I recently sold property in the bay area. It's crazy indeed, but if I had the chance I'd sit on it for at least another 10 years. There no signs of progress to increase inventory and between Google/Apple/Facebook (and name every other large tech company) there's enough cash in their coffers to hire 300,000 more engineers making $300k/year. Which basically means even in a massive downturn, they're still going to hire net new in the 10's of thousands every year for the next 10 years.

I don't think people really fathom how big of a deal this is. When was the last time a group of heavily concentrated companies were so flushed with cash sitting in banks? And also who's most coveted asset was highly paid white collar workers? Wall Street in the 80's maybe?

>There's no signs of progress to increase inventory

SB 827? That's what's kept me from buying. The fact that housing in the Bay is political scares me off. I'll bet on economics every day, but not on politics.

SB827 passing will only begin to tickle the situation. It's a good start, but nowhere near what needs to be done. NIMBY'ism is part regulation, part culture. I don't see the culture part going away anytime soon.

Out of curiosity - is there anywhere in the US in history where housing that had the highest value in the country was affected massively (negatively) by regulation?

Wait and see what happens as a result of SALT deduction reform. Property taxes in the most expensive zip codes just became twice as expensive for many people. California may be less effected due to proposition 13 but places like Texas and New Jersey could be hit hard. I'm guessing we'll start to see the impact (whatever it is) in early 2019 when 2018 tax returns are due.

I just bought a condo in SF myself. It was an agonizingly difficult decision that I had been contemplating for years and years before finally taking the plunge. Some of what drove my decision was that most experts don't believe that the Bay Area real estate market is a bubble [1] [2].

(I wouldn't wish the anxiety around this decision on anyone, least of all future generations, which is why I've resolved to buck the trend of homeowner NIMBYism.)

[1]: https://www.mercurynews.com/2017/10/19/housing-economist-pos...

[2]: https://www.mercurynews.com/2018/01/11/unpacking-the-bay-are...

If you're in it for the long haul, then it was a very wise decision.

The bay area, specifically San Francisco, is one of the best real estate purchases anyone can make. It's geographically constrained and has historically shown to gain value over the past 100 years CONSISTENTLY.

There will be some small bumps in the road here or there, but when you look back in 20, or 30 years, I can almost guarantee you're going to see pretty solid returns. At least you can rest easy knowing it was perhaps the safest real estate investment anyone (who can afford it) could make.

The fact that real estate is so fundamentally an investment here (in the US/in the western world) is a deep underlying part of the problem. I agree - this person made the right decision, from their point of view, and it will be a good return on investment. But I'm definitely sort of existentially disappointed in the sort of social system that makes housing an investment like this.

Me too. I would take 0% return on investment and reasonable housing costs over obscene housing prices and some return on investment in a heartbeat. For people who just want a comfortable safety net for themselves and their children and not speculation, investments should be liquid and diversified, not tied up in one illiquid asset.

You and me both brother.

Want to get REALLY depressed? Consider this FACT:

Foreign investors (rich people) can purchase homes in the US (San Francisco), and have no requirement to live in them, or use them. They can be purchased as purely speculative investments and it happens ALL THE TIME.

I spoke with a real estate agent at a major SF firm, and asked them point blank - WHO can afford these insane home prices? He generated a nice little chart for me of the buyers by career. Software Engineers was number 4.

#1 - Foreign Investors (mainly Chinese) #2 - Trust funds #3 - I forget (this was 4 years ago) #4 - Software Engineer

How / why it's legal for foreign investors to hold onto homes that people could be living in is beyond me. It destroys communities, and seriously hurts everyone.

The thing holding me back is that I don't think it's sustainable to have small single-family homes going for >$1m in tear-down condition. It might not get hit with a huge correction, but I can't see these properties being worth $5m in 2028. No one can predict the future, but I don't see how it can keep going at anywhere near the pace it's currently going.

That $1m is for the land. The tear down condition home can be upgraded ad-infintum. Look at the tiny London flats right now where they are building multiple stories down into the ground.

I do not agree. You assume that things don’t change. The past 100 years doesn’t matter at all because the past 80 years are starkly different than the last 20 years. It’s not only the local housing bubble that one needs to be concerned about, it’s the stock market, specifically tech, bubble in general that should give rise to concern. While your city is culturally diverse, it is economically homogeneous. Sure, a stock market correction or downturn hurts the whole country, it specifically impacts those who overpaid for assets. If you can’t pay the mortgage for the next couple years, does it really matter that it will undoubtedly bounce back in 5-10 years? Never buy an assessment that is overpriced. Housing in the Bay Area is obviously and unarguably overpriced because supply is artificially suppressed.

