Everybody is getting pumped about the new wave of tech IPOs. These SF Bay Area tech IPOs include Uber, Lyft, Airbnb, Slack, Pinterest, and more. Although some had a hard start initially, all tech IPOs have pumped billions into the SF Bay Area economy.
The default assumption is that these tech IPOs will bring in huge demand and drive SF Bay Area real estate prices up. After all, these companies are worth billions and employ tens of thousands of sub-35 year-old-employees looking to establish roots.
If you ask most real estate agents in the Bay Area what they think about the future of real estate, one of the first things they will mention is the upcoming tech IPO tsunami. They’ll say things like,
“You better buy now before the lockup periods are over!”
“Buy now or get priced out forever!” <- all-time classic line
If you’re a real estate agent, it’s always a good time to buy or sell property since they make money on transactions. No problem as that’s just business.
But I have a feeling the industry is overestimating the impact tech IPOs will have on real estate prices and underestimating the impact tech IPOs will have on a homeowner’s desire to sell.
Remember, to get rich, you often need to challenge yourself to think differently. Herds can sometimes get slaughtered. There are very few “no-brainers” in this world. If there were, we’d all be financially free well before our expiration dates.
Overall, I assign a 30% chance the tech IPO boom causes SF Bay Area prices to fall, meaning there’s a 70% chance the tech IPO boom is neutral or beneficial to the real estate market.
Overrated: Demand Surge From Tech IPOs
There are now headlines saying “Thousands Of New Millionaires Are About To Eat SF Alive,” quoting people who think the average home price in SF will soon be $5 million.
As with any wild assumptions, it’s good to do some analysis using real numbers instead of hyperbole. Let’s go through an exercise to ascertain what the realistic incremental demand is for housing from tech IPOs.
- The median home price in San Francisco is about $1.5 million. In the SF Bay Area, the median ranges from around $800K in the East Bay up to $3.1 million in places like Palo Alto.
- To feel wealthy enough to buy an above average/median home and have money left over to pay for life, let’s assume a $1 million after-tax windfall from the IPO.
- 99% of the employees are not highly-comped execs, but 35 and under employees making less than $300,000 a year all-in, a middle class lifestyle for the Bay Area.
- The average employee has been with the company for two years.
- Given the average startup employee is underpaid on salary due to stock compensation, the average startup employee does not already have a 20% downpayment for a median-priced home.
- The average employee’s option strike price is higher than zero since the vast majority of employees didn’t join at the beginning.
- The tax rate on the exercise of options after the IPO lockup period will be approximately 50% total to account for state and federal taxes. For them to become windfall millionaires, they would have to sell at least $2M in options. Of those with this optionality, I suspect only a small percentage will enter the housing market. Let me explain.
Let’s say the company IPOs at a $20B valuation. To get $2M in proceeds the employee must liquidate 0.01% (1 basis point) ownership in the company.
Now let’s go back to our assumptions. If they’ve been there two years at IPO time and they want their money within a year of IPO, they’ll only have vested 3/4 of their initial 4-year grant, which means they must have been granted 1.33 basis points ownership.
Further, given their strike price isn’t zero, even with ballistic growth since joining two years ago, they’ll need an even higher grant than 1.33 bp. Let’s call it 1.5 bp (0.015%).
The employee option pool size at this stage is typically around 15%. And of course, they’re not distributed evenly. At a $20B company there are probably 500 – 1000 employees who could end up owning 1-1.5bp on average.
So at a $20 billion valuation post IPO, if its value holds in time for employees to sell usually 6 months after IPO, the IPO may yield 1,000 eligible buyers with $2-3 million gross / $1-1.5 million after-tax, assuming they sell ALL their stock.
Now multiply these 1,000 people by the percentage of how many will actually enter the real estate market with this money in the ensuing year. If 50% want to buy property, that’s 500 eligible buyers. If 20% want to buy property, that’s only 200 eligible buyers.
