21 ms·

Stop Buying Real Estate in SF

104 points by abcampbell 11y ago

abcampbell 11y ago
If you like this, I have put up a bunch of the data that went into the analysis on the blog. Using tableau public to drive interactive visualizations (which is meh). http://www.snow.ventures/blog/ http://www.snow.ventures/blog/ Open to feedback!
- nedwin 11y ago
  Would be good to see a plot of housing prices in SF during the last bubble and the post-bubble ramifications. We've been here before so not including that graph seems strange.
  - abcampbell 11y ago
    You can see that in the video in the article. The rise and fall of the blue dots over time. SF housing didn't go bust during the 2001, but there was significantly less leverage in the system and home prices were significantly more affordable.
arcamp 11y ago
NYT had an interesting calculator on rent vs buy a while back: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
- ccarter84 11y ago
  I loved this calculator when they first issued it, (2012ish?) but now they've revamped it and it takes up too much space for whatever functionality they added.
  - ccarter84 11y ago
    Found it! The advanced panel, the simple graphics, highlighting the parallel rolls of expected rate of Rent increase vs Home price appreciation and making it a slider! Much usability, minimal space. -- http://web.archive.org/web/20120228050050/http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://web.archive.org/web/20120228050050/http://www.nytimes... This is the exact reason I support Archive.org...well that and occasionally it helps with work stuff.
deleted 11y ago
[deleted]
quattrofan 11y ago
And London
sawthat 11y ago
If there was a way to live here that didn't suck as an investment that would be great. But there isn't. You can rent (costs the same or more than a mortgage, without the tax advantage) and you'll have nothing left to invest. Or you can buy and "invest" all your money in home equity, exposing yourself to ... all the downside.
- ChuckMcM 11y ago
  What is the downside in your mind? Are you thinking that house prices will fall dramatically and you'll be underwater?
  - themartorana 11y ago
    Or you lose your job, and your ability to pay the mortgage, and so you lose your house and your deposit...
    - sawthat 11y ago
      Right, if you are underwater this means you basically have to walk away and lose it all. If you are renting you just lose the rent paid, which is a lot, which is why there really isn't a "smart" way to live in the bay area.
    - brianlweiner 11y ago
      Unless I'm dramatically mistaken you don't lose your principal when the bank forecloses. Obviously in many cases during the 2008 crisis the homes were underwater (valued at less than the loan amount), in that case then yes, you end up without a house or any equity since it's valued at less than you owe. In the hypothetical where you lose your job and can no longer afford the mortgage - presuming you went an extended period without paying - the bank will eventually force a sale of the property to recover the loan amount. If you have positive equity in a home then you'll have some money leftover after the proceeds of the sale are used to pay off the remaining balance to the bank.
      - 11y ago
rubidium 11y ago
"Meaning even if you put 50% of your income into buying your home, it would take you almost 20yrs to pay for the median home in SF making the median income."
minimaxir 11y ago
What the heck is going on with that initial scatter plot? The Y-axis is log-base3, which is nonstandard but technically valid. The X-axis? log-base2 times $30k? It doesn't work like that, and it might be misleading to portray SF/California as outliers, especially when different bases are being used for the axes. Yes, SF real estate is expensive, no one will deny that. But the core argument appears to be "don't buy SF real estate because the economy is on a downturn" which is specific to neither real estate nor SF.
- ChuckMcM 11y ago
  Its a way to emphasize the point, and I agree with you that it pushes it into deception. That said, it seems like most of the people looking at homes in my neighborhood both people work, and generally at engineering median[1], not area median salaries. So when you're annual income is 250K plus, spending 6K a month on a $1.5M mortgage is 1/3 your income. [1] http://www.indeed.com/salary/q-Software-Engineer-l-Silicon-Valley,-CA.html http://www.indeed.com/salary/q-Software-Engineer-l-Silicon-V...
- GFK_of_xmaspast 11y ago
  How is that any different than a log-log plot that's been squished in one axis? What I'm smdh about is that least squares fit, I want to see what happens if you use a Huber loss.
- ScottBurson 11y ago
  No, the core argument is "don't buy SF real estate because interest rates are going up". It's a valid point. Given a certain amount of income, a home buyer can afford a certain monthly payment. If interest rates go up, and prices didn't fall, payments would go up. Since the market can't support higher payments -- people are paying as large a fraction of their income as they can stand to already -- what will happen instead is that prices will have to come down. As for the plot, it's just a log-log plot. Stretch the axes however you like; it's still going to have the same shape.
  - lintiness 11y ago
    if the author knows which way interest rates are going, he should quit his day job and buy / short interest rate futures. the road is littered with bodies of people who believe japan's interest rates couldn't stay at "zero" forever.
