
Stop Buying Real Estate in SF - abcampbell
https://medium.com/@alexanderbcampbell/stop-buying-real-estate-in-sf-8c019897469#.t4bbabam3
======
sytelus
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.

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.

~~~
disposition2
Not to simplify it but chances are there is more gold in the ground, real
estate is the one commodity that is truly finite. Granted, people can always
build on unbuilt land but that in turn requires infrastructure, etc to support
a new community or residence.

For this reason, it being finite, I wish the US government would set some
restrictions on allowing business and foreign investments to purchase
residential real estate. It is hard enough (San Francisco seems like a large
part of the rest of the US on steroids) for working people to purchase these
days...having empty homes bought by non-residents just sit waiting until the
prices are forced (due to said) to rise is only going to exacerbate the
situation.

~~~
vinceguidry
> real estate is the one commodity that is truly finite

This is untrue in both the literal and figurative senses. In the literal
sense, real estate isn't just land, other properties of land, such as mineral
or air rights, can also be created, bought, and sold. You can build up and
sell condominiums. You can build down. You can dredge land out of the ocean.
Eventually you'll be able to build out in space.

In the figurative sense, people make this claim to assert that real estate is
becoming rare, and therefore intrinsically valuable. While certain markets
definitely are this way, like NYC penthouses, the asset class as a whole is
much like it's brethren in this regard. Value is in the eye of the beholder,
trends develop rapidly and can bolster or devalue individual properties at
breathtaking rates.

~~~
dev360
I wish startups could tackle actually making affordable home ownership a
reality. This is a much larger problem for our generation than what people
care to admit.

Specifically, I'm wondering why there are no cheap modular houses (like in
movie ex machina). Houses that are mass produced, cheap and relatively easy to
ship and assemble but configurable.

~~~
vinceguidry
> I wish startups could tackle actually making affordable home ownership a
> reality.

You're looking at one of the oldest, most capital-intensive markets in
existence. It's practically the polar opposite of technology. Not a whole lot
startups can really do.

> Specifically, I'm wondering why there are no cheap modular houses (like in
> movie ex machina). Houses that are mass produced, cheap and relatively easy
> to ship and assemble but configurable.

Well, that's easy to answer. In most real estate transactions, the cost of the
underlying land is going to be the dominant factor, the house is just a value-
add, the equivalent of buying a soda with your meal.

Modular houses themselves are at a disadvantage because it's not the cheapest
way to put homes on land. Modern stick-framed houses are so cheap to put up
these days that once you factor in the R&D, transportation and specialized
installation costs, factory-built modular homes are at a severe disadvantage.
Construction workers are literally everywhere, the labor is so cheap that it's
practically a non-factor.

Also, it's easy to over-build. If developers create a glut, nobody's going to
make money for a long time. Prices don't really come down during a glut
because the developer would rather let the house sit than sell at a loss. So
you get a lot of empty housing stock sitting around.

~~~
prostoalex
> You're looking at one of the oldest, most capital-intensive markets in
> existence. It's practically the polar opposite of technology. Not a whole
> lot startups can really do.

Well, prefab homes are a thing and they even use the word 'modular' liberally
[http://opinionator.blogs.nytimes.com/2013/05/23/prefab-
lives...](http://opinionator.blogs.nytimes.com/2013/05/23/prefab-lives/)
mobile homes are a thing, and are fairly dominant in low-income areas (which
kinda sorta impacts the market acceptance of prefab homes). But no one has
quite cracked the prefab for multi-family market.

~~~
abakker
[http://www.telegraph.co.uk/news/picturegalleries/worldnews/1...](http://www.telegraph.co.uk/news/picturegalleries/worldnews/11485389/Chinese-
company-builds-57-storey-skyscraper-in-19-days-in-pictures.html)

Multifamily and prefab.

------
fiatmoney
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.

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.

That's not even accounting for the consumption value of the house itself.

~~~
chermanowicz
Spoken like a true economist (not that this is a bad thing). I agree with your
first point, but I think you're wrong about the put option. It is not easy to
"break even or minimize your losses" at all. Only if you're putting no money
down would this be even close. Real estate is illiquid by definition and post
2008 nearly every foreclosure lost 100% of the equity built (and a major
impact on your credit score).

~~~
fiatmoney
Right, I'm looking at it as one component of an overall cash flow & asset
portfolio. It's easy to construct a scenario where it doesn't pay off -
deflation that hits incomes, house prices, and rents is an easy one. But, as
one component of an overall portfolio it has certain characteristics that help
you hedge other risks you're exposed to in a way that not a lot of other asset
classes can.

