Bay Area housing frenzy cooling

[sunny_socal]

I'm finally out of this place never to return to California's gridlocked and stiflingly overpopulated coastal cities.

Where are you headed?

+1 curious as well.

I can’t wait to get out of this state. CA is a complete dump and a waste of money. Am considering some smaller cities (Denver, Austin, Charlotte) but haven’t come up with an exit plan yet.

Uh, don't be in such a hurry. I moved from San Diego to Austin, here's what I know now.

The good
- It's more green out here, plenty of trees and natural grass
- Water is more abundant. It rains, there are rivers and lakes, seasonal creeks
- People are nice and tend to be more polite than in CA
- Food tends to be better and there's more variety
- Gas is much cheaper! Easy to find at $2.50/gal and no messing around with summer/winter blends or special state requirements.
- No state tax
- Utilities cost less
- State politics follow common sense
- Schools are MUCH better
- Housing costs are less

The not so good
- Traffic is bad and it's getting worse. I had a 1-hr commute before, I have a 1-hr commute now.
- There is no infrastructure to support the growth. Freeways are a couple lanes each way, even at merge points. (Compare to 6-12 lanes each way in CA.) Not enough freeways and everyone knows the 'secret back roads' now that mobile mapping is common.
- There is no real Mexican food here, it's virtually all Tex-Mex. Not the same thing, believe me (think cheese out of a can)
- The beer isn't as good
- It can be pretty humid at times, you'll sweat if you move a muscle
- Austin has nice scenery compared to the rest of TX, but nothing compared to CA
- Food prices are actually worse out here
- Pay is much lower
- Housing cost is growing rapidly.

Was it a mistake? Yes, from career point of view and overall "lifestyle."
Was it a win? Yes, for my kids and their future. They are in a great school and have much better opportunity out here.

[unclescrooge]

Lots of hypothesis as to why, but will be interesting to watch as to whether this is an overdue correction in a few overheated markets, or a harbinger of a broader problem in the economy.

I concur. I suspect that the "why" is a confluence of factors, many of which have already been mentioned - rising rates, tariffs, etc. I'll simply throw in another: Changes to the tax code, i.e. SALT capped at 10K, mortgage interest capped at interest on $750K of mortgage debt.

Since CA is a high-tax state and many mortgages in the Bay area are above $750K (let's leave out the cash buyers for now), that takes a number of potential buyers out of the market....

Mortgage interest deduction was already capped at $1M, and as you say the Bay Area market exceeded that years ago.

SALT cap is more meaningful, but let’s do some quick math. For a family earning $300k (state income tax of $20k) and property tax of $20k the change means $30k in newly non-deductible income, which translates into only additional $10k of tax, not a game changer. I’m not even taking into account the lower federal tax brackets, which mitigates these impacts.

SALT is a red herring. People paying 10k in property taxes were also probably got with AMT, so they weren't deducting any state it property taxes. Now they get to deduct 10k!

[Nearly A Moose]

My part of DC *feels* *just a bit* softer for homes in the 1.6-2.5M range. Not sure if there is data behind that. Just adding that in.

[ssquared87]

I'm finally out of this place never to return to California's gridlocked and stiflingly overpopulated coastal cities.

Where are you headed?

+1 curious as well.

I can’t wait to get out of this state. CA is a complete dump and a waste of money. Am considering some smaller cities (Denver, Austin, Charlotte) but haven’t come up with an exit plan yet.

Uh, don't be in such a hurry. I moved from San Diego to Austin, here's what I know now.

The good
- It's more green out here, plenty of trees and natural grass
- Water is more abundant. It rains, there are rivers and lakes, seasonal creeks
- People are nice and tend to be more polite than in CA
- Food tends to be better and there's more variety
- Gas is much cheaper! Easy to find at $2.50/gal and no messing around with summer/winter blends or special state requirements.
- No state tax
- Utilities cost less
- State politics follow common sense
- Schools are MUCH better
- Housing costs are less

The not so good
- Traffic is bad and it's getting worse. I had a 1-hr commute before, I have a 1-hr commute now.
- There is no infrastructure to support the growth. Freeways are a couple lanes each way, even at merge points. (Compare to 6-12 lanes each way in CA.) Not enough freeways and everyone knows the 'secret back roads' now that mobile mapping is common.
- There is no real Mexican food here, it's virtually all Tex-Mex. Not the same thing, believe me (think cheese out of a can)
- The beer isn't as good
- It can be pretty humid at times, you'll sweat if you move a muscle
- Austin has nice scenery compared to the rest of TX, but nothing compared to CA
- Food prices are actually worse out here
- Pay is much lower
- Housing cost is growing rapidly.

Was it a mistake? Yes, from career point of view and overall "lifestyle."
Was it a win? Yes, for my kids and their future. They are in a great school and have much better opportunity out here.

Thanks for sharing your experience, very helpful!

I've hard the same about traffic in Austin, and it does give me reason for pause. I do think if you live in downtown Austin, then things are a bit better as the city is walkable and you can use Uber to get around to places that are just outside of walking distance, but I can see this being a problem if you don't want to live in the downtown area.

As far as career, that would be a toss up for me. I'd get paid the same no matter where I live, potentially more if I move to a market that's less developed for my company as there'd be more sales opportunities and less competition from colleagues for those sales.

Very surprised on the Mexican food front...I love Mexican, but I love Tex-Mex as well so I'd be okay with that.

