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Still too soon to buy in Bay Area..


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2010 Aug 4, 1:03pm   8,311 views  25 comments

by joshuatrio   ➕follow (4)   💰tip   ignore  

I know this was posted on Patrick's front page, but I had to repost it in here for some of the realtors on this board.

http://bayarearealestatetrends.com/2010/08/it-is-too-soon-to-buy-and-hold/?source=patrick.net

Take a poll of would-be real estate investors and the consensus would be that the time to buy long-term rental investments in low-end markets is here, or it is very close. Here in Northern California, investors are drooling over deals in places like Antioch, Concord, Stockton, and Modesto, where prices have already fallen 50-70% or more.

Unfortunately, the low-end market still has a few more years of price declines ahead. It is too soon to buy-and-hold invest in real estate.

Sure, there are some good real estate investments out there today, but there are going to be much better opportunities in the coming years. A patient investor will be rewarded.
Bullish Assumptions

Most real estate investors are passionate that prices will be stable or trend higher. They are physically and emotionally invested in that outcome. Here are some of the common bullish arguments and counter-arguments:

* The property gets positive cash-flow at today’s price.
o Counter: Rents are falling as the economy and jobs flounder. See HERE, HERE, HERE, HERE, HERE, and HERE. What’s more, a lot of investors who think they have positive cash-flow have interest-only loans and/or aren’t accounting for maintenance or vacancy, etc. Today, most price-to-rent ratios still favor renters. Again, you could buy now and be fine…or wait and be better.
* Values are already down X, there is no way they’ll go down more.
o Counter: Why couldn’t they?
* The purchase price is below construction/replacement cost.
o Counter: So what? There is no reason why short/mid-term prices can’t be below construction costs. Most bubbly areas were tremendously overbuilt and could be in this situation for many years. Besides, land, labor, and material costs have been plummeting, lowering the bar for what construction costs really are.
* Long-term demographics have not changed – there is still a shortage of housing.
o Counter: Sure, if you wait long enough, you will show price appreciation. But, for the next 5 years or so, we have a huge shadow inventory to work through giving us way too much supply. This not only includes foreclosures, but all of the regular Sellers who have been waiting, all of the vacant property, and all of the approved construction projects not yet completed. Besides, who, besides investors, is going to buy all of these houses? The next generation of homebuyers has too much debt.
* Real Estate Prices have bottomed.
o Counter: Government manipulation temporarily stopped the price tailspin, but prices have not yet had a chance to find their true, free-market bottom. Some economists are calling a bottom, but economists have been calling bottoms ever since we were at the top. Already, sales and prices have begun to turn back down and the second-half slowdown has begun. What natural economic forces are there to stop the decline?

Fundamentally, there is no reason why home prices can’t go lower, even in the most beaten-down communities.
Pushing on a String

Prices have already risen off the bottoms in the hardest-hit communities. Thanks to tax credits, low interest rates, and limited foreclosure activity, the supply/demand curve shifted, the downward spiral stopped, and prices have actually come up 10-20% in the past year.

But what will happen when the manipulation ends?

In Antioch and Pittsburg: Is the Worst Over?, I asked “is this a legitimate recovery? Or has the bubble been re-inflating?”

These charts clearly show the bubble building, the massive price collapse, and the impact of tax credits and foreclosure moratoria. Prices bottomed out about the same levels as they were in 1997 (which isn’t too far off from 1990), then began to grow again.

…

Without additional context, these charts would indicate a healthy turnaround in the housing market. Unfortunately, these charts don’t tell the whole story.

The whole story is that, within a few months of the 2008 foreclosure moratorium, supply quickly dwindled and prices stabilized. You can clearly see the downward price trajectory before the government got involved. As government intervention slowly fades, the downward price slide will resume.

Consider this chart from Government Details Housing Manipulation And What To Expect When It Ends.

