Tuesday, January 03, 2017

Bay Area real estate Bubble 2017

San Francisco Bay Area real estate is going to crash and burn hard. Nobody is ever really able to say how or why though, just that what goes up is supposed to come down.

I'm gonna break down why it will happen and why it not happening yet.

Prices are too high compared to average income in the region, so while there is "demand" in the sense of lots of people wanting to live here, there will be an affordability cap when even well-heeled techies balk at the crazy prices.

Why this didn't happen: There are also investors in this market, and while many people lack the down payment money to buy, lots of people have high monthly incomes and can RENT. Investors buy the house and the tenant pays the mortgage. Since there is demand for rent at prices that will pay the mortgage on these properties, there is continued investor demand. Prop 13 makes this a good long-term strategy if the investor intends to hold property a long time.

Low interest rates permit these prices, but the second interest rates go up, expect prices to come down - people can only afford what they can afford, so as interest represents a larger portion of the mortgage payment, purchasing power decreases.

Why this didn't happen: Interest rates have stayed very, very low by historical standards. If they DO go up, you likely would see some limit to purchasing power. See the previous point for why that might not lower house prices.

The tech economy here has behaved cyclicly in the past, with overly aggressive speculation leading to overextended investors and periods of contraction. When the tech crash comes, housing prices will surely plummet. Why this didn't happen: Maybe we aren't at the end of the cycle yet. Maybe the expansion of tech during this cycle has been somehow more sustainable and robust than previous cycles. Maybe the increase in demand is completely unrelated to the tech economy (doubtful but there are lots of other reasons why this is a desirable place - weather, proximity and cultural accessibility to China and India and their rapidly growing middle class, etc.)

The flood of construction finally hitting the market is going to absorb demand and we're finally getting that "trickle down housing" we've been promised.

Why this didn't happen: the same thing that happened and made trickle down economics a lie in wages - rich people just held onto the housing. First, the "boom" is only relative to the previous pathetic rate of construction, it's not actually a boom relative to the backlog of unmet demand for housing. Second, and relatedly, there is so, so much more demand than supply that at the low and middle ends and the housing isn't "trickling down" because it is still getting absorbed by demand higher on the economic ladder - the 10 million dollar homes selling for 8 doesn't really do anything except give one rich person a price break and reduce another rich person's windfall. elasticity on housing is very much a thing - people who had roommates would live on their own because they found an apartment in the place they wanted to live where none were previously available, or people who rented out rooms in their apartment as master tenant just go back to living on their own and having -gasp- a SPARE room. Just like trickle-down economics, trickle down housing really works out to "if you give rich people more housing, they will.....keep more housing and enjoy that extra space." Only after people willing to pay market price are fully exhausted and there is excess supply will market price drop and flow to demand at lower price points. We need a lot more boom to get there.

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