[mervinj7]

My part of DC *feels* *just a bit* softer for homes in the 1.6-2.5M range. Not sure if there is data behind that. Just adding that in.

Now you got me curious, so I looked up houses sold in the last 4 weeks near where my coworkers are looking for houses. Obviously, the sample size is very limited but it looks like there's mix of overasking, listed, and underasking offers. A year, all of these should have gone for 9% over asking. That last one is any empty lot with a super funky shape.

Listed for $1.3M, Sold for $1.425M, 10 days on market
https://www.redfin.com/CA/Campbell/1153 ... ty-details
Listed for $1.68M, Sold for $1.62M, 16 days on market
https://www.redfin.com/CA/Campbell/1589 ... ty-history
Listed for $1.29M, Sold for $1.29M, 17 days on market (EMPTY LOT)
https://www.redfin.com/CA/Campbell/1440 ... ty-history

[SilverGirl]

You’re telling me that a professional College-educated couple earning $300k and wondering whether to pull the trigger on a $1.5M house (probably the largest purchase in their lives) can’t do the math on tax impacts? I find that hard to believe.

Hahaha. Relax, dude. I didn't say "can't". Of course they can. They're just understandably busier with other things - getting their kids to soccer practice, attending to their demanding bosses, etc. Whether or not you find it "hard to believe" is irrelevant. They're not you, and you're not they. Like I said, supply and demand.... Focus on helping OP.

This description kind of freaks me out because you have described my family situation to a 'T'. And yes we have been at soccer tournaments both the past weekends. We have not had time to figure out to specifically figure out the impacts of the tax changes to our personal situation. We are buying the house anyway. (We do have an llc so we know there is a positive in there in terms of the pass thru which will help negate the negative from the lack of being able to fully deduct the 1M mortgage interest).

[runner540]

You’re telling me that a professional College-educated couple earning $300k and wondering whether to pull the trigger on a $1.5M house (probably the largest purchase in their lives) can’t do the math on tax impacts? I find that hard to believe.

Hahaha. Relax, dude. I didn't say "can't". Of course they can. They're just understandably busier with other things - getting their kids to soccer practice, attending to their demanding bosses, etc. Whether or not you find it "hard to believe" is irrelevant. They're not you, and you're not they. Like I said, supply and demand.... Focus on helping OP.

This description kind of freaks me out because you have described my family situation to a 'T'. And yes we have been at soccer tournaments both the past weekends. We have not had time to figure out to specifically figure out the impacts of the tax changes to our personal situation. We are buying the house anyway. (We do have an llc so we know there is a positive in there in terms of the pass thru which will help negate the negative from the lack of being able to fully deduct the 1M mortgage interest).

SilverGirl, how does the LLC help for a personal residence? The mortgage interest deduction is only for personal first or second homes..

[SilverGirl]

You’re telling me that a professional College-educated couple earning $300k and wondering whether to pull the trigger on a $1.5M house (probably the largest purchase in their lives) can’t do the math on tax impacts? I find that hard to believe.

Hahaha. Relax, dude. I didn't say "can't". Of course they can. They're just understandably busier with other things - getting their kids to soccer practice, attending to their demanding bosses, etc. Whether or not you find it "hard to believe" is irrelevant. They're not you, and you're not they. Like I said, supply and demand.... Focus on helping OP.

This description kind of freaks me out because you have described my family situation to a 'T'. And yes we have been at soccer tournaments both the past weekends. We have not had time to figure out to specifically figure out the impacts of the tax changes to our personal situation. We are buying the house anyway. (We do have an llc so we know there is a positive in there in terms of the pass thru which will help negate the negative from the lack of being able to fully deduct the 1M mortgage interest).

SilverGirl, how does the LLC help for a personal residence? The mortgage interest deduction is only for personal first or second homes..

Just helps our overall picture since more than fifty percent of our income is through our business...

[SoAnyway]

You’re telling me that a professional College-educated couple earning $300k and wondering whether to pull the trigger on a $1.5M house (probably the largest purchase in their lives) can’t do the math on tax impacts? I find that hard to believe.

Hahaha. Relax, dude. I didn't say "can't". Of course they can. They're just understandably busier with other things - getting their kids to soccer practice, attending to their demanding bosses, etc. Whether or not you find it "hard to believe" is irrelevant. They're not you, and you're not they. Like I said, supply and demand.... Focus on helping OP.

This description kind of freaks me out because you have described my family situation to a 'T'. And yes we have been at soccer tournaments both the past weekends. We have not had time to figure out to specifically figure out the impacts of the tax changes to our personal situation. We are buying the house anyway. (We do have an llc so we know there is a positive in there in terms of the pass thru which will help negate the negative from the lack of being able to fully deduct the 1M mortgage interest).

I don't want to derail OP's thread, but no worries, SilverGirl. Good on you for supporting your kids' soccer teams, and buying the new home for your family. NO guilt for not doing ALL the math ahead of time. You're busy with more important priorities, and you're not the only one a bit overwhelmed in trying to figure out what all the changes mean for your specific situation.

You're correct that there are benefits on the pass-through LLC side, assuming you're not in one of the categories of LLCs that got shut out. You or your accountant would need to dig deeper to figure out the extent to which they'll offset the new SALT/interest limitations. I'm guessing that even if net-net, you're at a level that will have you paying higher taxes than before, you can cash-flow the difference. If you REALLY want to know now vs. when you file your 2018/2019 tax returns, who prepares your tax returns? If you, TT Taxcaster might be able to help. If an outside EA or accountant, give them a ring.