This still requires that it isn't "too" expensive even given those other
benefits.

------
wtvanhest
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:

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).

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).

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.

~~~
jorts
Having a property manager and a home warranty can alleviate a lot of the pain
points of owning a place that's not local.

~~~
wtvanhest
That is a misconception. Once you do the math, a property manager is not
economically feasible and a home warranty doesn't really help.

Typical property management fees are 10% of gross where most properties net
much less than 10% over the first 10 years of ownership in cash flow.

A home warranty is usually only given for new homes as an incentive. New homes
can appreciate, but if you are 'investing' you should be focused on buying at
a good price, not buying at a retail price from a home builder.

The home warranty second market (i.e. 3rd party home warranties) can reduce
risk, but do not typically cover small repairs like a toilet not working etc.
Those need to be done by the home owner, because if you hire someone every
time it will cost you too much.

Like I said, you will have a very, very bad time if you try to geographically
diversify real estate holdings.

------
code4tee
"This is the only asset class with significantly above average gains for
decades."

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.

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.

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").

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minimaxir
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.

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.

~~~
ScottBurson
No, the core argument is "don't buy SF real estate because interest rates are
going up". It's a valid point. Given a certain amount of income, a home buyer
can afford a certain monthly payment. If interest rates go up, and prices
didn't fall, payments would go up. Since the market can't support higher
payments -- people are paying as large a fraction of their income as they can
stand to already -- what will happen instead is that prices will have to come
down.

As for the plot, it's just a log-log plot. Stretch the axes however you like;
it's still going to have the same shape.

~~~
lintiness
if the author knows which way interest rates are going, he should quit his day
job and buy / short interest rate futures. the road is littered with bodies of
people who believe japan's interest rates couldn't stay at "zero" forever.

------
sawthat
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.

~~~
ChuckMcM
What is the downside in your mind? Are you thinking that house prices will
fall dramatically and you'll be underwater?

~~~
themartorana
Or you lose your job, and your ability to pay the mortgage, and so you lose
your house and your deposit...

~~~
mikeryan
Unless you've over leveraged your mortgage you should (right now) still be
able to get out of a house in the Bay Area with most of your equity intact
should you no longer be able to keep up with the payments.

If you're underwater because you've used your house as an ATM you're on your
own but responsible parties shouldn't be losing their deposit.

This all changes if there's a huge downward swing in home prices. It's unclear
if there's downward pressure whether home prices would significantly fall as
opposed to flatten out . The 2008 collapse caused about 5 years of lowered
home prices, bottoming out around 2010. But a lot of that was also driven by
poor lending practices.

~~~
superuser2
If there is a market correction coming in the Bay Area tech world, then for
many of us layoffs and plummeting home prices are likely to happen at the same
time. I accept that unemployment is a possibility, and I accept the the
collapse of the value of my assets is a possibility, but I'd like to make sure
they happen separately.

~~~
ChuckMcM
However, if that happened it would be unprecedented. Seriously so. During the
foreclosure crisis, which was itself unprecedented, house prices fell in a
significant way for the first time, they also recovered faster than any other
part of the country.

A possibly more realistic scenario is a magnitude 9 quake along the Hayward
fault. Something that would destroy (not merely damage) a significant chunk of
infrastructure resulting in the dissolution of hundreds, if not thousands of
businesses and the concomitant unemployment that would ensue.

However even in that case the amount of resources available to restart are
really unprecedented relative to the rest of the country.

~~~
mahyarm
An earthquake on hayward might just make housing worse as many businesses will
still be around, but the housing supply dropped a lot.

------
arcamp
NYT had an interesting calculator on rent vs buy a while back:
[http://www.nytimes.com/interactive/2014/upshot/buy-rent-
calc...](http://www.nytimes.com/interactive/2014/upshot/buy-rent-
calculator.html)

~~~
ccarter84
I loved this calculator when they first issued it, (2012ish?) but now they've
revamped it and it takes up too much space for whatever functionality they
added.

~~~
ccarter84
Found it! The advanced panel, the simple graphics, highlighting the parallel
rolls of expected rate of Rent increase vs Home price appreciation and making
it a slider! Much usability, minimal space.

\--
[http://web.archive.org/web/20120228050050/http://www.nytimes...](http://web.archive.org/web/20120228050050/http://www.nytimes.com/interactive/business/buy-
rent-calculator.html)

This is the exact reason I support Archive.org...well that and occasionally it
helps with work stuff.

------
frandroid
> 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.