The 1990s weren’t that long ago. Anyone who believes markets can rise forever is in for a shock when they slide.

> We’re in a bubble that’s ready to burst IMO.

Not necessarily. Bubbles are based on speculation. The last bubble was powered by sub-prime mortgages, which is what burst.

The Bay Area has the problem of ongoing immigration, a very highly paid demographic, and housing market that isn't keeping up. Simply, Offer < Demand.

Offer isn't looking to catch up any time soon [1], and demand crashing would mean the tech economy will have crashed as well (or, you know, The Big One).

[1] I'll have to sleuth up the link from 6mo-1y ago about how maximizing consctruction at this point would only keep up with demand, effectively only preventing a further increase.

Rents are flat the last three years. Values are up by over 30%. That difference feels speculative..

Looking at the Case-Shiller index for SF, I would agree it looks speculative.[1]

SF home prices went from an indexed 219 in Mar 2006, down to 120 in May 2009. That's a 45% decrease over two years.

Right now the index is at 259 and that's inflation adjusted.

[1]https://alfred.stlouisfed.org/series?seid=SFXRSA

I believe the Case-Shiller index is "seasonally-adjusted", not "inflation-adjusted"[1]. What makes you think it's adjusted for inflation?

[1] https://www.advisorperspectives.com/dshort/updates/2018/03/2...

The question also is, have sales kept up at those values?

The thing with subprime mortgages is, noone saw it coming. How do you know some other forces are at play in todays market? Forces that may not be true in the blink of an eye?

Not saying it is gonna burst, and i see the factors, but theyw ere there in 2008 too.

I lived in Vegas at the time. I saw it for the obvious problem that it was. I told everyone in the area that the bust was going to happen, but everyone was blinded by the money they were making. The shock people had was both amusing and disturbing at the same time.

Funny somewhat related story; just as the downslide started in that market we made an offer on a house 50k below asking. The owner, an investor, laughed at us. After the bust, we had already moved away at that point, we saw the house finally sold for something like 100k to 150k less than our low-ball offer.

Another somewhat related funny story; went to an open house and told the realtor I was worried over falling house values before deciding to buy. We were told house values don't fall. Didn't bother to point out to her that the for sale sign out front had a "reduced" sticker on it.

I have more, but I don't won't to be a bore.

I hear the same sentiment from realtors these days. Everyone drank the bay area real estate doesnt ever drop koolaid, in the long run, it might be true, in the short run, they probably have no clue, just busy selling their business.

I hear "low inventory, high demand" all the time, and while it is true, the part that most people ignore is, it is still possible that older buyers still have a ton of profit, while recent buyers can be under water

People absolutely saw it coming. I remember Geithner making comments to the effect of "we aren't ready yet!" when the bubble finally broke. The Fed was already making plans to shore up the affected banks, but hadn't yet built up the funds to do so effectively.

But then it depends on which timescale we're talking about.

When did they notice, and why did the housing prices go up and away years leading to 2008?

Basically, everybody wanted to ride the gravy train and nobody wanted to be the killjoy that pulled the brakes before it flew off of the cliff. There was a lot of money to be made and nobody thought they would be the ones left holding the bag.

The movie The Big Short explained this pretty well.

I suggest reading the book as well.

It's a long timeline, but I'd say things started getting specific late 2006:

https://en.wikipedia.org/wiki/Subprime_crisis_impact_timelin...

In December 2007 in Australia I saw a presentation on the coming collapse of the US subprime housing market - in a lunchtime seminar given by a (tech) colleague for interests sake.

Not necessarily. I am afraid that such sentiment would be priced in as well. If people are so certain about the market, the price would be led by the expectation rather than the fundamental.

The median family can't remotely afford the median house; we've left the fundamental value way behind.

It may or may not be a bubble, and honestly I don't know which outcome is worse. That is what really scares me.

Well, it's worse than a bubble. It's a genuine mass-scale shortage of housing. I don't think housing prices will crash down anytime soon based on all the pent up demand. But, much of it depends on how much hiring Google and other companies decide to do. If they keep hiring, Real estate will continue to go up.

Eventually they’re either going to lobby and change the laws-they will always get their way-or eventually hiring will slowly shift out of California. If the Bay Area had built more housing and kept housing prices in the realm of affordability I doubt Austin, Denver and many other cities would have half the tech scenes they have. One city’s loss is another’s gain. California is the real loser though in the situation which is why the should fix the housing restrictions on a state level and step in to overturn some of the stupid laws we have (like capping homes to 4 stories).

