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.<p>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.
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.<p>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.<p>That's not even accounting for the consumption value of the house itself.
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:<p>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).<p>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).<p>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.
"This is the only asset class with significantly above average gains for decades."<p>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.<p>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.<p>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").
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.<p>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.
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.
NYT had an interesting calculator on rent vs buy a while back: <a href="http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html" rel="nofollow">http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...</a>
> 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.<p>I wasn't buying the monetary arguments because the Bay Area is monetarily primarily defined by the startup scene, but this argument seems interesting.<p>The comparison to the oil boom drives it home.<p>As for "what defines a bubble", we really only know once it bursts... Otherwise it's a bull market!
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.
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).<p><a href="http://www.snow.ventures/blog/" rel="nofollow">http://www.snow.ventures/blog/</a><p>Open to feedback!
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.<p><a href="http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b3035d679ec.jpg" rel="nofollow">http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b30...</a>
The argument about exposure is a <i>general</i> 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 <i>adapt</i> 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.
<p><pre><code> the influx of foreign buyers (particularly money coming
from China that is not that price sensitive)
</code></pre>
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.
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).
The article is comparing median income (of all residents) to prices that home-owners pay which is pretty much apples to oranges.<p>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.
"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."
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)
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. ;)