Even with limited supply and 4.5% interest rates, sales volume is dropping. There aren’t even enough buyers at today’s prices to hold values steady. Imagine what will happen when housing supply eventually increases!
An Inside Look

I would argue that many of the people who think that now is the time to invest in the lower-end simply haven’t spent much time there. If they did, they would know that most of the residents are just barely hanging on.

If the economy continues to re-sour, a lot of people are going to lose their grip.

I used to live in the Central Valley and still have friends there. Here is a story of one of the most desirable streets in town, in an older, established area:

There is a house on a desirable, upper-middle-class street where the owners have stopped making payments. Business is down, the house needs some work, and the value is upside down. What was once worth $600,000 is now worth $300,000.

Directly behind them is a short sale where they owners bought in 2006 and haven’t made a payment in 2 years. The auction date is set for this month. Next to that house is one that was owned by a realtor who walked away in 2008. The house has been vacant ever since with no NOD filed.

Next door is a vacant house. The owners were foreclosed on last month. He is a salesman and they have two young kids. Two doors down from there is a home that was foreclosed on 2 years ago (one of the first).

Across the street are two beautiful homes where the owners have decided to take jobs elsewhere. Both owe several hundred thousand more than their homes are worth and both intend to rent their homes out until things get better. Both will be losing at least $25,000-$35,000 per year as the rents won’t cover the costs. In time, one or both may walk away.

Further down the street is a businessman. He invested in a commercial property that went south and legal issues with the partnership have taken everything else. Unless the business climate improves quickly, this home could be another grim statistic.

Literally just about every other house in this neighborhood is at risk of foreclosure at some point in the next few years. And these are doctors and lawyers. Imagine how bad it is in less-affluent pockets!

But it’s not just the Central Valley. It’s the Bay Area Bubble Towns of Antioch, Brentwood, Pittsburg, Livermore, Concord, East Palo Alto, etc. Today, there are over 40,000 Bay Area homes in serious default, but where a Notice of Default has not yet been filed. This massive shadow inventory will haunt these communities and put downwards pressure on home prices for years to come.

Remember, 1-in-6 California mortgages are delinquent or in foreclosure.
There Is No Urgency

The bottom line is that there is no compelling reason to invest today and tie up capital. For most investors, the meager returns simply aren’t worth the opportunity cost of having that cash invested in such an illiquid asset.

With lower prices likely over the next 2-3 years, today’s investors will be rewarded for showing patience and restraint.

#housing

Comments 1 - 25 of 25        Search these comments

1   toothfairy   2010 Aug 4, 1:21pm  

i'm not a realtor but I'm more bullish than some. I agree with the idea that prices could fall more but getting in exactly at the bottom is not as easy as people think. I dont expect there will be a time where you can just thumb through the MLS and every house will be cheaper to buy than rent. It just doesn't happen that way. Maybe this time is different who knows.

His point about rents falling... he sites 6 examples and the only one relevant to the Bay area is dated March 2009! Not a very strong argument if you ask me.

2   Greg Fielding   2010 Aug 4, 3:05pm  

Thanks for posting the article!

You guys are all correct in that prices HAVE risen over the last year...especially at the low end. I'm going to upload the graphs that accompany the original post just to keep things in context.

Regarding prices going up: they have been. The point I tried to make was that we can't ignore that massive government intervention is the reason why.

Regarding bottom picking: there certainly are some sound deals out there right now. But, I think the deals will get much better in the future as prices will fall further.

Regarding declining rents: It is true that relatively-desirable specific pockets have seen strong rents the last 12 months. However, I don't think this will continue in the coming years. Lower wages, high unemployment, and lower risk appetites will eventually take a toll on rents. People simply have less money to spend on monthly payments than they did 3 years ago, even in the Bay Area.

I've worked with investors IN CONCORD buying property over the last year and watched low end prices run up considerably. This is a mini-bubble, blown by Uncle Sam. Especially now, I would avoid buy-and-hold investing in Concord.

EDIT: The image uploader seems to be having some issues...I'll keep trying.