The intent to buy percentage is certainly not 70% – 100% since some already have property, some don’t want the hassle of owning property, some think property prices are too expensive, and some want to pocket their gains and move away from the Bay Area.
A total of $100B in valuation with the same math would produce roughly 5,000 potential buyers with $1-$1.5 million after tax. If we use a 20% intent to buy percentage, we’d yield 1,000 true buyers or 2,500 true buyers using a 50% intent to buy percentage.
Total New Demand From Tech IPOs
If we add up the total projected public values of Uber, Lyft, Airbnb, Palantir, Pinterest, and Slack, we’re talking about a total public value of roughly $200B from 2019 – 2020.
Therefore, one can make an educated guess there will be roughly 10,000 eligible buyers and anywhere between 2,000 – 5,000 high intent buyers,resulting from all these IPOs over a two year period.
These 2,000 – 5,000 high intent buyers with $1 – $1.5 million in cash after tax are therefore looking for properties worth between $1 million – $7.5 million based on a 20% – 100% downpayment.
But how does 2,000 – 5,000 new buyers compare to supply? Ah hah! This is the missing part of the equation people don’t seem to account for when projecting home prices.
SF Bay Area Supply Could Surge
The SF Bay Area real estate market finally cooled off in 2018. Some tech companies like Nvidia, Facebook, and Apple lost 20% – 40% of their value, even though the S&P 500 was only down about 6.4%.
A correction was bound to happen as price growth outstripped wage growth for so many years.
Check out this price chart by Compass, the largest real estate broker in SF. Notice how the median price peaked in early 2018 and is down 11.5%.
At any given time, there are between 6,000 – 8,000 homes for sale in the San Francisco Bay Area. In March 2019 there were 7,792 homes for sale in the Bay Area, up from 6,233 a year before according to Zillow, +25% YoY.
In the San Jose sub area, there were 3,011 homes for sale in March 2019, up from 2,102 the same time a year before. That’s an almost 50% YoY increase in inventory folks.
Check out this chart below that shows how the inventory of homes for sale is spiking in the Bay Area. We’re at 7-year highs, and the number looks to be going higher as sellers try to cash in.
What on Earth is going on with the supply surge? It’s actually pretty simple to explain.
2019 marks the 10th year of a bull market in the S&P 500. Meanwhile, real estate prices are up 80% – 100%+ since 2012. The SF Bay Area population is aging and the area is becoming congested, homogenous, and unaffordable, even for most tech workers.
Further, there is a demographic shift away from the SF Bay Area to the heartland of America because costs there are much lower.
When you can live in a 2,500 square foot single family home for less than $2,000 a month compared to paying $4,500 a month for a 1,000 square foot two bedroom apartment, while earning a similar amount, the pull to leave is strong.
Google, for example, announced in February 2019, it is spending $13 billion to expand into the heartland. Their blog post writes, “These new investments will give us the capacity to hire tens of thousands of employees, and enable the creation of more than 10,000 new construction jobs in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina and Virginia.”
If Google, one of the wealthiest companies today, is finding it cost ineffective to pay its engineers $300,000+ because it costs over $3 million to buy a median-priced home in Palo Alto, you know other companies are expanding into the heartland as well.
Underrated: Real Estate Seller FOMO
Imagine you’re a homeowner who is up 100% in the past 10 years. Your 20% down payment is up 500%. By all comparisons, you’re rich! And if you owned more than one property during this time period, you’re really feeling lucky.
You wanted to sell in 2017 but held off. Then you wanted to sell in 2018, but tech was crashing and the real estate market was weak.
With the upcoming new tech IPOs, now is finally your chance to sell to a lucky newly-minted millionaire in 2019 or 2020. You’re praying the IPO surge will lift prices back to all-time highs and then some.
Sure, all these new tech company IPOs over the next couple years employ ~35,000 people (Uber ~13K, Airbnb ~11K, Lyft 2K, Palantir ~3K, Slack ~1K, Pinterest ~1K, etc), some of whom will want to buy real estate.