I wasn't buying the monetary arguments because the Bay Area is monetarily
primarily defined by the startup scene, but this argument seems interesting.

The comparison to the oil boom drives it home.

As for "what defines a bubble", we really only know once it bursts...
Otherwise it's a bull market!

------
venantius
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.

~~~
cowsandmilk
yep. This is a common argument against using % of income for housing burden as
a measure.

If you make $200K, paying 40% of your salary for housing is much less of a
burden than if you make $20k. (e.g. you are left with a much larger amount of
money to pay for necessities like food, and probably still have quite a large
disposable income)

------
abcampbell
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).

[http://www.snow.ventures/blog/](http://www.snow.ventures/blog/)

Open to feedback!

~~~
nedwin
Would be good to see a plot of housing prices in SF during the last bubble and
the post-bubble ramifications. We've been here before so not including that
graph seems strange.

~~~
abcampbell
You can see that in the video in the article. The rise and fall of the blue
dots over time.

SF housing didn't go bust during the 2001, but there was significantly less
leverage in the system and home prices were significantly more affordable.

------
bduerst
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.

[http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b30...](http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b3035d679ec.jpg)

------
MBlume
The argument about exposure is a _general_ 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 _adapt_ 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.

------
myth_buster

      the influx of foreign buyers (particularly money coming 
      from China that is not that price sensitive)
    

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.

~~~
nerfhammer
If there wasn't an extreme housing shortage and expectations for it to
continue long-term then such investors wouldn't be interested in the first
place. It's a symptom, and probably not much of a cause.

~~~
myth_buster
What I meant was that the dynamics have changed. A local buying house is
different from a non-resident buying the property solely as an investment.

It gives off a different price signal.

------
foobarian
Here we go again, concluding we shouldn't buy houses because we won't make
money from it.

~~~
lechevalierd3on
Yeah because renting makes you rich right?

~~~
gcarre
The article isn't about buying vs renting. It's about buying real estate in
the Bay Area as an investment. The bottom line is that if you have money to
invest you should invest it in something else because it's too risky right
now, especially if you are already exposed to the risk by working in tech in
the Bay Area.

~~~
abcampbell
Yes, this is what I am saying.

------
CyberDildonics
At what point would it be cost effective to park a cruise ship close to the
shore and rent out the rooms?

~~~
sawthat
Never. Only people who have never been on a boat on the pacific coast think
this is a good idea.

~~~
CyberDildonics
Who said anything about good ideas?

------
etep
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).

~~~
abcampbell
The premise is that you should consider your broad life portfolio, and with
sufficient reflection, most people would probably want to diversify their
life. Have written about this before:

[http://www.snow.ventures/blog/2015/12/10/diverisify-your-
lif...](http://www.snow.ventures/blog/2015/12/10/diverisify-your-life)

And yes, everything is connected, but connected to _different degrees_. That's
just an input in how you think about your risk.

We cannot entirely escape system risk (insofar as we are all part of one big
system) but that doesn't mean we can't diversify away from out exposure to
individual systems (bay area tech for example).

------
tathastu
The article is comparing median income (of all residents) to prices that home-
owners pay which is pretty much apples to oranges.

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.

------
rubidium
"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."

------
Apocryphon
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)

~~~
ChuckMcM
Living south of San Jose and working in SF means very long commutes. Working
in San Jose though it would be fine, just like working in Fremont or Milpitas
is great for folks living in those towns. If you're working in the Santa Clara
valley (aka Silicon Valley) you can live in a lot of places, but commuting
north/south on 85 is painful to say the least.

~~~
Apocryphon
Right, but I mean I never even hear about people living in the communities
adjacently south of SF. I understand traffic going into the city is a mess,
and those places are somewhat more rundown and more suburban, but it's closer
than Oakland is.

~~~
jedberg
Commuting from Oakland, assuming public transit, it much closer to SOMA than
even South SF.

And honestly, it's probably a selection bias. The people who live in those
areas are families because they're mostly single family homes. They aren't the
young single people who make a lot of noise about housing prices.

------
vanrysss
Come to Portland! The office space and engineers are cheaper here.

~~~
beachstartup
not for long.

what i want to know: where are people from portland moving to?

~~~
beatpanda
I feel like people have been saying this about Portland (e.g. its about to
become way too expensive and 'ruined') for about ten years, and Portland is
still a very nice and affordable city.

------
ejk314
Is there any way to hedge your investment in a SF house if you must move there
anyways?

------
awgneo
Stop Doing Everything in SF

------
quattrofan
And London

------
mixmastamyk
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. ;)