3   Greg Fielding   2010 Aug 4, 4:21pm  

Don't kid yourself... Concord and Fremont saw their markets turn because banks stopped foreclosing on houses in August of 2008, not because of China. Hundreds and hundreds of distressed homes that should have hit the market since simply haven't. Eventually they will and supply could quickly dwarf demand.

I don't think anywhere is different. Concord will be pulled down by Pittsburg and Antioch and pushed down by Walnut Creek and Pleasant Hill. Everywhere is intertwined.

Investors love to say that Concord is close to BART, but BART will be extended to Antioch in the near future.

You said that 1 in 20 might get the tax credit...that's because the other 19 are investors and flippers. This is not healthy.

Don't get me wrong...Concord is not a bad place to invest because the cash-flow is reasonable. But I would expect this recent run-up in prices to be undone AND potentially even lower prices in the coming years.

Buying now may be fine. Waiting might be better.

4   thomas.wong1986   2010 Aug 5, 4:23am  

pkowen says

Good thread. I feel the Silly Valley will keep decreasing - and Thomas points out a good part of why. Even City workers getting laid off (and SJC is still not out of the woods). I still see places I certainly have no use for (rent or buy), offered at over 1/2 million and no buyers.
http://www.redfin.com/CA/San-Jose/408-Rutland-Ave-95128/home/580849
http://www.redfin.com/CA/San-Jose/1926-El-Dorado-Ave-95126/home/716444 on market 187 days
http://www.redfin.com/CA/Santa-Clara/2545-Amethyst-Dr-95051/home/1463171 on market 752 days (!!)
I’ll admit there are more for sale that are worth viewing, but still a LOT of over-priced junk

Agreed. A lot of these homes back in the mid 90s were around 100K or so. To even think of them being Half a Mil is just nuts. They are more likely to be around $150K or so at best today. But that includes many other cities in the Bay Area. Many homes in all ranges will eventually fall or must fall. We are a long way off to some sane prices.

There are a lot of things happening around here, but it will take some time to sink in.

5   thomas.wong1986   2010 Aug 5, 5:06am  

Walnut Creek... Beverly Hills.. Aristocracy ???

Sure, what ever spins your wheels.

6   Greg Fielding   2010 Aug 5, 5:16am  

Concord is a blue-collar town and a town where a lot of homeowners stretch themselves over the last decade.

Here's a screenshot of foreclosure activity (I had to zoom in pretty far because there were so many).

What's more there are 40K+ Bay Area loans delinquent but not yet in foreclosure. I'm sure Concord has it's fair share.

http://bayarearealestatetrends.com/2010/07/bay-area-mortgage-limbo/

This is not to say Concord is a bad place to invest, but to say that everyplace has more pain ahead and Concord is not immune.

7   thomas.wong1986   2010 Aug 5, 6:20am  

SF ace says

Walnut Creek is the go to business, retail and entertainment hub in Contra Costa County, which of course is not saying that much, after all it is Contra Costa County. It is home to insurance companies PMI and AAA CA and regional banks Bank of the West and CA bank & Trust. Consulting firm Accenture makes their Bay Area headquarter here and Accounting firm BPM has offices here as well. It has a little bit of professional service and small business conducts their office business here. The economic activity is pretty robust here. It’s definitely an up and coming spot

In another words, hasnt changed in the past 20-25 years.

8   pkowen   2010 Aug 5, 6:22am  

Well I guess maybe Marin is the 'go to' place for those who already made their money and want to be (or pretend to be) hip? Close to Napa / Sonoma? Autodesk is there, of course, I almost ended up working for them years back.

Accenture - that was what I was thinking of. There are smaller companies too, like SPL that I think was bought by Psoft and then of course by Oracle. I thought there were some others. Insurance and banking, that rounds out a certain economic base, perhaps broader in some ways than SV. I have been to Walnut Creek, just to explore the area and checking out a job. It was ... 'ok'. I can see it as the go-to for CCCo but as you say that's not saying much.