CyberDildonics 11y ago
At what point would it be cost effective to park a cruise ship close to the shore and rent out the rooms?
- sawthat 11y ago
  Never. Only people who have never been on a boat on the pacific coast think this is a good idea.
  - CyberDildonics 11y ago
    Who said anything about good ideas?
foobarian 11y ago
Here we go again, concluding we shouldn't buy houses because we won't make money from it.
- lechevalierd3on 11y ago
  Yeah because renting makes you rich right?
  - gcarre 11y ago
    The article isn't about buying vs renting. It's about buying real estate in the Bay Area as an investment. The bottom line is that if you have money to invest you should invest it in something else because it's too risky right now, especially if you are already exposed to the risk by working in tech in the Bay Area.
    - abcampbell 11y ago
      Yes, this is what I am saying.
  - chillydawg 11y ago
    Depends if you have something better to do with the deposit you would otherwise give to a bank for the permission to rent from them. Personally, renting is better value than buying for me, even given london house prices.
- sliverstorm 11y ago
  Really I don't understand why anyone buys or rents, both seem risky and fraught with expenses.
  - beatpanda 11y ago
    Because most cities in the U.S. are trying their hardest to make it illegal not to, in yet another move to subsidize the profits of land owners.
etep 11y ago
I find this article to be self-contradictory. The premise is that you should diversify outside of your geographic economic ecosystem, but the claims continue that the whole economy is connected (i.e. when there is a rush for the exit). Agreed that diversification is good, but two quibbles: please draw some distinction to address this contradiction, and two, there is no mention of the difference between owning a home that you personally gain use of, and buying a property as an investment (i.e. one that provides income).
- abcampbell 11y ago
  The premise is that you should consider your broad life portfolio, and with sufficient reflection, most people would probably want to diversify their life. Have written about this before: http://www.snow.ventures/blog/2015/12/10/diverisify-your-life http://www.snow.ventures/blog/2015/12/10/diverisify-your-lif... And yes, everything is connected, but connected to different degrees. That's just an input in how you think about your risk. We cannot entirely escape system risk (insofar as we are all part of one big system) but that doesn't mean we can't diversify away from out exposure to individual systems (bay area tech for example).
Apocryphon 11y ago
On the other hand, what about the emerging housing markets in the Bay Area? Oakland, perhaps? (For some reason, there doesn't seem to be much demand outside of East Bay- haven't heard of anyone rushing to buy in Daly City or South SF, much less San Jose)
- ChuckMcM 11y ago
  Living south of San Jose and working in SF means very long commutes. Working in San Jose though it would be fine, just like working in Fremont or Milpitas is great for folks living in those towns. If you're working in the Santa Clara valley (aka Silicon Valley) you can live in a lot of places, but commuting north/south on 85 is painful to say the least.
  - Apocryphon 11y ago
    Right, but I mean I never even hear about people living in the communities adjacently south of SF. I understand traffic going into the city is a mess, and those places are somewhat more rundown and more suburban, but it's closer than Oakland is.
    - jedberg 11y ago
      Commuting from Oakland, assuming public transit, it much closer to SOMA than even South SF. And honestly, it's probably a selection bias. The people who live in those areas are families because they're mostly single family homes. They aren't the young single people who make a lot of noise about housing prices.
    - GFK_of_xmaspast 11y ago
      When I worked in SF, I knew lots of people who lived in Daly City and Burlingame and Millbrae and etcetc.
- sbochins 11y ago
  Oakland was one of the highest growing housing markets last year. Prices will continue to climb as SF continues to become more unaffordable. I'd say most cities surrounding SF are safe investments. It may be too late now to get a good return on investment. You would have wanted to start looking 1-2 years ago.
sytelus 11y ago
I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades. It does go down once in a while but it comes roaring back in relatively short time. Even when dropping, it rarely goes below 25% protecting most of the principal. This is about the only item that had massive inflation in past 7 years. I think what is happening is real estate is becoming currency just like what gold was used to be. In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate. It's a like you eat a lot but only your waist is accumulating all the fat and you wonder why your hands and feet remain so thin. I suspect this trend will continue because people are realizing real estate is more safer currency that can be relied upon as opposed to stocks or anything else. The safety is derived from the fact that, in worst case, it can be rented to generate better than interest returns or physically be used. This assumption can only be violated if interest rates grows a lot beyond rent income and thus in high inflation. However overall economic inflation cannot happen if all the surplus keeps landing in real estate. So it seems like virtuous self locked cycle.
- mixmastamyk 11y ago