But the SF Bay Area has 7.6 million residents, some of whom will want to take advantage of the new tech IPOs and sell their real estate.
Let’s say only 20% of the 7.6 million people own their homes since ~15% of the population are kids and there are dual adult households. That’s still 1.52 million homeowners who might want to consider cashing out versus 35,000 new tech IPO employees who might be able to buy.
In other words, the ratio of potential sellers to potential buyers is 43:1 in this scenario (1.52M to 35K).
Even if we more conservatively assume only 10% of the 7.6 million Bay Area residents own their homes, and there are 100,000 tech company IPO employees all living in the Bay Area, the ratio of potential sellers to potential buyers is still 7.6:1 (760K to 100K).
We can drill down further and estimate the high intent to sell sellers out of the 760,000 – 1,520,000 estimated homeowners in the SF Bay Area, which is already a conservative figure.
Even if just an additional 5% of SF Bay Area homeowners decide to list their homes over the next couple of years, that’s an extra 38,000 – 76,000 in new supply flooding the market compared to 2,000 – 5,000 high intent buyers based on $200 billion worth of tech company IPO value.
Therefore, the ratio of potential sellers to potential buyers still ranges from 7.6:1 to 38:1. Even if we double the high intent buyer count to 10,000, supply still far outweighs demand.
Supply > Demand Scenario
Given the lopsided ratios, one could easily conclude a surge in inventory will more than offset the uptick in demand from tech IPO employees. Instead of seeing a step up function in home prices, we could very well see a step function down after the initial frenzy is over.
If you still can’t see or believe how prices could go down based on the numbers, here’s a classic Supply / Demand chart to illustrate the point along with my commentary.
The initial price point equilibrium is where S1 (supply) intersects D2 (demand) to get P1 (price). With all the tech company IPO hoopla, the default assumption is that demand shifts up from D1 to D2. As a result, real estate prices increase in the short-run to P2 as FOMO buyers go all-in at or close to the peak of the market. Time frame: next 12 months
But as prices rise, supply rises to match demand as more homeowners get tempted to cash in. With more listings on the market, S1 shifts down to S2 and prices temporarily get back to even. Time frame: in 12-24 months
However, what I’m arguing is that there’s a good chance the tech IPO hoopla will awaken a slumbering bear of 760,000 – 1,520,000 homeowners in the SF Bay Area who flood the market with new supply. In such a scenario, the supply curve shifts from S1 to S3. Time frame: in 12 – 30 months
When D2 intersects S3, real estate prices end up lower than during the initial D1 and S1 intersection equilibrium.
But things could get even worse given how slowly it usually takes for homeowners to read headlines, contact an agent, prepare their home for sale, and then list their home on the Multiple Listing Service.
The Johnny-come-latelies would create even more supply past the new equilibrium, thoroughly overwhelming demand. As the inventory of homes piles up, more price cuts are an inevitability.
As prices decline to P4, homeowners, home sellers, and the mass media start to panic, causing even more pricing pressure. This is how real estate cycles form, and partly why a recession might appear by 2021. Time frame: in 20 – 36 months.
Just like how there is FOMO for buying, there is FOMO for selling. To not cash out when you had the opportunity might be the worst feeling ever. During the 2000 dotcom bubble, there were plenty of paper millionaires who lost everything because they refused to take profits.
During the 2008-2010 housing crisis, SF Bay Area real estate did fall between 20% – 30%, with many examples of people losing their homes to foreclosure or short-sales. Surely, many who’ve held on are considering their second chance.
When it comes to forecasting where real estate prices are heading, determining supply could be much more important than determining demand.
Buy Real Estate For Life, Invest For Income
At the end of the day, you should buy a property to live in and enjoy life first. Run the numbers. If you foresee owning your home for at least five years and the cost makes sense after putting at least 20% down, then go ahead and buy.