"We’re in a bubble that’s ready to burst IMO."

People have been saying this every single day since I moved to San Francisco in 2009. I guess if you keep predicting it eventually, you might end up being right, but its not exactly insightful.

Markets can stay irrational for a long period of time and then correct pretty quickly. I’d be surprised if prices aren’t near a plateau. A lot of tech companies are shifting hiring to other states. I don’t see the Bay Area growing forever and rent/home prices won’t go up exponentially forever.

I know many of my neighbors in the bay area bought long time ago (20 years) for maybe 1/5 of the current value. It would have to drop quite a bit to put them in the red. And they are getting the same high salary as any other techie. Of course the tech industry can eventually totally collapse but then why would people want to move in?

>We’re in a bubble that’s ready to burst IMO

Why do you think that, though? Is it solely because prices are rising very quickly? There's no indication whatsoever that people will stop buying any time soon. Homes are selling >110% of asking price for all cash within days, and supply is essentially fixed.

People were saying the exact same thing before the crash in 2007.

Not saying a crash is imminent, but prices are even higher than before last crash, even taking inflation into account.

>People were saying the exact same thing before the crash in 2007.

People were buying overvalued homes they couldn't afford in the middle of nowhere on subprime adjustable mortgages, which caused the crash of '07 when the ARM rates kicked in and they couldn't afford payments. This is a fundamentally different situation.

Now, a very small number of elite highly wealthy people from around the world are treating American housing stock as their investment vehicles since there is literally no other better option in 2018. Where we go from here in terms of affordable housing, nobody knows. But I really really doubt we're going to see a housing crash any time soon. It's just simple supply and demand.

Do you have a source for foreigners "treating American housing stock as their investment vehicles" and that driving up prices?

That was the complaint in Vancouver until they actually started tracking foreigner purchases and it turned out it was 10-15% of purchases (higher in certain neighborhoods). That means the other 85-90% of demand was from Canadians.

I dont have much knowledge, but i hear asian buyers investing looked similar to japan investing in 80s.

In the period after the downturn and just before the market started to tick up in mid 2012, there were a number of Asian investors buying up large swaths of foreclosed and distressed homes in Oakland for cash.

I recall this specifically, as I was in the market for a house at the time. Fortunately, I didn't face much cash competition as I was shopping slightly upmarket. The line seemed to be $300-400k. Those folks would be seeing pretty good returns at this point as those houses are now typically worth $500-600k and might be renting for $2-3k.

I believe the pricing growth is fueled by tech wage growth which is unsustainable.

I also think the tech sector in general (especially any company that is driven by ads) is due for a major correction soon, if not a full burst.

I can’t tell you exactly why I feel it, it’s more an emotional thing, but I don’t see a better strategy than that when trying to predict long-term housing prices.

I believe tech salaries will decline starting in about 5 years, and accelerating in 10 years.

Why?

HUGE influx of people into the field, fueled by government programs, people in tech pushing for more people to join (why they would ever do this is beyond me, say goodbye to your salary), education in high school and younger, wide availability to learn online, outsourcing, etc... The influx of workers will simply outstrip demand once worker influx hits it's powerband in 5-10 years.

Programming is on the same path that many craft careers have been on in years past. Mark my words - it's a blue collar job in the making.

If you aren't specializing in some niche field of programming right now, you will be kicking yourself in 10 years.

I’m not so sure. Many tech related jobs are fundamentally hard things for the majority of people to do. Even those with college degrees.

The problem with a bad hire in tech is that they can be worse than useless. Mentoring a junior software engineer can be very expensive and not many companies want to do that in an environment like the Bay Area where people hop between jobs frequently. Personally I think this is very short sighted and sad as I love mentoring junior engineers.

Thinking logically and being able to clearly articulate your thought process is a rarer skill than you would think.

I do a lot of teaching/consulting in the Bay Area. I see a lot of people coming out of bootcamps trying to get entry level positions.

Some of the candidates graduating from these bootcamps are awesome and have lots of potential but those are few and far between. Also, their is a shortage of entry level positions.

The best bootcamps filter heavily and generally only take people with a vaguely related college degree (Economics, law, physics, biology) or who have shown an aptitude (portfolio).

I’m summary, I wouldn’t be surprised if the growth in tech jobs outstrips the supply of quality candidates. If anything having years of relevant experience is going to become even more valuable as time progresses. It’s the entry level candidates that are going to have a harder time landing a job and paying rent in the Bay.

