The following is meant to provoke thought and provide perspectives on buying or selling real estate within San Francisco and San Mateo County marketplace during the pandemic and its affect on the economy and all areas of lifestyle.
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Rollercoaster Stock Market and Economy:
- S&P 500 index as of mid-April is down approximately 15% from previous recent high. This affects some Buyers down payment which could lower their purchase power or even take some out of the market
- According to USA Today, as of mid-April, since mid-March, there has been new unemployment filings in CA of ~127k people which accounts for ~4% total workers. This is likely understated.
- 2020 IPO window is basically closed which employees at some local companies were anticipating for a liquidity event.
- Uncertainty of economy will make some buyers delay any major purchases
Lost in Covad-19 news is the November 2020 Presidential elections. It’s safe to state that whether Trump or Biden wins in November will have a significant impact on the direction of the USA. The combination of the next 6 month uncertainty, and then the results of election will affect the stock markets, and people’s confidence or skittishness of the economy. This could either delay or accelerate people’s actions on real estate.
Uncertainty of the Pandemic:
Bay Area counties generally have SIP through May 3. The date is not fixed and could extend longer. The longer SIP is extended, the worse businesses and people will be negatively affected. Those who believe the pandemic will be mitigated sooner, rather than later are more bullish that things will recover rapidly. Those who think things will take much longer than anticipated will be more bearish. This is uncharted territory so who knows.
Bay Area Population:
Over the last 8+ years, we have seen tremendous job growth in the area and a migration to SF Peninsula faster than new housing units, thus driving up real estate values and average rent. Question is how many thousands of people will leave the Bay Area with companies currently laying off employees, fewer new job postings, fewer private company liquidity events, and a slow down in new VC investments in start-ups? One tangible positive effect to this possibility is hopefully a decrease in traffic on 101/280 freeways and area bridges!
Back in mid-2010’s, we saw the explosion of sub-prime, no down payment, no documentation loans that led to the mortgage meltdown and economic recession. Coming out of the recession, we saw lenders clamp down on their underwriting such that only the safest and most stable borrowers could qualify for a mortgage. Over the next 8 years or so, we slowly observed lenders becoming more creative and looser in the type of loan products that were available to borrowers allowing more buyers to qualify. This is especially important for the expensive SF Bay market.
Given the upcoming issues with people’s ability to keep up with mortgage payments if they’ve lost their jobs or are small business owners, lender underwriting has already started tightening underwriting standards and eliminating the more aggressive products. Some Buyers will have a more challenging time getting qualified than just last year, even though interest rates remain low.
Medium-to-Long Term Perspectives…Why Might One Consider Real Estate Now?
For those who are regular readers of my blog posts, I always emphasize that it is not possible with 100% certainty to predict and time the stock and real estate markets. Those who can are probably long retired! Given all the challenges the world is experiencing right now, some may question why anyone would want to still aggressively look at Bay Area real estate during these unprecedented times of Shelter-in-Place. The following are some financial and non-financial reasons for these owner-occupied Buyers:
Buying owner occupied real estate isn’t just a financial decision, it’s a lifestyle decision. I am happy to have a house these days where my kids are able to kick a soccer ball around the yard and shoot some baskets during SIP. Real estate is most people’s single biggest financial investment in their lives, but it is also where one that directly impacts quality of life. Kids will go to their neighborhood school and make friends, and where people are part of a community. Being quarantined now highlights the meaningfulness of a “forever home” even more.
Regardless of one’s viewpoint on the current economic uncertainties, we are still in the high technology and biotech capital of the world. We are at the footsteps of Cal Berkeley and Stanford University. Companies who value a highly educated workforce will always want to have a major presence in the area to tap into intellectual and financial capital. Google, Apple, Visa, Oracle, Genentech, Gilead, Electronic Art, Facebook, and even Wells Fargo….oh my. Major VCs and Angels are here.
Beautiful Landscape and Climate All Around:
There are slew of reasons why people love it here, besides jobs. No matter where one lives in SF or San Mateo counties, you are within 45 minutes away from mountains, beaches, city life, suburbia, from Michelin rated to hole-in-the-wall ethnic restaurants, various religious sects, airports, bridges, too many things to list. Diversity of people. Year round mild weather. Spectacular SF skyline and Golden Gate bridge views. I have traveled to 26 countries in the world and 25 US States and SF continues to be my favorite city in the who world.
Lack of Land:
Specific to the mid-Peninsula and San Francisco, there just isn’t excess of land that hasn’t already been developed. Supply of new housing units are contrained which makes it challenging to keep up with recent historical job growth during strong economic times. This is partially why real estate prices had skyrockets during the most recent boom times such that buyers had to more often than not compete in multiple offer situations. This is also why those buyers who are committed to living and working in the SF Peninsula may now be seeking this as an opportunity to buy into the real estate market now despite uncertainty in short term.
Interesting Datapoint from the Last Recession in 2008-2011
Let’s revisit the last recession during the mortgage meltdown from approximately 2008 to 2011. Case-Shiller is widely recognized for data within real estate for major metropolitan areas. Based on different iterations of the data and dependent on how broad SF Bay is defined, I’ve seen the SF Bay real estate bubble burst by an average range of between 30-40% from 2007 to 2011. But this is across the entire Bay Area across all price points and asset classes. For example, at one point in parts of East Bay’s condo prices were down up to 60% from their previous high water mark.
For a narrower analysis that represents a sweet spot for the type of owner-occupied Buyers who may be looking right now, I ran MLS data on just 3 cities in the mid-Peninsula of San Mateo, Belmont and San Carlos for just Single Family Residences (houses) in the 1000 to 2000 square feet size. Basically, this is your very solid 2-4 bedroom house catered to 1st time home buyers or move up buyers. Take a look at chart.
|YEAR||# SOLD||AVG $/SF|
In peak 2007, the average $/SF was $634. The bottom of real estate in 2011, the average $/SF dropped by only 21%. From the bottom in 2011 to 2019’s $1,076, the market rose 115% – more than double. Even if someone bought at the previous cycles high of $634, and then rode it down in 2011 and kept living in the property through 2019, the gain would have still been an astounding 70%.
Without getting into more complex financial theory and measurements, assuming one took out a mortgage, the leveraged ROI is multiples higher than 70%.
And here’s the other factor as discussed previously of why someone might just jump in and buy in 2008, 2009 or 2010 when the market was still not at the very bottom? Rather than try to wait a few years before buying to try to time the market (very difficult to do), the Buyer actually gets to move into their home and actually enjoy their purchase rather than live in either a rental or a smaller property. It’s hard to put a dollar amount on quality of life standards and stability.
Of course, the 21% decline didn’t include a larger geographic territory and didn’t include the larger properties and smaller condos which would have had an effect on the pricing decline during this time. But that number is just an interesting different perspective particularly for the the type of Buyers who might still be in the market right now.
We are all praying for Coronavirus to be contained and vaccine to be developed. Shelter-in-Place has been challenging for all. I hope everyone stays safe out there, and that those greatly affected will be able to rebound from any set-backs. As always, my doors and/or Zoom call is always open and available to talk real estate, upcoming NFL draft or anything else, I am around and would look forward to speaking to you.
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