Just know that real estate is seasonal. If you are reading this article in the spring, you will witness the strongest period of demand as buyers get paid their bonuses and commit to their new year’s resolutions.
The people who lose their minds, and sometimes their shirts are often buying during the spring. The buying frenzy fades in the summer, picks up again in the fall, and dies down during the winter. Winter is always the best time to buy.
Even if the tech company IPOs don’t help boost real estate prices, they should at least provide a floor of no more than a 20% decline from peak to trough. These tech IPOs are raising new funding that will likely keep the party going for longer e.g. $1.4 billion in new funding for Pinterest.
Just be careful thinking that you just can’t lose buying Bay Area real estate today. As 2007-2010 showed and 2018 showed again, prices do come down from time to time.
Please pay attention to monthly inventory numbers. They are already at 7-year highs. The higher supply goes, the stronger the downward pricing pressure. It doesn’t matter how great a property is. If the house two doors down is also trying to sell, your hope for a bidding war is gone.
Diversify Your Real Estate Holdings
If you want to invest in real estate once you own your primary residence, it’s better to invest outside of the SF Bay Area where cap rates are 3-5X higher, and valuations are 50% – 80% lower.
I truly believe investing in noncoastal city real estate through real estate crowdfunding or specialty REITS are going to be a multi-decade positive trend. Thanks to telecommuting, video chat, the internet, mobile phones, and new online tools, both companies and employees are moving to cheaper areas of the country.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
SF Bay Area Real Estate In 2021
I’m always going to look for real estate bargains in San Francisco. The city is just too dynamic with so many high paying jobs it’s hard to bet against the SF Bay Area real estate market over the long term.
In fact, I’m now bullish on San Francisco Bay Area real estate in 2021 and beyond. There will be a rush of people back to big cities once there is herd immunity. Therefore, I also recommend people buy big city real estate before the herd comes back.
The biggest opportunity I see is buying panoramic ocean view properties in areas like Golden Gate Heights, Sunset, Parkside, or the Richmond district. Ocean view properties in every other international city in the world trades at a huge premium except for in San Francisco. I expect this valuation differential to narrow tremendously over the coming years.
Luckily, the real estate sector has roared back post pandemic. I don’t think the housing market will crash any time soon. In fact, San Francisco real estate is one of the best values in the country now.
The error in this article is that tech workers prefer to buy in southeast San Francisco neighborhoods not the east bay not Marin. So this massive supply doesn’t exist. Not all neighborhoods command 40% over asking all cash but those are the neighborhoods these IPOs will look at. And there is a finite number of homes for sale in those areas.
Don’t think so. The smart tech workers who see value are buying single family homes in the Sunset and Parkside neighborhoods. And the really savvy tech workers are looking at Golden Gate Heights, where you can get ocean views.
Ridesharing makes commuting cheap now. And these neighborhoods will forever change and increase in value.
Hi! Loved the article. Would love your opinion on this little dilemma. I own a nice little 1br up on twin peaks that I rent out. I’d like to sell just to get a bigger place in the east bay, but have no idea how to time it with all this going on. The scenario above aside, if things continue like this for a few years, will my place in SF appreciate more than a place in the EB? If there’s some months after my sale will I see much slippage in my buying power in the EB? And finally, one thing sticks in my mind which is that prices are so hyperextended now, even if new lower-end millionaires can afford it, do they want to, and would their financial advisor recommended it as a good investment? IOW, mine being a starter home, might kids looking for a starter home search elsewhere for better value? Thanks so much for your thoroughness!