  > I think there is something else going on in real estate. It is supported, subsidized, and protected by the government at almost any cost, with the result that average-income people can no longer afford a home in desirable areas.
  - qubex 11y ago
    If people were really being priced out eventually San Francisco would fizzle out as a centre for innovation and the interest would move elsewhere. It probably isn't going to happen any more than high prices in New York failed to price out banks and bankers.
myth_buster 11y ago
the influx of foreign buyers (particularly money coming from China that is not that price sensitive) I thought this was a major factor in the increase in home prices. Anecdotal evidences of "tourists" coming in to buy property as an investment, instances of people buying homes without even visiting and bidding wars with homes ending up in the hands of people paying premium and in cash. This phenomenon has also been reported in other major cities like London, Toronto, Vancouver.
- nerfhammer 11y ago
  If there wasn't an extreme housing shortage and expectations for it to continue long-term then such investors wouldn't be interested in the first place. It's a symptom, and probably not much of a cause.
  - myth_buster 11y ago
    What I meant was that the dynamics have changed. A local buying house is different from a non-resident buying the property solely as an investment. It gives off a different price signal.
mixmastamyk 11y ago
Agreed, though this is advice for the 1%, if that. Must be nice to be considering property in SF, huh? Better drive my Bentley to the office and do some location scouting. ;)
fiatmoney 11y ago
You are born short housing - you need to buy or rent it in order to get neutral. And given the labor market, most people need to buy where they work. This correlation is ~impossible to hedge (I guess you could short local industries, but a lot of these aren't public and there are a lot more covariates driving housing prices, from interest rates to embezzled overseas money). There's also a problem with hedging on an asset-price basis vs. a cash flow basis, which is even more difficult. Good thing CA is a non-recourse state, which means your mortgage comes with an embedded put option. When you consider the option value of the put, the option value of locking in interest rates (ie a call on a long-term zero-coupon bond), the inflation hedge, and potentially lower month-to-month costs (not unheard of, depending on your tax bracket) it makes it pretty easy to break even or minimize your losses even given a fairly bad story, over a 5-10yr period. This assumes you actually run the numbers. That's not even accounting for the consumption value of the house itself.
- sytelus 11y ago
  Couple of things that seems incorrect: 1. You are not born short housing. The population in western countries is growing very slowly and the new construction has kept up with it very easily. The problem occurs because of population movement. For example, massive people moving from many different areas to one single area. 2. Buying home is not always a value proposition. In fact, for most people it is actually not until late in the cycle and tax benefits more likely cancels out with other expenses like property taxes, maintenance and HOA. My feeling is that most people ends up cutting down other costs to compensate and thus they experience overall decrease in the living standards, however I don't have data to support this.
  - fiatmoney 11y ago
    When I say "born short housing", I mean you must acquire housing of some kind in order to just exist in society. It's not a "housing / no housing" choice, it's a "buy / rent" choice wherever you are.
  - jdmichal 11y ago
    > You are not born short housing. That must have been a fun birth... I'm guessing C-section? More seriously, being short means you have a position you need to buy in order to cover. Unless those builders are giving those new houses away, guess what, you're still short until you buy one. Your other point, however, is very good. From a purely mathematical perspective, it doesn't always work out in your favor. But there's also a lot of intangibles that come into play with something as personal as housing.
ejk314 11y ago
Is there any way to hedge your investment in a SF house if you must move there anyways?
bduerst 11y ago
According to the skyscraper theory of bubbles, the new Salesforce Tower in SF is a signal that there is a bubble set to burst sometime 2016-17. http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b3035d679ec.jpg http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b30...
wtvanhest 11y ago
I spent the first 5 years of my career in commercial real estate where I met a lot of people who started with a single house and turned it in to massive portfolios. I asked every single person for advice on the best strategies and two points came out of those discussions: 1) Interest rates falling is the single biggest factor that allowed people to make a lot of money on real estate. (This is pointed out by the author and its worth rereading that section and really understanding it). 2) Geographic diversification doesn't work in real estate because its a physical asset that requires a hands on approach. Big developers / owners get big by buying locally and being ruthless about only buying things very, very close to where they live until they get so big that they start hiring (40+ units). Then they stretch out 1-3 miles and they don't truly geographically diversify until they get absolutely massive (200+ units). I leave this comment as a warning for those who think its a good idea to buy a rental property in Vegas or whatever. Feel free to not buy anything in SF, but what ever you do, DO NOT ATTEMPT to geographically diversify by buying a house outside the bay area if you live in the bay area. It will not be a fun time.
