cycles now.

Another author named Robert Campbell wrote a book called Timing the Real Estate Market that you might find useful.  He narrowed his buy/sell indicator down to a blend of 5 data points:  existing home sales, builder permits, defaults, foreclosures, and interest rates.  He also focuses exclusively on the California market, but I would think the same concepts would transfer well to other areas.

There's also a book called Timing the Real Estate Market: How to Buy Low and Sell High in Real Estate by Craig Hall that I have not read, but might be worth checking out.

 Ha!  Are you serious?  That is hilarious.

Using the prior peak as a baseline for the current market isn't a good idea because that was the most overpriced housing market in history.  It would be kind of like using the year 2000 NASDAQ as a benchmark for stock market values.  It doesn't make sense because those levels were completely detached from reality.  Our current cycle will probably not reach that level of overvaluation (10x median incomes at the peak), but affordability could still be a problem due to a combination of rising values and rising interest rates.  

Mortgage payments are affected by both inputs and mathematically every increase in rates eliminates another segment of the population from being able to buy. Eventually, you don't have enough buyers to support demand at the increased price level and prices need to come down to allow more buyers into the market.  The return of affordability products will offset this for awhile - interest only payments make it much easier to afford a house - but eventually they will not be enough unless standards are loosened further.  That eventually reaches a breaking point.

I agree with @Jim Keller that long term SoCal is a good place to invest, but my point is wait until the bottom of the cycle to buy for maximum gains.  Much of the easy gains have already occurred for the current cycle so you have less upside potential and increased risk buying right now.  You may not face a loss in value, but rather many years of stagnation, much like someone that bought in 2003. Feeding a negative cash flow for 10 years with no gain in appreciation isn't a winning formula for building wealth in my book.

@Matt R. The basic outline for a crash is when affordability gets stretched to the limit and even highly educated people start to feel a sense of hopelessness about ever owning a home.  Then a recession hits and all the late-comers that stretched to buy start losing their jobs, leading to a wave of foreclosures and forcing prices down.  It happened in the 80's, 90's, and 2000's.  The 80's was a bit of an anomaly because high inflation kept nominal prices flat, but in real terms homes were losing value and people were struggling to pay their 12%+ mortgage rates.

Like I said, there is probably a couple more years to go.  The affordability products are just now starting to re-emerge and that will take some time to play out.  A few weeks ago I heard that 80/15 piggy back loans are making a comeback for those that can't put 20% down, and today I came across this article that interest only loans are coming back:

http://www.buffalonews.com/city-region/interest-on...

The nation's second largest wholesale lender is going to be offering these, so brokers nationwide will soon be marketing IO loans to their clients that can't afford to buy using conventional loan terms.  Sound familiar?

You can tell we are nearing the top of a market cycle when threads like this start popping up repeatedly.  I think it will be another couple years before the market peaks, but there is an awful lot of Kool-aid flowing in California these days. Nobody... and I mean NOBODY... thinks home prices are going down again.  

It was only four years ago that everybody thought it was the end of the world and people would tense up if you told them you were buying property.  My how things have changed.