HI Hoops, no one can tell the future, you can only day within a certain degree of certainty that due to inflationary pressures the real estate markets across the US will trend upwards in the long run, If you take a look at places like Dublin and Newark you will see that they are still getting 4% – 8% population growth year over year which is a strong indicator of property appreciation, You simply want to place yourself in the growth path. But emotional factors that you are talking about are important too because these people are very intelligent and don’t want to get caught on the wrong side of a currently up trending market. So until the lack of inventory in the population growth paths starts applying pressure back inwards, the more reliable investments are going to be within 20 – 30 miles of these hot zones were prices have started to cap off and slow down. Where as the properties just out side these areas are trying to catch up. I would suggest purchasing a property in the East Bay if that will make you happy, living situation wise, and in my personal opinion ( not a financial advisor ) I think you should be getting a relatively close appreciation rate no matter where you purchase in this area. If you need any assistance let me know ccantoniocc@gmail.com i’m hosting investor meetups and learning from the best active investors right now and joining a brokerage in these next few weeks so I would love to help you look at the options when it comes to selling.
An excellent post: I appreciated the demand-side analysis where you put a number on the potential buyers arising from the IPO’s. When the Tax Cuts and Jobs Act was passed in 2017, it seemed to me obvious that the effect of the SALT and mortgage-interest limitations would have a huge effect on Bay Area real estate. However, lower demand didn’t manifest until the fall of 2018.
How to do a rent vs buy analysis is well known, with people comparing the after-tax cost of each scenario. For decades the Bay Area analysis has favored “rent”, but prices have continued to rise, I think because of the non-monetary benefits of ownership plus the price appreciation. Now that the balance has shifted decisively toward rental instead of buying (because most of the outlay for property taxes and debt service is non-deductible in an owner-occupied property), I think the IPO’s at best will result in a bounce in a bear market.
Longer term, I expect that rents will rise, prices will fall, and more investors will dip their toe in to Bay Area rental real estate.
I’ll close with this story: a CPA buddy (I’m a retired CPA) used to joke back in the 1980’s that we should buy each other’s houses and rent them to each other. The owner/landlord could deduct in full (and still can!) mortgage interest and property taxes AND depreciate the building portion. (In 2018 and later the owner/landlord could very probably claim the QBI deduction, too.) The after-tax cost of the property expenses would enable a comparatively low rent to be charged to break even on the cash flow. Making the arrangement legal would be complicated to allow for one party to exit the relationship, especially to retain the upside for the property he lived in but did not own. We both agreed that a) the arrangement wouldn’t be ethical and b) with the reward of ownership inuring to the tenant the IRS could argue this was a tax-avoidance scheme. So we could never do this ourselves or recommend it to our clients….
Interesting article and comments. A few people I know (including us) are seriously thinking of moving abroad and working remotely in the next couple of years. We have a multi-family property in the East Bay and we are really unsure about whether to sell or rent out all the units and hold on to it. If we sell, we could pull out about $1m equity, buy a cheap place for cash to live in elsewhere and invest the rest. If we rent our place out, we’ll make about $1,700 a month (after all costs including earthquake insurance and ridiculously high property tax) and have no cash, but if we can hold on to it long term, the mortgage will gradually get paid off and it could be a nice little nest egg.
The way I see it is that if you have property in a desirable location (like London, SF or NY), if you can ride out the lower points, it will always go up gradually over time. The high points are usually higher than the last high and the low points are usually higher than the last low. I’m still unsure though! I think prices won’t rise too much in the next few years.
First time hearing this contrarian view. Great breakdown and analysis. Many people I know are looking to leave the Bay Area, many already have to Seattle, Austin, and some even to NYC as a transfer from big tech in a proper city instead of Menlo Park or Mountain View.
Downside is that SF has the concentration of interesting business I’d want to work for (scalable and making ambitious impact on the world). Big Companies in many other places are not that interesting to me.
Interesting analysis, but I do think a few other factors we should consider. (Biased as I just get into the SF market again with majority chunk of my cash after sitting on the sideline for last 2 years). I am just talking about buy/sell/flip situation in San Francisco, not about income/rental property or outside the city.
1: If you look at those companies, other than Palantir(their IPO is still pretty far away) and Zoom, they are all HQ in San Francisco, if you add a couple of upcoming smaller IPOs (PagerDuty/Cloudflare) and a few best performing tech IPOs in the last couple of years (Twilio, Okta, etc), they are all HQ in San Francisco.