- jorts 11y ago
  Having a property manager and a home warranty can alleviate a lot of the pain points of owning a place that's not local.
  - wtvanhest 11y ago
    That is a misconception. Once you do the math, a property manager is not economically feasible and a home warranty doesn't really help. Typical property management fees are 10% of gross where most properties net much less than 10% over the first 10 years of ownership in cash flow. A home warranty is usually only given for new homes as an incentive. New homes can appreciate, but if you are 'investing' you should be focused on buying at a good price, not buying at a retail price from a home builder. The home warranty second market (i.e. 3rd party home warranties) can reduce risk, but do not typically cover small repairs like a toilet not working etc. Those need to be done by the home owner, because if you hire someone every time it will cost you too much. Like I said, you will have a very, very bad time if you try to geographically diversify real estate holdings.
swagv 11y ago
Same as it ever was. I love people who think they just discovered something today that a lot of people already knew 20 years ago.
venantius 11y ago
I think this is pretty trivially a poor analysis as it focuses on the median. Most of the real estate in SF is being bought by people who are seriously above the median and for whom this may be a much easier financial burden for them to bear. SF has a seriously non-uniform distribution of incomes and (more importantly) wealth.
- jsn117 11y ago
  aside from the concentration of extreme wealth, i'd say it's on par with the rest of the country
- cowsandmilk 11y ago
  yep. This is a common argument against using % of income for housing burden as a measure. If you make $200K, paying 40% of your salary for housing is much less of a burden than if you make $20k. (e.g. you are left with a much larger amount of money to pay for necessities like food, and probably still have quite a large disposable income)
frandroid 11y ago
> When you work in tech and live in the Bay Area, your life is already so positively exposed to the local economic and financial system, that buying a home is just doubling down on a (life) portfolio that’s already in need of diversification. I wasn't buying the monetary arguments because the Bay Area is monetarily primarily defined by the startup scene, but this argument seems interesting. The comparison to the oil boom drives it home. As for "what defines a bubble", we really only know once it bursts... Otherwise it's a bull market!
vanrysss 11y ago
Come to Portland! The office space and engineers are cheaper here.
- dsp1234 11y ago
  House prices are almost at pre-recession levels in some places, but it's still possible to get a really nice 2000 sqft place in a 30-45 drive for $300-400k (cheaper in worse areas)
- beachstartup 11y ago
  not for long. what i want to know: where are people from portland moving to?
  - beatpanda 11y ago
    I feel like people have been saying this about Portland (e.g. its about to become way too expensive and 'ruined') for about ten years, and Portland is still a very nice and affordable city.
code4tee 11y ago
"This is the only asset class with significantly above average gains for decades." One can't just look at the increase in value of Real Estate over time, one must also consider the cost of holding that asset. Unlike many other assets Real Estate is very expensive to own (taxes, maintenance, mortgage interest). That all adds up. Over the long term it's typically better to own than rent (in part because our tax system significantly favors owners over renters). However, people that talk about buying more house than they need (or a far more expensive house than they need) and then say "but it's an investment so it's OK" usually have no clue. Long term it's hard to consistently 'make' money on a home you live in. Commercial or investment real estate is a whole different ball game... but when it comes to your own home the best financial decision is usually to live modestly (and understand that a bigger or fancier house is a cost and no "an investment").
MBlume 11y ago
The argument about exposure is a general argument against home ownership. If you own a home in Detroit and work for Ford, you are doubly exposed to the region's financial health. If you live in Houston and work for an oil company you are doubly exposed. This is why I think home ownership is overrated. We should be looking for policies that enable people to adapt to changing economic situations, even if that means moving from place to place, and home ownership (which we heavily incentivize in the US) actively hampers that.
tathastu 11y ago
The article is comparing median income (of all residents) to prices that home-owners pay which is pretty much apples to oranges. Fewer people are buying houses in the Bay Area right now already which causes the disparity in the house-price-to-income ratio: Most folks who can afford a house worth 1M (and prove it to a lender) are probably earning dual-income in the tech sector and 330K (which would make the ratio 3x, same as the national average) is not too much of a stretch between two technology jobs.
awgneo 11y ago
Stop Doing Everything in SF