9   thomas.wong1986   2010 Aug 5, 6:41am  

SF ace says

If you really think about it, it has a lot more going for it than anywhere in Marin County, which of course is twice as expensive and devoid of any economic engine. I never understand why Marin County is so expensive.

A lot of Bay Area celebs live or have lived there over the decades. Oddly some like Andrea Agassi, they overpaid for their home and sold at a loss years later.

PK - Autodesk has been around in the north bay for a very very long time, early 80s.

10   Greg Fielding   2010 Aug 5, 6:46am  

Walnut Creek is a hard place to define. Rather than have it's own vibe, it's more a collection of different towns mushed together.

There is the downtown shopping district, Lafayette/WC area, an Alamo/WC, a Clayton Side, Pleasant Hill Side, and Concord section. Each has their own flavor.

It is definitely the economic hub of CCC and the bars are filled with cougars at night.

11   SFace   2010 Aug 5, 6:46am  

thomas.wong1986 says

SF ace says


If you really think about it, it has a lot more going for it than anywhere in Marin County, which of course is twice as expensive and devoid of any economic engine. I never understand why Marin County is so expensive.

A lot of Bay Area celebs live or have lived there over the decades. Oddly some like Andrea Agassi, they overpaid for their home and sold at a loss years later.
PK - Autodesk has been around in the north bay for a very very long time, early 80s.

That's the thing, you have an area that is so expensive, yet all they have is Autodesk as a private employer. They could easily be acquired by Adobe, like Macromedia if their stock is weak enough within 5 years. If there is one area that is not worth the $$, it is Marin County.

12   fil   2010 Aug 5, 10:08am  

SF ace says

thomas.wong1986 says234

SF ace says235

If you really think about it, it has a lot more going for it than anywhere in Marin County, which of course is twice as expensive and devoid of any economic engine. I never understand why Marin County is so expensive.

A lot of Bay Area celebs live or have lived there over the decades. Oddly some like Andrea Agassi, they overpaid for their home and sold at a loss years later.

PK - Autodesk has been around in the north bay for a very very long time, early 80s.

That’s the thing, you have an area that is so expensive, yet all they have is Autodesk as a private employer. They could easily be acquired by Adobe, like Macromedia if their stock is weak enough within 5 years. If there is one area that is not worth the $$, it is Marin County.

You can commute to SF from Marin. There are also some good schools and nice small towns. Of course you could argue that some of the other bay area suburbs have all that too.

13   thomas.wong1986   2010 Aug 5, 4:33pm  

There was once a Walnut Creek Ferrari Dealership, and SF Dealer as well as I recall. But both went under some 15 years ago... guess there wasnt much interest or money. Lambo dealership in Los Gatos went under in less than a year more recently. The orginal Los Gatos Dealership which did well back in the 80s and during the 2000 tech boom, also closed and sells Bentleys... No.. its not Beverly Hills by a long shot.

14   Serpentor   2010 Aug 5, 4:34pm  

some people really are delusional about how special their place is. I hear the same argument from the Bay area, to Utah, to Vegas, to Florida, to even Freakin New Jersey. Everyone think where they live is "special"
East Bay is not special. LOL.

15   a4adam   2010 Aug 6, 2:10am  

fil says

SF ace says

thomas.wong1986 says234

SF ace says235

If you really think about it, it has a lot more going for it than anywhere in Marin County, which of course is twice as expensive and devoid of any economic engine. I never understand why Marin County is so expensive.

A lot of Bay Area celebs live or have lived there over the decades. Oddly some like Andrea Agassi, they overpaid for their home and sold at a loss years later.
PK - Autodesk has been around in the north bay for a very very long time, early 80s.

That’s the thing, you have an area that is so expensive, yet all they have is Autodesk as a private employer. They could easily be acquired by Adobe, like Macromedia if their stock is weak enough within 5 years. If there is one area that is not worth the $$, it is Marin County.