[runner540]

You’re telling me that a professional College-educated couple earning $300k and wondering whether to pull the trigger on a $1.5M house (probably the largest purchase in their lives) can’t do the math on tax impacts? I find that hard to believe.

Hahaha. Relax, dude. I didn't say "can't". Of course they can. They're just understandably busier with other things - getting their kids to soccer practice, attending to their demanding bosses, etc. Whether or not you find it "hard to believe" is irrelevant. They're not you, and you're not they. Like I said, supply and demand.... Focus on helping OP.

This description kind of freaks me out because you have described my family situation to a 'T'. And yes we have been at soccer tournaments both the past weekends. We have not had time to figure out to specifically figure out the impacts of the tax changes to our personal situation. We are buying the house anyway. (We do have an llc so we know there is a positive in there in terms of the pass thru which will help negate the negative from the lack of being able to fully deduct the 1M mortgage interest).

SilverGirl, how does the LLC help for a personal residence? The mortgage interest deduction is only for personal first or second homes..

Just helps our overall picture since more than fifty percent of our income is through our business...

Ah, I see. It does figure into how much you can afford for shelter, but those tax benefits are NOT related to whether you buy or rent your shelter. I guess the point some posters are making is that it makes the buy vs rent math less favorable for buying.

[slalom]

SALT cap is more meaningful, but let’s do some quick math. For a family earning $300k (state income tax of $20k) and property tax of $20k the change means $30k in newly non-deductible income, which translates into only additional $10k of tax, not a game changer. I’m not even taking into account the lower federal tax brackets, which mitigates these impacts.

As I'm sure I don't need to tell you, HedgeFundie, most people don't do that math (whether or not correct) and even if they do, $10k might or might not be a "game changer" to THEM. All they heard is that, under the new rules, they won't be able to deduct all the taxes and mortgage interest as a homebuyer under the old rules. Rational or not, that potential buyer might move to the sidelines. Supply-and-demand, baby: Fewer potential buyers, equal or more sellers, price goes down....

A family earning $300k in CA only takes home about $150k after federal, state, CA SDI, social security, extra medicare tax, health insurance portion, plus 401k deductions etc. An additional $10k (~$830/mo) of tax is still a large amount and can definitely swing affordability of a mortgage.

[HEDGEFUNDIE]

SALT cap is more meaningful, but let’s do some quick math. For a family earning $300k (state income tax of $20k) and property tax of $20k the change means $30k in newly non-deductible income, which translates into only additional $10k of tax, not a game changer. I’m not even taking into account the lower federal tax brackets, which mitigates these impacts.

As I'm sure I don't need to tell you, HedgeFundie, most people don't do that math (whether or not correct) and even if they do, $10k might or might not be a "game changer" to THEM. All they heard is that, under the new rules, they won't be able to deduct all the taxes and mortgage interest as a homebuyer under the old rules. Rational or not, that potential buyer might move to the sidelines. Supply-and-demand, baby: Fewer potential buyers, equal or more sellers, price goes down....

A family earning $300k in CA only takes home about $150k after federal, state, CA SDI, social security, extra medicare tax, health insurance portion, plus 401k deductions etc. An additional $10k (~$830/mo) of tax is still a large amount and can definitely swing affordability of a mortgage.

It didn’t for me, it didn’t for SilverGirl above, and it looks like the NYT also thinks it’s no big deal, article just last month:

“The Trump Tax Cuts Were Supposed to Depress Housing Prices. They Haven’t”
https://nyti.ms/2ofnqnu?smid=nytcore-ios-share

It wasn’t supposed to take long for the Trump tax cuts to hobble housing prices, particularly in the high-tax, high-cost metro areas where the new law was poised to rip federal incentives to buy new homes.

Nearly nine months later, those warnings have not materialized. While the nation’s housing market is showing signs of weakness on several fronts — particularly in new-home construction — prices across the country are continuing to climb. That’s true even in the million-dollar-plus markets of California and Washington, D.C., which appeared most at risk for a hit when the bill was pending.
...
Ms. Stokes, a Realtor who runs the Stokes Group at McEnearney Associates in the Washington, D.C., area, noticed at the time what she calls a “pause” in buyer activity. But soon after Mr. Trump signed the law in December, buying activity picked right back up again in the wealthy neighborhoods of the District of Columbia and the high-end suburbs of Maryland.

“We haven’t seen buyers lower their price point” as a result of the tax law, Ms. Stokes said. “All buyers are aware of it, and they’re factoring it in. But they’re not changing what they want to do.”
...
Zillow researchers say the Boston metro area illustrates the point. It straddles state lines, with one state (Massachusetts) featuring higher state income taxes that drive more residents to claim the SALT deduction. After the law passed, ZIP codes in the Boston area saw a 0.6 percentage point slowdown in home appreciation on the Massachusetts side — and a 0.1 percent acceleration on the New Hampshire side.
...
On the flip side is San Jose, Calif.: Its prices continue to skyrocket, even though Silicon Valley residents are heavy users of the SALT deduction.

So a Boston house that would have appreciated 10% this year, is "only" appreciating 9.4% because of the tax law...

[BusterMcTaco]

SALT is a red herring. People paying 10k in property taxes were also probably got with AMT, so they weren't deducting any state it property taxes. Now they get to deduct 10k!