104 points by abcampbell 11y ago

If you like this, I have put up a bunch of the data that went into the analysis on the blog. Using tableau public to drive interactive visualizations (which is meh). http://www.snow.ventures/blog/ http://www.snow.ventures/blog/ Open to feedback!

nedwin 11y ago
Would be good to see a plot of housing prices in SF during the last bubble and the post-bubble ramifications. We've been here before so not including that graph seems strange.
- abcampbell 11y ago
  You can see that in the video in the article. The rise and fall of the blue dots over time. SF housing didn't go bust during the 2001, but there was significantly less leverage in the system and home prices were significantly more affordable.

arcamp 11y ago

NYT had an interesting calculator on rent vs buy a while back: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

ccarter84 11y ago
I loved this calculator when they first issued it, (2012ish?) but now they've revamped it and it takes up too much space for whatever functionality they added.
- ccarter84 11y ago
  Found it! The advanced panel, the simple graphics, highlighting the parallel rolls of expected rate of Rent increase vs Home price appreciation and making it a slider! Much usability, minimal space. -- http://web.archive.org/web/20120228050050/http://www.nytimes.com/interactive/business/buy-rent-calculator.html http://web.archive.org/web/20120228050050/http://www.nytimes... This is the exact reason I support Archive.org...well that and occasionally it helps with work stuff.

deleted 11y ago

[deleted]

quattrofan 11y ago

And London

sawthat 11y ago

If there was a way to live here that didn't suck as an investment that would be great. But there isn't. You can rent (costs the same or more than a mortgage, without the tax advantage) and you'll have nothing left to invest. Or you can buy and "invest" all your money in home equity, exposing yourself to ... all the downside.

ChuckMcM 11y ago
What is the downside in your mind? Are you thinking that house prices will fall dramatically and you'll be underwater?
- themartorana 11y ago
  Or you lose your job, and your ability to pay the mortgage, and so you lose your house and your deposit...
  - sawthat 11y ago
    Right, if you are underwater this means you basically have to walk away and lose it all. If you are renting you just lose the rent paid, which is a lot, which is why there really isn't a "smart" way to live in the bay area.
  - brianlweiner 11y ago
    Unless I'm dramatically mistaken you don't lose your principal when the bank forecloses. Obviously in many cases during the 2008 crisis the homes were underwater (valued at less than the loan amount), in that case then yes, you end up without a house or any equity since it's valued at less than you owe. In the hypothetical where you lose your job and can no longer afford the mortgage - presuming you went an extended period without paying - the bank will eventually force a sale of the property to recover the loan amount. If you have positive equity in a home then you'll have some money leftover after the proceeds of the sale are used to pay off the remaining balance to the bank.
    - 11y ago

rubidium 11y ago

"Meaning even if you put 50% of your income into buying your home, it would take you almost 20yrs to pay for the median home in SF making the median income."

minimaxir 11y ago

What the heck is going on with that initial scatter plot? The Y-axis is log-base3, which is nonstandard but technically valid. The X-axis? log-base2 times $30k? It doesn't work like that, and it might be misleading to portray SF/California as outliers, especially when different bases are being used for the axes. Yes, SF real estate is expensive, no one will deny that. But the core argument appears to be "don't buy SF real estate because the economy is on a downturn" which is specific to neither real estate nor SF.

ChuckMcM 11y ago
Its a way to emphasize the point, and I agree with you that it pushes it into deception. That said, it seems like most of the people looking at homes in my neighborhood both people work, and generally at engineering median[1], not area median salaries. So when you're annual income is 250K plus, spending 6K a month on a $1.5M mortgage is 1/3 your income. [1] http://www.indeed.com/salary/q-Software-Engineer-l-Silicon-Valley,-CA.html http://www.indeed.com/salary/q-Software-Engineer-l-Silicon-V...
GFK_of_xmaspast 11y ago
How is that any different than a log-log plot that's been squished in one axis? What I'm smdh about is that least squares fit, I want to see what happens if you use a Huber loss.
ScottBurson 11y ago
No, the core argument is "don't buy SF real estate because interest rates are going up". It's a valid point. Given a certain amount of income, a home buyer can afford a certain monthly payment. If interest rates go up, and prices didn't fall, payments would go up. Since the market can't support higher payments -- people are paying as large a fraction of their income as they can stand to already -- what will happen instead is that prices will have to come down. As for the plot, it's just a log-log plot. Stretch the axes however you like; it's still going to have the same shape.
- lintiness 11y ago
  if the author knows which way interest rates are going, he should quit his day job and buy / short interest rate futures. the road is littered with bodies of people who believe japan's interest rates couldn't stay at "zero" forever.