You can commute to SF from Marin. There are also some good schools and nice small towns. Of course you could argue that some of the other bay area suburbs have all that too.

Weather in Marin is better than SF or Easy Bay. At least that was my experience. It's also very pretty over there. I don't live in Marin now but I grew up there. I agree, though, it is overpriced and the commute to SF is not so great either (unless you live close to a ferry).

16   fil   2010 Aug 6, 2:25am  

a4adam says

fil says291

SF ace says292

thomas.wong1986 says234293

SF ace says235294

If you really think about it, it has a lot more going for it than anywhere in Marin County, which of course is twice as expensive and devoid of any economic engine. I never understand why Marin County is so expensive.

A lot of Bay Area celebs live or have lived there over the decades. Oddly some like Andrea Agassi, they overpaid for their home and sold at a loss years later.

PK - Autodesk has been around in the north bay for a very very long time, early 80s.

That’s the thing, you have an area that is so expensive, yet all they have is Autodesk as a private employer. They could easily be acquired by Adobe, like Macromedia if their stock is weak enough within 5 years. If there is one area that is not worth the $$, it is Marin County.

You can commute to SF from Marin. There are also some good schools and nice small towns. Of course you could argue that some of the other bay area suburbs have all that too.

Weather in Marin is better than SF or Easy Bay. At least that was my experience. It’s also very pretty over there. I don’t live in Marin now but I grew up there. I agree, though, it is overpriced and the commute to SF is not so great either (unless you live close to a ferry).

I have to agree, the weather is nicer in Marin. There are also a lot of professionals these days who can work remotely or work at home a few days a week. The drive from Mill Valley to SF wouldn't be that bad, or you have the GG bus or ferries. The biggest downside if you are in tech is if you lose your job you might find yourself interviewing in Mountain View and that would be a beast of a commute.

17   Tude   2010 Aug 6, 3:59am  

thomas.wong1986 says

There was once a Walnut Creek Ferrari Dealership, and SF Dealer as well as I recall. But both went under some 15 years ago… guess there wasnt much interest or money. Lambo dealership in Los Gatos went under in less than a year more recently. The orginal Los Gatos Dealership which did well back in the 80s and during the 2000 tech boom, also closed and sells Bentleys… No.. its not Beverly Hills by a long shot.

Thats because there are less rich idiots in the Bay Area. They are smart enough to know that a real nice driving machine is actually a Porsche or an M series BMW. Only tools buy POS Italian sports cars.

18   Tude   2010 Aug 6, 4:00am  

a4adam says

fil says

SF ace says

thomas.wong1986 says234

SF ace says235

If you really think about it, it has a lot more going for it than anywhere in Marin County, which of course is twice as expensive and devoid of any economic engine. I never understand why Marin County is so expensive.

A lot of Bay Area celebs live or have lived there over the decades. Oddly some like Andrea Agassi, they overpaid for their home and sold at a loss years later.

PK - Autodesk has been around in the north bay for a very very long time, early 80s.

That’s the thing, you have an area that is so expensive, yet all they have is Autodesk as a private employer. They could easily be acquired by Adobe, like Macromedia if their stock is weak enough within 5 years. If there is one area that is not worth the $$, it is Marin County.

You can commute to SF from Marin. There are also some good schools and nice small towns. Of course you could argue that some of the other bay area suburbs have all that too.

Weather in Marin is better than SF or Easy Bay. At least that was my experience. It’s also very pretty over there. I don’t live in Marin now but I grew up there. I agree, though, it is overpriced and the commute to SF is not so great either (unless you live close to a ferry).

It depends on what you consider "good" weather. Some people like sun and warmth...

19   Nick   2010 Aug 6, 4:23am  

Orinda and Lafayette are getting somewhat more affordable and have more houses on the market than a year ago (and honestly, who on this forum would ever own a Concord house _to live in_?).