I used to think this but it was not actually the case. The amount of deduction that pushed us into AMT still mattered. For example:

A) $300k and $50k deduction, owed $50k regular or $40k AMT. ($50k)
B) $300k and $70k deduction, owed $40k regular or $40k AMT. ($40k)
C) $300k and $90k deduction, owed $30k regular or $40k AMT. ($40k)

B is where AMT "kicked in" but that extra $20k deduction versus A stillll counted. Everything past that point didn't. So it's not actually correct that those who hit AMT got zero benefit from their SALT deduction... They just had their own version of a cap. Maybe higher than $10k, maybe lower... But almost never $0.

[clar0097]

I thought things were cooling down in our area of the Bay Area, but in the last few weeks we have put in 2 offers on houses that beg to differ. One went for $750K over ask and the other for $850K over ask.

[FlyAF]

I thought things were cooling down in our area of the Bay Area, but in the last few weeks we have put in 2 offers on houses that beg to differ. One went for $750K over ask and the other for $850K over ask.

Uhmmmmm

[TravelGeek]

I thought things were cooling down in our area of the Bay Area, but in the last few weeks we have put in 2 offers on houses that beg to differ. One went for $750K over ask and the other for $850K over ask.

What was the ask in those cases? $1 or $1m?

[beyou]

Come on, Bay area is a bargain....to me sitting in Manhattan, where one can spend millions on a 2 BR apartment.

[clar0097]

I thought things were cooling down in our area of the Bay Area, but in the last few weeks we have put in 2 offers on houses that beg to differ. One went for $750K over ask and the other for $850K over ask.

What was the ask in those cases? $1 or $1m?

Both had a $1M list price.

[mervinj7]

Come on, Bay area is a bargain....to me sitting in Manhattan, where one can spend millions on a 2 BR apartment.

Back in 2015, the city of San Francisco was already more expensive than Manhattan. Has that changed?

https://sf.curbed.com/2015/8/5/9933370/ ... ns-by-230k

[beyou]

Single Family housing is more in Bay area, but on the little island of Manhattan, there are few Single Familyl homes.
And those that you can buy, a townhouse or 4BR home on the island is about $5 million.
In the burbs, yes the NY suburban homes on avg are lower than the burbs around SF Bay area.
But I said Manhattan, most articles talk about avg home prices across a broader region.

Also note if you count other costs besides housing, northeastern burbs are still the most expensive place to live.
4 of top 5 most expensive areas are in the northeast (and the other was in Hawaii, not CA).

https://www.businessinsider.com/most-ex ... ew-york-15

Housing isn't the only cost, though a major factor and very expensive outside Manhattan, DC and Boston too.
But when you add in property taxes and much more...gets more expensive to live in the northeast, all-in-cost.

[mervinj7]

Got the monthly market report for my neighborhood from Redfin. Here's how the stats breakdown for month-to-month vs year-to-year.
1. $1,349,000 Median Sale Price
-1.0% from last month +13.8% from last year
2. $803 Median Sale Price per Square Foot
-2.0% from last month +20.6% from last year
3. 102.8% Average Sale-to-List Ratio
-1.0% from last month -4.2% from last year
4. 23 Average Days On-Market Before Sale
+15.0% from last month +109.1% from last year
5. 3 Approximate Number of Competing Offers
+250.0% from last month -19.2% from last year

In general, prices are very slightly down/flat but houses are staying on the market longer with less competing offers.

[tesuzuki2002]

We have been in the market for a house this summer and all agents are saying the market is seeing fewer people seeing homes, fewer offers coming in per house, and slight more inventory, and yet expected sale prices are still the same. My theory is that buyers haven’t wisened up yet to what’s going on. We have personal experience that buyers have not realized the tide is turning yet. Guys, wisen up! As buyers, we don’t need to be killing each other anymore for these houses. Stop overpaying.

You got that right... inventory is WAY up where I live in So Cal... it's up 4X in the last couple months... properties have been on the market for months now... I keep seeing price corrections.. but the boom is gone for now...

[TravelGeek]

I thought things were cooling down in our area of the Bay Area, but in the last few weeks we have put in 2 offers on houses that beg to differ. One went for $750K over ask and the other for $850K over ask.

What was the ask in those cases? $1 or $1m?

Both had a $1M list price.

So both were deliberately severely underpriced?

[whodidntante]

All signs are pointing to another bubble.
We have a combined housing and stock market bubble forming.

FOMC have not been increasing the funding rate fast enough.
It is only a matter of when and how deep the burst of the bubble will be.

If the FOMC does 2 more .25 point rate hikes, the 2/10 yield curve will likely invert, recession to follow in 18 months and a subsequent stock market correction/bear and housing prices resetting to sane levels. I predict 2020 for the bear. I plan to stand around and do nothing. I might go to Quebec with my wife.

The Federal Reserve bought trillions of dollars of bonds to bring down longer term rates. The BoJ and ECB did their best imitation of the Fed. I don't think an inversion of the yield curve portends recession unless other things also look icky, like unemployment reversing course.

[corn18]

All signs are pointing to another bubble.
We have a combined housing and stock market bubble forming.

FOMC have not been increasing the funding rate fast enough.
It is only a matter of when and how deep the burst of the bubble will be.