2: People want to live in the city and that’s why those company started in SF in the first place.
Even the young couple who are starting a family, they want to stay in the city longer and compared to the south bay, SF is actually cheaper. The whole better school district thing only makes senses economically if you want to have at least two kids, but a lot those young tech workers don’t even want to have one to start with.
3: East Bay is really all the young tech workers are moving to. However, most of them still prefer to live in SF if they can. (But unless you worked at a successful company, that’s just an aspiration).
Given 1/2/3, I think SF can still see a 15 to 20% upside in the next few years.
I think your analysis is very helpful to think which price category will get the biggest boost.
A lot of people think the most contended category in the city will go from $1M-$2M to $2M-$3M, I can kind of see that but average price 5M is just BS IMHO. The cash windfall is a one-time thing unless you hit 5M+ or something, you are still a w2 earner with a guaranteed income of ~250K.
I think that’s a highly probable scenario of 2,000,000 to 3,000,000 as the sweet spot from 1,000,000 to 2,000,000.
The scenario I paint in this article is it a unlikely scenario that has probably 35% chance of happening. The likely and result is continued high demand for housing and continued our board appreciation.
I just want people to be aware of the downside scenarios before investing such massive amounts of money when prices are ready so high, including myself.
I think this article is making a lot of assumptions about supply I’m not sure hold true.
Half the houses we go see are estate sales after the homeowners die….the sad reality is that prop 13 discourages moving from one home to another in an appreciating market. Anyone that bought in 2012 can’t really sell for a profit and move across the street or to another neighborhood because those gains won’t really be gains – they’ll have to completely exit the bay area & California. Same for anyone that bought before the recession.
Basically, the only people that sell homes are those that are moving out of the area completely or to another coastal city. Most of the people moving aren’t people that own homes and are moving…they’re young people giving up on real estate here.
Sure inventory might go up a bit as a result of newly minted buyers, and I do think prices are coming down a bit, but that’s more of a result of tax changes as people realize their deductions are going away, home loans above 750k lose tax benefits, and everyone’s “rent vs buy” calculator is shifting more to rent due to losses in the tax benefits for SALT deductions in high COL places like California.
Add in rising rents, and if you bought in 2012, 1990, or 2004, there’s really no reason to sell unless you’re FORCED to sell. Why sell? even if you leave? You can rent out your place to cover your mortgage. This is evident when you can rent a home for 3k that would have a mortgage of 6k – the rental market in most areas is so much cheaper than a mortgage, which just means everyone is renting their homes out rather than selling.
So, while I don’t disagree there may be some spike in inventory, some level of decline in prices…I just think it’s going to take a situation where people are FORCED to sell to actually cause the supply and demand shift you’re proposing. Why would I ever sell a property I bought in 2012 when the rent generated exceeds the mortgage? I think you’re assuming lots of people want to sell and move away. And you’re right about moving away – but it’s not the people that own homes.
Homeowners here are
1. Locked in because theyve lived here for 20+ years and don’t move because of huge property tax shifts. They have a life here, so they’re generally not moving to the heartland just to retire cheaply.
2. Young families with lots of money saving for 5-7 years before buying a small place. They can’t afford to move.
3. Rich families where they bought their kids houses and didn’t have to concern themselves with the market.
4. Middle class people who are supplementing their income with rents because their 2.5k mortgage place is being rented out for 3.5k a month.
5. People that are sitting and waiting to sell at the right time to leave the area and cash out.
After leaving here for 5 years, I think you’re overstating #5. The people leaving aren’t usually homeowners with roots here.