What I do not understand is that houses in Danville (without HOA, naturally) for the same 700-800K do not stay on the market for as long as in O/L. Although Danville is not as close to SF (and is only marginally closer to Silicon Valley) and is very far from BART (~10 miles). Demographics and schools seem to be of the same high quality in all three ..

20   Greg Fielding   2010 Aug 6, 4:30am  

Nick says

Orinda and Lafayette are getting somewhat more affordable and have more houses on the market than a year ago (and honestly, who on this forum would ever own a Concord house _to live in_?).
What I do not understand is that houses in Danville (without HOA, naturally) for the same 700-800K do not stay on the market for as long as in O/L. Although Danville is not as close to SF (and is only marginally closer to Silicon Valley) and is very far from BART (~10 miles). Demographics and schools seem to be of the same high quality in all three ..

Danville is a desirable place...schools, parks, downtown, etc.

http://bayarearealestatetrends.com/2010/08/danville-home-price-graph/

this is 94506, not 94526...but the idea is the same...

21   Tude   2010 Aug 6, 4:39am  

Nick says

Orinda and Lafayette are getting somewhat more affordable and have more houses on the market than a year ago (and honestly, who on this forum would ever own a Concord house _to live in_?).
What I do not understand is that houses in Danville (without HOA, naturally) for the same 700-800K do not stay on the market for as long as in O/L. Although Danville is not as close to SF (and is only marginally closer to Silicon Valley) and is very far from BART (~10 miles). Demographics and schools seem to be of the same high quality in all three ..

Who the hell are you? I guess I'm the low life ghetto person that would DARE live in such a place as Concord, wow what a shit-hole. Not that I live there...I just happen to live in just as shitty a place I am sure according you. You are the reason that my husband would rather live anywhere else in the Bay Area besides Orinda, which happens to be the place he grew up. It's been completely ruined by self-righteous assholes.

People LOVE Danville, it's all shiny and new and full of white people and stepford wives with plastic surgery and horrific, bratty kids. The American dream!

22   thomas.wong1986   2010 Aug 6, 4:39am  

Nick says

What I do not understand is that houses in Danville (without HOA, naturally) for the same 700-800K do not stay on the market for as long as in O/L. Although Danville is not as close to SF (and is only marginally closer to Silicon Valley) and is very far from BART (~10 miles). Demographics and schools seem to be of the same high quality in all three ..

Silicon Valley, Danville and SF City are and have been in the past, seperate economic centers.
This was the case certainly back in the 80s and 90s. We have certainly seen tech companies migrate out further out from Santa Clara (Silicon Valley). So many who came here post 2000 with jobs in the east bay settled in Danville.

23   thomas.wong1986   2010 Aug 6, 4:46am  

Tude says

It’s been completely ruined by self-righteous assholes.

There are plenty of areas of the SF Bay Area which has seen this.

24   thomas.wong1986   2010 Aug 6, 4:52am  

Greg,
From your website...

Looking at long-term trends, we each must fall into one of two camps. Either you believe that, eventually, home prices will revert back to their relative historical norm because people can only pay so much of their monthly income for housing. OR, you believe that this time really is different; that people going forward will be willing to pay relatively more each month for shelter than for the last 120 years.

I don’t see how this time is different. I don’t know why, socioeconomically, people will pay more of their monthly paychecks for housing over the next 120 years than they did for the last 120. Sure, you can make a case that a particular neighborhood or town has become more desirable, but that is irrelevant on a national scale.

In short, if you believe that the economic growth since 1996 was robust enough to justify the doubling of home prices during that time, then perhaps home prices are now at the “correct” levels. But if you believe that most of the economic growth since 1996 was built on bubbles and debt, then it’s hard to find a reason why homes should be twice as expensive.

The answer for the Bay Area, is certainly true that since 1996, home prices were inflated with "easy money". Both from the tech bubble and toxic loans.

25   thomas.wong1986   2010 Aug 6, 5:45pm  

Tude says

Only tools buy POS Italian sports cars.

LOL! amica mia! you me and a sunday drive in my Alfa Spider.

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