We hear talk of bubbles, especially during increasing markets, but we don't typically know what to look for beyond high prices and a feeding frenzy of buying.
Bubbles expand, blowing larger and over-inflating the market; we are in more of a constriction as available inventory remains at near-historic lows. That's not to say these prices will continue their current trajectory, but more on that later.
A component of real estate bubbles beyond lack of supply for high demand is speculative buying and building. Sure there are people flipping houses again and yes, that is considered speculative, but at these prices there's not nearly the number of flippers out there that there were a decade ago. People are paying high prices as they look toward living in their new home "forever" (which tends to be around 10-15 years, depending on the growth of the market and their family size). On the side of speculative building, we're not seeing that in the Bay Area. There are few, if any, builders betting on the Field of Dreams, "if I build it, they will come" philosophy. Instead we're seeing building in response to demand for housing from incoming jobs, and thus new residents needing somewhere to live. And even still, the builds are slow going as cities negotiate percentages of affordable housing with developers.
The chief economist at Realtor.com put together a list of six factors he used to create a "bubble index" which he then used to create the graph below comparing how this index measured up in 2005 in cities around the country compared to today. The six factors are: price appreciation, the prevalence of house flipping, the share of buyers financing their purchases versus paying cash, price to income ratios, price to rent ratios, and housing starts to housing formation numbers.
Based on the graph above, there are some cities that are pretty close to bubble territory, if not deeper into it than they were in 2005, however you can see that San Francisco and San Jose have a ways to go. Still, that doesn't mean we will continue to realize the kind of gains we have in recent years (17% since 2012 in Oakland alone).
The steady average increase of 5% year over year is not likely to continue forever, though it's doubtful we'll experience a crash like we felt in 2007-2009 which resulted in a 30% dip in values. No, instead it's more likely that we'll see a gentle slowing, more of a plateau than a real dip. In fact, San Francisco's condo and loft market began to feel a slowing down earlier this year with more price reductions and longer time on the market.
Curious what you can keep an eye in our Bay Area market? In addition to the aforementioned speculative building, my eye is on the tech money. Anecdotally I've heard there are big tech companies opting to scrap the ESOPs and other stock based incentives and instead pay their employees the cash value of those options. Talk about a cash infusion in the market! I'm also eying the not-so-elusive unicorns, companies with a valuation of $1B or more. They are not as rare as they once were and according to techworld.com, between 2000-2003 it took 8.5 years for a company to become a unicorn; between 2009-2013 we're down to 2.9 years on average. Unicorns are dying too as investor confidence softens or user numbers dwindle. Tech is big money in the Bay Area. We are lucky to be home to so many giants with solid future growth securing the livelihoods of their employees, but not everyone can be a Google, Apple, Intel, or Facebook.
If you've been thinking about selling, this is a great time to begin planting seeds. No one has a crystal ball and though it doesn't look like a bubble, we could be hitting a plateau in prices. Get the most you can out of your investment now and time your purchase plan well by moving swiftly and smartly. Call me to learn how to reap your largest benefits.