Tend to agree. Law went through a huge spike in graduates and private law schools last decade, and when the economy hit bottom, many lawyers felt the worst of it, especially recent grads who've still never really been able to get a foot in the door, while still paying off six figures of law school debt.

The difference between law and software engineering is that you can't really BS your way in software for too long without being caught. I knew a few friends who would never have been able to pass the math and engineering courses a decent CS program requires, but they were admitted and essentially paid a huge bribe (with loans) to get a law degree from a low-tier school, cram for months for the bar, and get certified.

But they never made much money in law, and probably would have been better off choosing another path.

I agree, the situation with law school a few years ago is a good analogy. Just because you got a degree from a random law school school doesn’t mean you are going to cut it in the real world.

My girlfriend is a lawyer who is transitioning to become a UX researcher via a bootcamp. The general standard of people in her bootcamp clas is quite high. On the young end you got recent grads from top tier schools (UC Berkeley English) on the older end of the spectrum you got a VP of marketing who’s worked at reasonably high profile consumer brands and who has a pretty good undergrad degree. Some of these bootcamps can be quite selective and aren’t easy to get into. They want highly motivated people who are smart. Those kinds of people are in short supply.

https://blog.codinghorror.com/why-cant-programmers-program/ Considering articles like this and the fact FizzBuzz tests are even a thing I wouldn't be so sure. I get your point, but the problem is while with enough time one can get it, quite a few people are going to hit a wall and not be able to pass it.

That article was written over 10 years ago

Has anything significant changed? We see the same phenomenon every time we try to hire developers.

I felt this way 20 years ago before the dot net bubble popped. But I greatly miss judged the size of the demand. I am not sure the ten year outlook is that bad.

I mostly agree and would argue it's due to the slow erosion of the middle / consumer class. Advertising-based businesses slowing down might be a leading indicator of a bigger macro trend: the reversion back to pre-WW2 levels of inequality :-/

“I also think the tech sector in general (especially any company that is driven by ads) is due for a major correction soon, if not a full burst.”

Why do you say that? Haven’t all the tech companies been performing well across a variety of metrics these last few years?

Ad money ultimately flows from consumer (mostly) discretionary demand. If we were to see a significant pullback in consumer discretionary spending, you’d see a lagging pullback in ad spending.

What is the price to rent ratio?

Cap rates are hovering around 2% Hong kong is worse, i hear.

2% in SJ? That's insane. I'm paying 0.35% of the average sale price in rent for a townhouse in my community (San Mateo/Burlingame area).

Both are insane, when you consider property tax and maintenance, unless you assume a continued upward march in valuations.

That is exactly why cap rates are squeezing.

Is that per month or per year?

Per month. I generally charge my tenants (outside the Area) pretty close to 1% per month, for reference. If I can't get 0.9% per month or more, the property isn't worth the effort at renting it out.

Looks like my data was old :)

I agree, it seems crazy to buy now. But will we actually see a crash, or just a period of stagnation?

I suppose it depends. Is the average property value increasing faster than the salaries of the people that fuel it? Sometimes folks will pack into a house, pumping up the total salary of the house over time, so you'd also have to consider cohabitation trends.

If property values goes up faster than salary per home, you'll end up with a precarious housing market subject to the whims of investor sentiment. Workers won't be able to move in and back up the house valuation if they are priced too high.

It's pretty straightforward to look at prices throughout the course of the real-bubble and speculate about that fact.

A few places along the peninsula had stagnant or slowly rising property values, like Palo Alto. Values in SF either held or declined very little. Places like Oakland lost a little value and Hayward, maybe one of the least desirable areas around the bay regained all of its lost value in just a few years.

Yup, in general investing an equivalent money in stocks is better than leveraging your income to buy an illiquid, non-diversified asset like a single-family home.

From Jan 1987 to Jan 2018, prices in San Francisco MSA have gone up 5.0% a year, ((258.81-46.95)/46.95)^(1/(2018-1987)). The equivalent amount invested in the stocks over that time period would have yielded 10.3% a year[1], with dividends reinvested.

Unless you are planning to use it as an investment property and reinvest rents (net of property tax, maintenance) in other properties, it still doesn't appear clear that buying a home vs renting and investing heavily in the market is a better bet, not to mention other intangibles like upkeep and longer commutes.

[1] https://fred.stlouisfed.org/series/SFXRSA

[2] https://dqydj.com/sp-500-return-calculator/