CyberDildonics 11y ago

At what point would it be cost effective to park a cruise ship close to the shore and rent out the rooms?

sawthat 11y ago
Never. Only people who have never been on a boat on the pacific coast think this is a good idea.
- CyberDildonics 11y ago
  Who said anything about good ideas?

foobarian 11y ago

Here we go again, concluding we shouldn't buy houses because we won't make money from it.

lechevalierd3on 11y ago
Yeah because renting makes you rich right?
- gcarre 11y ago
  The article isn't about buying vs renting. It's about buying real estate in the Bay Area as an investment. The bottom line is that if you have money to invest you should invest it in something else because it's too risky right now, especially if you are already exposed to the risk by working in tech in the Bay Area.
  - abcampbell 11y ago
    Yes, this is what I am saying.
- chillydawg 11y ago
  Depends if you have something better to do with the deposit you would otherwise give to a bank for the permission to rent from them. Personally, renting is better value than buying for me, even given london house prices.
sliverstorm 11y ago
Really I don't understand why anyone buys or rents, both seem risky and fraught with expenses.
- beatpanda 11y ago
  Because most cities in the U.S. are trying their hardest to make it illegal not to, in yet another move to subsidize the profits of land owners.

etep 11y ago

I find this article to be self-contradictory. The premise is that you should diversify outside of your geographic economic ecosystem, but the claims continue that the whole economy is connected (i.e. when there is a rush for the exit). Agreed that diversification is good, but two quibbles: please draw some distinction to address this contradiction, and two, there is no mention of the difference between owning a home that you personally gain use of, and buying a property as an investment (i.e. one that provides income).

abcampbell 11y ago
The premise is that you should consider your broad life portfolio, and with sufficient reflection, most people would probably want to diversify their life. Have written about this before: http://www.snow.ventures/blog/2015/12/10/diverisify-your-life http://www.snow.ventures/blog/2015/12/10/diverisify-your-lif... And yes, everything is connected, but connected to different degrees. That's just an input in how you think about your risk. We cannot entirely escape system risk (insofar as we are all part of one big system) but that doesn't mean we can't diversify away from out exposure to individual systems (bay area tech for example).

Apocryphon 11y ago

On the other hand, what about the emerging housing markets in the Bay Area? Oakland, perhaps? (For some reason, there doesn't seem to be much demand outside of East Bay- haven't heard of anyone rushing to buy in Daly City or South SF, much less San Jose)

ChuckMcM 11y ago
Living south of San Jose and working in SF means very long commutes. Working in San Jose though it would be fine, just like working in Fremont or Milpitas is great for folks living in those towns. If you're working in the Santa Clara valley (aka Silicon Valley) you can live in a lot of places, but commuting north/south on 85 is painful to say the least.
- Apocryphon 11y ago
  Right, but I mean I never even hear about people living in the communities adjacently south of SF. I understand traffic going into the city is a mess, and those places are somewhat more rundown and more suburban, but it's closer than Oakland is.
  - jedberg 11y ago
    Commuting from Oakland, assuming public transit, it much closer to SOMA than even South SF. And honestly, it's probably a selection bias. The people who live in those areas are families because they're mostly single family homes. They aren't the young single people who make a lot of noise about housing prices.
  - GFK_of_xmaspast 11y ago
    When I worked in SF, I knew lots of people who lived in Daly City and Burlingame and Millbrae and etcetc.
sbochins 11y ago
Oakland was one of the highest growing housing markets last year. Prices will continue to climb as SF continues to become more unaffordable. I'd say most cities surrounding SF are safe investments. It may be too late now to get a good return on investment. You would have wanted to start looking 1-2 years ago.

sytelus 11y ago

I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades. It does go down once in a while but it comes roaring back in relatively short time. Even when dropping, it rarely goes below 25% protecting most of the principal. This is about the only item that had massive inflation in past 7 years. I think what is happening is real estate is becoming currency just like what gold was used to be. In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate. It's a like you eat a lot but only your waist is accumulating all the fat and you wonder why your hands and feet remain so thin. I suspect this trend will continue because people are realizing real estate is more safer currency that can be relied upon as opposed to stocks or anything else. The safety is derived from the fact that, in worst case, it can be rented to generate better than interest returns or physically be used. This assumption can only be violated if interest rates grows a lot beyond rent income and thus in high inflation. However overall economic inflation cannot happen if all the surplus keeps landing in real estate. So it seems like virtuous self locked cycle.