If the FOMC does 2 more .25 point rate hikes, the 2/10 yield curve will likely invert, recession to follow in 18 months and a subsequent stock market correction/bear and housing prices resetting to sane levels. I predict 2020 for the bear. I plan to stand around and do nothing. I might go to Quebec with my wife.

The Federal Reserve bought trillions of dollars of bonds to bring down longer term rates. The BoJ and ECB did their best imitation of the Fed. I don't think an inversion of the yield curve portends recession unless other things also look icky, like unemployment reversing course.

Concur. They are going to be selling those for many years, so an inversion may just be an anomaly. I'll let you know in 10 years.

[usaar33]

Many have stock grants. All of them have to stick with their stock grants for 3-4 years, minimum. Stock market has been on a rip. Tech stocks have been on a double-rip.

It all adds up.

Yes, they are affordable to tech employees, but Bay Area housing is still ridiculously overpriced on a price/rent basis. (i.e. you need very generous future appreciation assumptions to be willing to buy if this is just an economic trade-off)

I know plenty of Bogleheads-minded tech folks that can afford to buy a house, but won't for this reason.

[HEDGEFUNDIE]

Many have stock grants. All of them have to stick with their stock grants for 3-4 years, minimum. Stock market has been on a rip. Tech stocks have been on a double-rip.

It all adds up.

Yes, they are affordable to tech employees, but Bay Area housing is still ridiculously overpriced on a price/rent basis. (i.e. you need very generous future appreciation assumptions to be willing to buy if this is just an economic trade-off)

I know plenty of Bogleheads-minded tech folks that can afford to buy a house, but won't for this reason.

Not necessarily. Here’s the math:

3 bd/2 ba house in the Peninsula, $1.5M to buy, $4500 to rent.

Let’s say the buyer puts $300k down to get a $1.2M mortgage. Annual costs:

Principal: $20k
Interest @ 4.5%: $54k
Taxes @ 1.2%: $18k
Insurance: $1k
Down payment opportunity cost @ 5%: $15k

Total cost to buy: $108k
Total cost to rent: $54k

So you are betting that the $1.5M house will appreciate $54k/yr to cover that delta. In the long term I’d say that’s a safe bet, given that over the last 20 years the CAGR has been around 10%.

(Btw I’m not including the tax benefits of owning or rent increases for renting, let’s just say those are canceled out by the maintenance costs of owning)

[usaar33]

Few notes inline

Given that over the last 20 years the CAGR has been around 10%.

That seems really high. The source I used (and sampling individual home zillow price histories) gives around 6-7% 20 year CAGR.

Not necessarily. Here’s the math:
..
So you are betting that the $1.5M house will appreciate $54k/yr to cover that delta. In the long term I’d say that’s a safe bet, given that over the last 20 years the CAGR has been around 10%.

It's a little tricky to use one-year costs to judge where you are at financially. The problem is that transaction costs on housing are huge - if you bought and sold a year later, your (double) closing costs are on par with the cost of ownership you wrote. Consequently, you need to look at this multi-year, where you get compounding opportunity cost effects from the down payment loss and principal pay down [1].

Additionally, while a 3.5% appreciation rate is very possible. However, having only a 5% opportunity cost feels extremely low in an environment where housing is appreciating 3.5%. As the tables on my post note, you should be looking at stock market investing returns of 9+%; at that point as the calculator overall shows renting at $4500 is cheaper than buying at $1.5M by about $1000/month.


[1] I'll admit I don't consider the case where you take a (not tax deductible) cash-out loan on your house as you pay it down to stay leveraged in the stock market.

[visualguy]

As the tables on my post note, you should be looking at stock market investing returns of 9+%; at that point as the calculator shows renting at $4500 is cheaper than buying at $1.5M by about $1000/month.

9%+ for the stock market seems optimistic considering where it is right now. Regardless, it's better to diversify - some in the stock market, some in Bay Area real estate.

[usaar33]

9%+ for the stock market seems optimistic considering where it is right now. Regardless, it's better to diversify - some in the stock market, some in Bay Area real estate.

It very well could be, but 3.5% housing returns is also optimistic considering where Bay Area housing is right now.

Diversifying into RE isn't a bad idea - but I see a broad-area REIT (at least in a tax-advantaged account) beating Bay Area RE and certainly being better diversified.

[runner540]

Few notes inline

Given that over the last 20 years the CAGR has been around 10%.

That seems really high. The source I used (and sampling individual home zillow price histories) gives around 6-7% 20 year CAGR.

Not necessarily. Here’s the math:
..
So you are betting that the $1.5M house will appreciate $54k/yr to cover that delta. In the long term I’d say that’s a safe bet, given that over the last 20 years the CAGR has been around 10%.

It's a little tricky to use one-year costs to judge where you are at financially. The problem is that transaction costs on housing are huge - if you bought and sold a year later, your (double) closing costs are on par with the cost of ownership you wrote. Consequently, you need to look at this multi-year, where you get compounding opportunity cost effects from the down payment loss and principal pay down [1].

Additionally, while a 3.5% appreciation rate is very possible. However, having only a 5% opportunity cost feels extremely low in an environment where housing is appreciating 3.5%. As the tables on my post note, you should be looking at stock market investing returns of 9+%; at that point as the calculator overall shows renting at $4500 is cheaper than buying at $1.5M by about $1000/month.


[1] I'll admit I don't consider the case where you take a (not tax deductible) cash-out loan on your house as you pay it down to stay leveraged in the stock market.