Who knows, maybe I’ll be wrong. To be honest, If I can find a place thats 30% of our income and I can rent out the basement ADU, I’ll hop on it regardless of price because I think the long term fundamentals are good. At the end of the day, the same advice seems to be true no matter what..Almost every place in America I would say….don’t buy unless you’re sticking around for 5+ years……
But if you can afford it, you like it, and you want to live there. Then you shouldn’t be trying to time the market for a 10% deals. Gains? Losses? It doesn’t really mean anything for your primary residence. Oh you lost 10% of your equity? Well if you didn’t lose your job it’ll recover. Oh you gained 10% of home value? Unless you’re moving it doesn’t really matter.
Would I be INVESTING in real estate to rent out here? Fuck no. Like we’ve already established, the rent market is well below mortgage costs because everyone bought up 8 years ago and those are being rented out to cover those low mortgages. But if you want to live here? Hell yes. The supply issues are never going to go away. The fires will keep the contractors busy, the earthquake will keep the contractors busy, the regulations will keep you from building up, etc. There’s no more space.
Hey RyGuy, if you happen to notice this, this is a copy/paste of a comment I just posted hoping Samurai might answer, but you seem to be speaking to exactly what I’m asking about, and I also couldn’t make sense of wiki’s explanation of Prop 13, so if you don’t mind, insights? One thing, I own it outright:
‘Would love your opinion on this little dilemma. I own a nice little 1br up on twin peaks, small but updated with killer view, that I rent out. I’d like to sell just to get a bigger place in the east bay, but have no idea how to time it with all this going on. The scenario above aside, if things continue like this for a few years, will my place in SF appreciate more than a place in the EB? If some months pass after my sale will I see much slippage in my buying power in the EB? And finally, one thing sticks in my mind which is that prices are so hyperextended now, even if new lower-end millionaires can afford it, do they want to, and would their financial advisor recommended it as a good investment? IOW, mine being a starter home, might the new kids looking for a starter home search elsewhere for better value?’
But you also raised the specter of prop 13, which I don’t understand. I’m not trying to ‘flip’ for profit, per se, just flip for upgrade, although I wouldn’t mind shaving a little off the top. But is this not a good idea either?
You said, “…the sad reality is that prop 13 discourages moving from one home to another in an appreciating market…Anyone that bought in 2012 can’t really sell for a profit and move across the street or to another neighborhood because those gains won’t really be gains – they’ll have to completely exit the bay area & California. Same for anyone that bought before the recession.” I bought in exactly 2012, but it was all cash. Is this still me?
Thanks ahead of time, Ry
Great Article!
I own a condo in the south bay(paid off). I’m debating whether to rent it out or sell it now and make investments elsewhere. are there any guidelines you recommend for making the right decision?
Thanks!
Jason
Sam:
A few years ago you wrote a couple posts, one outlining how SF was very cheap compared to other “international” cities, and another about how interest rates are likely going to be low (at least relatively) for decades.
Have you backed off of either of these views? Or, if not, are they already baked into your analysis here?
I still think SF is one of the cheapest international cities in the world and that interest rates will be low for our life time. In fact, I just locked in a 10/1 ARM to refinance my 5/1 ARM expiring this summer. I was going to pay the ARM off before it reset to 4.5% from 2.5%. But now, at 3%, I think I’ll just keep it. Check out LendingTree for some competitive bids, and then go to your relationship bank and ask them to match.
This scenario of tech IPOs hurting SF real estate prices in 2-3 years is a minority possibility of happening. I would ascribe this scenario as having a 30% chance of happening. It is 70% likely that the tech IPOs will keep prices high and help push prices up at the margin.
Great analysis Sam! Just a thought, are you sure about the assumption of 5% homeowners might sell? It feels like fewer than that. Tech workers who are in their 30s, 40s and just bought in the few years are staying for the long term. All cash buyers from China who bought do not see the need to cash out. People who are reaching retirement age already sold and moved few years ago. Like you said, it’s all about the supply, what if that 5% assumption is wrong?
This are assumptions
Most of housing stock is owned by older, longer term homeowners.
Interesting analysis.
Now that tax season is coming to an end, most salaried people in high cost areas are realizing they are screwed with the new tax law. Expect increased selling.