mixmastamyk 11y ago
> I think there is something else going on in real estate. It is supported, subsidized, and protected by the government at almost any cost, with the result that average-income people can no longer afford a home in desirable areas.
- qubex 11y ago
  If people were really being priced out eventually San Francisco would fizzle out as a centre for innovation and the interest would move elsewhere. It probably isn't going to happen any more than high prices in New York failed to price out banks and bankers.

myth_buster 11y ago

the influx of foreign buyers (particularly money coming from China that is not that price sensitive) I thought this was a major factor in the increase in home prices. Anecdotal evidences of "tourists" coming in to buy property as an investment, instances of people buying homes without even visiting and bidding wars with homes ending up in the hands of people paying premium and in cash. This phenomenon has also been reported in other major cities like London, Toronto, Vancouver.

nerfhammer 11y ago
If there wasn't an extreme housing shortage and expectations for it to continue long-term then such investors wouldn't be interested in the first place. It's a symptom, and probably not much of a cause.
- myth_buster 11y ago
  What I meant was that the dynamics have changed. A local buying house is different from a non-resident buying the property solely as an investment. It gives off a different price signal.

mixmastamyk 11y ago

Agreed, though this is advice for the 1%, if that. Must be nice to be considering property in SF, huh? Better drive my Bentley to the office and do some location scouting. ;)

fiatmoney 11y ago

You are born short housing - you need to buy or rent it in order to get neutral. And given the labor market, most people need to buy where they work. This correlation is ~impossible to hedge (I guess you could short local industries, but a lot of these aren't public and there are a lot more covariates driving housing prices, from interest rates to embezzled overseas money). There's also a problem with hedging on an asset-price basis vs. a cash flow basis, which is even more difficult. Good thing CA is a non-recourse state, which means your mortgage comes with an embedded put option. When you consider the option value of the put, the option value of locking in interest rates (ie a call on a long-term zero-coupon bond), the inflation hedge, and potentially lower month-to-month costs (not unheard of, depending on your tax bracket) it makes it pretty easy to break even or minimize your losses even given a fairly bad story, over a 5-10yr period. This assumes you actually run the numbers. That's not even accounting for the consumption value of the house itself.

sytelus 11y ago
Couple of things that seems incorrect: 1. You are not born short housing. The population in western countries is growing very slowly and the new construction has kept up with it very easily. The problem occurs because of population movement. For example, massive people moving from many different areas to one single area. 2. Buying home is not always a value proposition. In fact, for most people it is actually not until late in the cycle and tax benefits more likely cancels out with other expenses like property taxes, maintenance and HOA. My feeling is that most people ends up cutting down other costs to compensate and thus they experience overall decrease in the living standards, however I don't have data to support this.
- fiatmoney 11y ago
  When I say "born short housing", I mean you must acquire housing of some kind in order to just exist in society. It's not a "housing / no housing" choice, it's a "buy / rent" choice wherever you are.
- jdmichal 11y ago
  > You are not born short housing. That must have been a fun birth... I'm guessing C-section? More seriously, being short means you have a position you need to buy in order to cover. Unless those builders are giving those new houses away, guess what, you're still short until you buy one. Your other point, however, is very good. From a purely mathematical perspective, it doesn't always work out in your favor. But there's also a lot of intangibles that come into play with something as personal as housing.

ejk314 11y ago

Is there any way to hedge your investment in a SF house if you must move there anyways?

bduerst 11y ago

According to the skyscraper theory of bubbles, the new Salesforce Tower in SF is a signal that there is a bubble set to burst sometime 2016-17. http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b3035d679ec.jpg http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b30...

wtvanhest 11y ago

I spent the first 5 years of my career in commercial real estate where I met a lot of people who started with a single house and turned it in to massive portfolios. I asked every single person for advice on the best strategies and two points came out of those discussions: 1) Interest rates falling is the single biggest factor that allowed people to make a lot of money on real estate. (This is pointed out by the author and its worth rereading that section and really understanding it). 2) Geographic diversification doesn't work in real estate because its a physical asset that requires a hands on approach. Big developers / owners get big by buying locally and being ruthless about only buying things very, very close to where they live until they get so big that they start hiring (40+ units). Then they stretch out 1-3 miles and they don't truly geographically diversify until they get absolutely massive (200+ units). I leave this comment as a warning for those who think its a good idea to buy a rental property in Vegas or whatever. Feel free to not buy anything in SF, but what ever you do, DO NOT ATTEMPT to geographically diversify by buying a house outside the bay area if you live in the bay area. It will not be a fun time.