Some economists have done this math for the major markets, to determine whether the implied appreciation rate is far outside of the normal. Their work indicates that SF slightly favors renting right now. https://business.fau.edu/departments/fi ... phs/#SF-CA

You can read their methodology here: https://business.fau.edu/departments/fi ... thodology/

[HEDGEFUNDIE]

9%+ for the stock market seems optimistic considering where it is right now. Regardless, it's better to diversify - some in the stock market, some in Bay Area real estate.

It very well could be, but 3.5% housing returns is also optimistic considering where Bay Area housing is right now.

Diversifying into RE isn't a bad idea - but I see a broad-area REIT (at least in a tax-advantaged account) beating Bay Area RE and certainly being better diversified.

Funny you should mention REITs, Bay Area-focused REITs have outperformed US REIT index over past 20 years, even on a risk-adjusted basis:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[visualguy]

It very well could be, but 3.5% housing returns is also optimistic considering where Bay Area housing is right now.

Diversifying into RE isn't a bad idea - but I see a broad-area REIT (at least in a tax-advantaged account) beating Bay Area RE and certainly being better diversified.

Real estate is all about location, location, location, not diversification. I'd take direct ownership of a well-located Bay Area property over any broad-area REIT.

I know Bay Area real estate seems extremely expensive to many, but it is still a "bargain" compared to real estate in other major economic centers around the world. Take a look even at prices in the Tel Aviv area in Israel (Silicon Valley 2), and see if you still think the Bay Area is expensive after you see what you get for similar money there... The Bay Area is the top tech center in the US, a magnet for people from all over the world, and one of the very few top places to live in the US. Incomes in the area seem to be getting more and more amazing - even I'm surprised, and I've always been very bullish about the prospects there. I wouldn't worry about appreciation.

[HEDGEFUNDIE]

It very well could be, but 3.5% housing returns is also optimistic considering where Bay Area housing is right now.

Diversifying into RE isn't a bad idea - but I see a broad-area REIT (at least in a tax-advantaged account) beating Bay Area RE and certainly being better diversified.

Real estate is all about location, location, location, not diversification. I'd take direct ownership of a well-located Bay Area property over any broad-area REIT.

I know Bay Area real estate seems extremely expensive to many, but it is still a "bargain" compared to real estate in other major economic centers around the world. Take a look even at prices in the Tel Aviv area in Israel (Silicon Valley 2), and see if you still think the Bay Area is expensive after you see what you get for similar money there... The Bay Area is the top tech center in the US, a magnet for people from all over the world, and one of the very few top places to live in the US. Incomes in the area seem to be getting more and more amazing - even I'm surprised, and I've always been very bullish about the prospects there. I wouldn't worry about appreciation.

The only thing that will truly change the trajectory of Bay Area RE is if (1) tech loses steam as the growth engine of the global economy, or (2) tech talent and companies truly diversify into other geographies (not just opening up regional sales and support offices).

I don't think it's productive to argue/speculate about the likelihood of either, but just wanted to lay out the parameters.

Edit: I guess I forgot (3) 9.0 earthquake submerges the whole Bay Area into the Pacific.

[visualguy]

The only thing that will truly change the trajectory of Bay Area RE is if (1) tech loses steam as the growth engine of the global economy, or (2) tech talent and companies truly diversify into other geographies (not just opening up regional sales and support offices).

I don't think it's productive to argue/speculate about the likelihood of either, but just wanted to lay out the parameters.

Edit: I guess I forgot (3) 9.0 earthquake submerges the whole Bay Area into the Pacific.

Right. I don't think anyone would seriously say that (1) is likely. (2) has been happening - Seattle, for example. However, those areas become very expensive as well, and the Bay Area still has other advantages which are very rare in the US (such as its wonderful climate and scenery) which help maintain its perch at the top. There's no other place in the US with that magic combination of factors (tradition of technology entrepreneurship, talent, financial resources, top universities, diversity, climate and nature).

[serbeer]

Real estate is all about location, location, location, not diversification. I'd take direct ownership of a well-located Bay Area property over any broad-area REIT.

I know Bay Area real estate seems extremely expensive to many, but it is still a "bargain" compared to real estate in other major economic centers around the world. Take a look even at prices in the Tel Aviv area in Israel (Silicon Valley 2), and see if you still think the Bay Area is expensive after you see what you get for similar money there...

Actually, Tel Aviv home price has been in decline lately:
https://www.haaretz.com/israel-news/bus ... -1.5910671

[2015]

Got the monthly market report for my neighborhood from Redfin. Here's how the stats breakdown for month-to-month vs year-to-year.
1. $1,349,000 Median Sale Price
-1.0% from last month +13.8% from last year
2. $803 Median Sale Price per Square Foot
-2.0% from last month +20.6% from last year
3. 102.8% Average Sale-to-List Ratio
-1.0% from last month -4.2% from last year
4. 23 Average Days On-Market Before Sale
+15.0% from last month +109.1% from last year
5. 3 Approximate Number of Competing Offers
+250.0% from last month -19.2% from last year

In general, prices are very slightly down/flat but houses are staying on the market longer with less competing offers.

Told the same thing by more than one realtor as I sold in the last week in Los Angeles. My realtor: "Oh, the market has definitely softened [since around May]."

