Wednesday, March 23, 2016

Housing is about to get melt your face off expensive in the Bay Area.

I haven't really talked about real estate lately because since they changed the rules in October the data has been really noisy. I've been waiting for a few months to see how things shook out. However this week a lot of bad news came out and I think people are misinterpreting the data and this is why.

If you drive anywhere in Silicon Valley these days you would believe we are in a building boom. Even when I was down in San Mateo this weekend they were putting new housing up. I bring this up because San Mateo is built on the Bay, so it doesn't have a lot of buildable land. I haven't been to the city lately(SF), but virtually everywhere else has projects going up. Or have gone up in the last year. Even in my burb where every piece of buildable land near downtown was snapped up perhaps a year and a half ago. An old car lot now has a mini complex of 20 units in my town.

That is how desperate builders are for land. You could see this at least a year ago because all these new developments in the Valley were being put up on shit land. Like next to the railroad tracks. Cute places, but your new neighbor is a train. Normally this would have alarmed me because visually it looks like this is going to bring prices down by a lot. However, building has never been this depressed for this long. Normally the trend is three years. This trend is now 8 years long.

I grew up in Santa Clara and Sunnyvale ad I've never really seen this much activity the whole time I've been alive. Usually its a more gradual sort of thing. I wasn't born here, but at this point I'm the closest thing to a native.

Anyway. I have been wholly shocked by how fast these new developments have filled up. And My town had quite a few of them. One of them was so popular they sold out and started holding an auction for their next set of houses this year. Yeah, it was a shock to us all.

And this is where the problem begins. All the low hanging land is now gone. It will be very expensive to find suitable land from here on out causing housing to be more  expensive. I think this is also what is causing the new housing data to look weak right now. A lot of of these projects are almost built out, so sales are going to look weak. You can't sell what you haven't built. They can't sell starter houses because land is so expensive.

The other thing that is bothering me is that people who write about real estate don't really seem to understand what happened during the recession to housing, Read: Why finding a starter home is harder than ever.

"Why the inventory shortage? Investors bought many foreclosed homes that were likely starter homes during the recession and turned them into rentals, thus keeping them off the sales market, McLaughlin said. In addition, a large share of lower-priced homes are still underwater compared with premium homes, which Trulia defines as the upper third of the market, he added.”These (underwater) homeowners are unlikely to sell and take a loss,” he said."

This is not exactly what happened.  What did happen was that everyone was tossed out of their homes and everyone moved into the low end market because it was all they could afford, or all they could qualify for. This has compressed the low and and high end markets. This has actually put a huge strain on the low end market which is not so low end any more. I don't even think they have it right when they claim that lower prices homes are still the ones underwater. Low end homes have appreciated roughly 100% since the depths of the crash everywhere I look. And logically who do you think has a better chance of toughing out out for 10 years? The low end market, or the high end market?

All I know if that if we even get a hint of inflation nobody is going to move because they have super low rates now. This market is going to be so stuck it's going to melt your face off.


Anonymous said...

Sacramento is the bay area's new low end. I bet in 10 years people will bemoan the gentrification of Stockton. What I'm a bit curious about is what happens to the prices when they start putting in super express lanes for the robot drivers. If commutes are a third of the time when they outlaw human driven cars, people will be willing to spread further out. It would be ironic if Google ends up imploding the local economy by solving the traffic problem. DF

she said: said...

The gentrification of Stockton is wild to think about, but East Palo Alto and now Oakland have turned so.... I could see the next stop being Stockton.

You will probably be dead before they outlaw humans driving cars. That means every single car on the road right now would be illegal. That is a lot of stock to get rid of.

Anonymous said...

You are probably right, but if all cars produced become automatic then it will probably only take 20 years before the bulk of drivers are using autopilot. I do see self driving becoming a"moral" issue that legislation will try to solve though. Accidents are a huge cause of death and if they can be avoided and put massive amounts of money into the pockets of big multinational companies then I can imagine a world where you need expensive permits in order to drive a "classic" DF

she said: said...

I think it will be more of a generational thing. Oddly, the people who will benefit the most will be the most resistant to the new tech. Some people are not going to want to switch. I even talked to a pilot once who said he'd never switch which I thought was fascinating since a lot of cockpits have automation now. But the pilot oddly didn't trust the cars. People are weird like that.

That is an interesting take on the old stock though. A few days ago Mr S. said he thought there wouldn't be any more sports cars because of self driving. Which makes me flat out sad. But maybe they will have some kind of permit system.