jorts 11y ago
Having a property manager and a home warranty can alleviate a lot of the pain points of owning a place that's not local.
- wtvanhest 11y ago
  That is a misconception. Once you do the math, a property manager is not economically feasible and a home warranty doesn't really help. Typical property management fees are 10% of gross where most properties net much less than 10% over the first 10 years of ownership in cash flow. A home warranty is usually only given for new homes as an incentive. New homes can appreciate, but if you are 'investing' you should be focused on buying at a good price, not buying at a retail price from a home builder. The home warranty second market (i.e. 3rd party home warranties) can reduce risk, but do not typically cover small repairs like a toilet not working etc. Those need to be done by the home owner, because if you hire someone every time it will cost you too much. Like I said, you will have a very, very bad time if you try to geographically diversify real estate holdings.

swagv 11y ago

Same as it ever was. I love people who think they just discovered something today that a lot of people already knew 20 years ago.

venantius 11y ago

I think this is pretty trivially a poor analysis as it focuses on the median. Most of the real estate in SF is being bought by people who are seriously above the median and for whom this may be a much easier financial burden for them to bear. SF has a seriously non-uniform distribution of incomes and (more importantly) wealth.

jsn117 11y ago
aside from the concentration of extreme wealth, i'd say it's on par with the rest of the country
cowsandmilk 11y ago
yep. This is a common argument against using % of income for housing burden as a measure. If you make $200K, paying 40% of your salary for housing is much less of a burden than if you make $20k. (e.g. you are left with a much larger amount of money to pay for necessities like food, and probably still have quite a large disposable income)

frandroid 11y ago

> When you work in tech and live in the Bay Area, your life is already so positively exposed to the local economic and financial system, that buying a home is just doubling down on a (life) portfolio that’s already in need of diversification. I wasn't buying the monetary arguments because the Bay Area is monetarily primarily defined by the startup scene, but this argument seems interesting. The comparison to the oil boom drives it home. As for "what defines a bubble", we really only know once it bursts... Otherwise it's a bull market!

vanrysss 11y ago

Come to Portland! The office space and engineers are cheaper here.

dsp1234 11y ago
House prices are almost at pre-recession levels in some places, but it's still possible to get a really nice 2000 sqft place in a 30-45 drive for $300-400k (cheaper in worse areas)
beachstartup 11y ago
not for long. what i want to know: where are people from portland moving to?
- beatpanda 11y ago
  I feel like people have been saying this about Portland (e.g. its about to become way too expensive and 'ruined') for about ten years, and Portland is still a very nice and affordable city.

code4tee 11y ago

"This is the only asset class with significantly above average gains for decades." One can't just look at the increase in value of Real Estate over time, one must also consider the cost of holding that asset. Unlike many other assets Real Estate is very expensive to own (taxes, maintenance, mortgage interest). That all adds up. Over the long term it's typically better to own than rent (in part because our tax system significantly favors owners over renters). However, people that talk about buying more house than they need (or a far more expensive house than they need) and then say "but it's an investment so it's OK" usually have no clue. Long term it's hard to consistently 'make' money on a home you live in. Commercial or investment real estate is a whole different ball game... but when it comes to your own home the best financial decision is usually to live modestly (and understand that a bigger or fancier house is a cost and no "an investment").

MBlume 11y ago

The argument about exposure is a general argument against home ownership. If you own a home in Detroit and work for Ford, you are doubly exposed to the region's financial health. If you live in Houston and work for an oil company you are doubly exposed. This is why I think home ownership is overrated. We should be looking for policies that enable people to adapt to changing economic situations, even if that means moving from place to place, and home ownership (which we heavily incentivize in the US) actively hampers that.

tathastu 11y ago

The article is comparing median income (of all residents) to prices that home-owners pay which is pretty much apples to oranges. Fewer people are buying houses in the Bay Area right now already which causes the disparity in the house-price-to-income ratio: Most folks who can afford a house worth 1M (and prove it to a lender) are probably earning dual-income in the tech sector and 330K (which would make the ratio 3x, same as the national average) is not too much of a stretch between two technology jobs.

awgneo 11y ago

Stop Doing Everything in SF