[Afty]

Meanwhile, in Silicon Valley: Teardown On 0.7 Acre Going For $5 Million In Sunnyvale

[randomguy]

I've been in the market in the Bay Area for the last 9 months. I've noticed a slow down as well. Hoping there will be a sweet spot soon where houses decline somewhat but interest rates haven't increased to make it a wash.

Why would you want to buy a house that is dropping in value? Sure it is better than buying at the peak but buying a house that drops another 300k after you buy it isn't a great investment. Better off waiting til the prices have bottomed out and buying.

[serbeer]

I've been in the market in the Bay Area for the last 9 months. I've noticed a slow down as well. Hoping there will be a sweet spot soon where houses decline somewhat but interest rates haven't increased to make it a wash.

Why would you want to buy a house that is dropping in value? Sure it is better than buying at the peak but buying a house that drops another 300k after you buy it isn't a great investment. Better off waiting til the prices have bottomed out and buying.

I suspect it is not very much different from waiting for stock market to "bottom out." Not many people are having much luck doing that -- for reasons discussed on this board numerous times.

[likashing]

I've been in the market in the Bay Area for the last 9 months. I've noticed a slow down as well. Hoping there will be a sweet spot soon where houses decline somewhat but interest rates haven't increased to make it a wash.

Why would you want to buy a house that is dropping in value? Sure it is better than buying at the peak but buying a house that drops another 300k after you buy it isn't a great investment. Better off waiting til the prices have bottomed out and buying.

I suspect it is not very much different from waiting for stock market to "bottom out." Not many people are having much luck doing that -- for reasons discussed on this board numerous times.

In the meantime, many are waiting it out paying ~$3.5k per month rent (typical entry-level 3-bed SFH rent in the Silicon Valley) i.e. at a cost of $42k a year. Many who thought it was expensive ~5 years ago (~2013) and waited, have paid ~$200k in rent over ~5 years already.

Some do have a high savings rate so if/when the market falls 40%, they might be able to buy a house in cash.

For those who can only afford a 20% down, even after the market falls 40%, they need to still have a job at that time in order to take advantage though.

[FunnelCakeBob]

Not all of the Bay Area is experiencing a real estate slowdown. Perhaps some sanity is restored in general but the real estate scene varies by location, neighborhood, and specific property. A house nearby just got snapped more than 50% over asking. That's not unusual in my area and I don't live the most desirable neighborhood.

[Momus]

People don't upgrade as often anymore. It would probably be a downgrade to them moving to the same house paying higher interest rate, that's why it's 'soft' market. They are in no hurry to move if the payment is going to be higher to get the same or crappier house.

Keep raising that rates fed, it will slowly collapse the demand on housing.

[Valuethinker]

Not all of the Bay Area is experiencing a real estate slowdown. Perhaps some sanity is restored in general but the real estate scene varies by location, neighborhood, and specific property. A house nearby just got snapped more than 50% over asking. That's not unusual in my area and I don't live the most desirable neighborhood.

I think it's all about the old (bi)fecta of schools + commute time? With other 'hood amenities coming in 3rd?

A lot of people have made a lot of money in this cycle in the Valley. Either through sale of stock on private exchange, sale of company to a larger company (an increasingly common fate for promising startups is to sell to Google (the big buyer of them all)/ Facebook etc. - anxious to avoid being blindsided in just the way Microsoft was by the internet) or IPO (much rarer). And companies are paying seriously over the odds for project managers, very talented coders, experienced sales and business development professionals etc.

Unless you are cashing out and checking out of the Valley, you are in your 30s or early 40s, renting gets old fast, you need a home, you quite possibly have kids in pre school or school. Conversely you are putting the hours in, and traffic congestion in the whole SF Bay area is just awful - you could spend your productive life stuck on the freeway.

So you try to buy a house but the prices are insane and there is no supply. So you wait for something you can afford to come along.

That puts a floor under housing prices in desirable locations. Even not great houses.

[Valuethinker]

People don't upgrade as often anymore. It would probably be a downgrade to them moving to the same house paying higher interest rate, that's why it's 'soft' market. They are in no hurry to move if the payment is going to be higher to get the same or crappier house.

Keep raising that rates fed, it will slowly collapse the demand on housing.

The Millennials have deferred home purchases because of poor job market the last 10 years, more limited career advancement than their peers 10 years older, and big student loan balances.

That means the trade up of the sellers of starter homes moving up the chain is not happening at the same rate (or was not).

I think the reason people are not upgrading is that the 2007-2010/11 period taught people that houses don't always go up in value, and that "investing" in your house is not necessarily making you wealthier. Also mortgage lenders are more conservative than they were pre Crash?

Based on past experience, rising rates usually result from better economic conditions - higher pay, lower unemployment. Those latter factors propel the housing market upwards for quite a while before rates get high enough to really bite.

[2015]

People don't upgrade as often anymore. It would probably be a downgrade to them moving to the same house paying higher interest rate, that's why it's 'soft' market. They are in no hurry to move if the payment is going to be higher to get the same or crappier house.

Keep raising that rates fed, it will slowly collapse the demand on housing.

The Millennials have deferred home purchases because of poor job market the last 10 years, more limited career advancement than their peers 10 years older, and big student loan balances.

That means the trade up of the sellers of starter homes moving up the chain is not happening at the same rate (or was not).

I think the reason people are not upgrading is that the 2007-2010/11 period taught people that houses don't always go up in value, and that "investing" in your house is not necessarily making you wealthier. Also mortgage lenders are more conservative than they were pre Crash?

Based on past experience, rising rates usually result from better economic conditions - higher pay, lower unemployment. Those latter factors propel the housing market upwards for quite a while before rates get high enough to really bite.

Narrative fallacy?

Nassim Nicholas Taleb writes: The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together.

I don't think anyone can every know with absolute confidence (a) why things are the way they are now; and (b) where they may be going. Howard Marks states we can't know, but we can prepare, by looking at where we are in the current cycle. Common sense shows we are not a market bottom now. What that portends for each individual is something only they can discern.

[randomguy]

I've been in the market in the Bay Area for the last 9 months. I've noticed a slow down as well. Hoping there will be a sweet spot soon where houses decline somewhat but interest rates haven't increased to make it a wash.

Why would you want to buy a house that is dropping in value? Sure it is better than buying at the peak but buying a house that drops another 300k after you buy it isn't a great investment. Better off waiting til the prices have bottomed out and buying.

I suspect it is not very much different from waiting for stock market to "bottom out." Not many people are having much luck doing that -- for reasons discussed on this board numerous times.

In the meantime, many are waiting it out paying ~$3.5k per month rent (typical entry-level 3-bed SFH rent in the Silicon Valley) i.e. at a cost of $42k a year. Many who thought it was expensive ~5 years ago (~2013) and waited, have paid ~$200k in rent over ~5 years already.

Some do have a high savings rate so if/when the market falls 40%, they might be able to buy a house in cash.

For those who can only afford a 20% down, even after the market falls 40%, they need to still have a job at that time in order to take advantage though.

It is really hard to save enough to make any progress on a million dollar house going up 7%/year from savings:). And if your savings rates is that high, you can afford to buy a lot of house at any interest rate:). And yes I am being some what tongue in cheek with the idea of market timing but it show the fundamental problem of hoping for market corrections to make things affordable. Getting a better payment but then loses 300k makes it really hard to come out a head. And figuring out if that 40% correction is going to turn into a 30% one is really hard. There is some arguments that housing is momentum based and slower than stocks (i.e. houses don't go up and down 10% in a week very often) but I am not sure they are actionable. This could be a momentary blip as we absorb the tax cut changes or maybe it is time for a correction since houses got overvalued. You can make your guesses.

Obviously the person in your example should have bought in 2013. Odds are no correction will go back to those levels. But that doesn't help anyone today. Realistically 40% nominal drops are really rare in established areas (i.e. we are not talking towns 90 miles away that were build on speculation) without fundamental changes in the area (i.e. major unemployment).

[Noobvestor]

Realistically 40% nominal drops are really rare in established areas (i.e. we are not talking towns 90 miles away that were build on speculation) without fundamental changes in the area (i.e. major unemployment).

I generally agree, though there is some variability - consider SF's direct neighbor to the east (literally one BART stop away):

https://www.trulia.com/real_estate/Oakl ... et-trends/

From 2000 to the peak in 2007, median sale prices went from $170,000 to $530,000.

They then proceeded to crash all the way back down to $170,000. That's massive.

It didn't stick (now back up to around $750,000!!!), but for a few years media prices did stay in the $170-230K range.

[mervinj7]

I generally agree, though there is some variability - consider SF's direct neighbor to the east (literally one BART stop away):

https://www.trulia.com/real_estate/Oakl ... et-trends/

From 2000 to the peak in 2007, median sale prices went from $170,000 to $530,000.

They then proceeded to crash all the way back down to $170,000. That's massive.

It didn't stick, but for a few years media prices did stay in the $170-230K range.

Thanks for the link. I did the same for Campbell, which is a small town near San Jose. It's not on the peninsula like Palo Alto or Mountain View nor does it have large tech offices like Cupertino and Sunnyvale.
From 2000 to the peak in 2007, median sale prices went from $360k to $725k (100% increase). After the crash, it dipped as low as $555k in 2012 (23% drop). Since then, it has appreciated to $1.35M (243% increase).

Just based on this, I would tell someone buying in Campbell to be prepared for a 23% drop if another 2008-like recession occurs.

https://www.trulia.com/real_estate/Camp ... et-trends/

[Hyperborea]

I generally agree, though there is some variability - consider SF's direct neighbor to the east (literally one BART stop away):

https://www.trulia.com/real_estate/Oakl ... et-trends/

From 2000 to the peak in 2007, median sale prices went from $170,000 to $530,000.

They then proceeded to crash all the way back down to $170,000. That's massive.

It didn't stick, but for a few years media prices did stay in the $170-230K range.

Thanks for the link. I did the same for Campbell, which is a small town near San Jose. It's not on the peninsula like Palo Alto or Mountain View nor does it have large tech offices like Cupertino and Sunnyvale.
From 2000 to the peak in 2007, median sale prices went from $360k to $725k (100% increase). After the crash, it dipped as low as $555k in 2012 (23% drop). Since then, it has appreciated to $1.35M (243% increase).

Just based on this, I would tell someone buying in Campbell to be prepared for a 23% drop if another 2008-like recession occurs.

https://www.trulia.com/real_estate/Camp ... et-trends/

The problem with using bulk median sales price is that the type and quantity of units sold varies and especially during a housing downturn. During the recession the number of homes for sale dropped considerably and were likely made up more of houses at the lower end of the price spectrum. That probably caused most of the 23% drop - not all of it but most of it.