Silicon Sultans Bid Up San Francisco Real Estate To Hysterical Levels

Posted by on February 24, 2017 1:29 pm
Tags:
Categories: Uncategorized

Another great real estate bubble update from our friends at DoctorHousingBubble.com 

San Francisco tends to put Southern California to shame when it comes to real estate mania.  The tech driven frenzy in the Bay Area is something to behold.  What is so interesting is that San Francisco, being the hippie and alt-culture hub back in the baby boomers heyday, is now fully gentrified by tech and investor owners that really have little to do with the hippie and art subculture of the area. I mean how many hippies can afford a $1.3 million crap shack?  The Bay Area continues to defy gravity when it comes to prices.  People are having to “drive to qualify” if they aren’t the DINK tech couples or investors with large pockets.  Of course by definition the ultra-wealthy are a small part of the market but with few properties for sale, if they have a desire to buy they are going to buy.  This is why you hear of stories of Google employees living out of vans even though they make what most would view as a fantastic salary.  San Francisco continues to march on a unique path.

San Francisco breaks through a new peak

San Francisco real estate has been as hot as the NASDAQ.  There is an allure to being part of the new tech-uber wealthy class.  Wearable tech, top of the line phones, cars that drive for you even when you are half awake.  So it is interesting for a region so self-aware that they are more than happy to purchase $1.3 million crap shacks.  Many younger tech workers are not falling for this and that is why the homeownership rate in San Francisco is among the lowest in the nation.  Short of you wanting to mortgage your life away writing code for a company that might be out of fashion in two years, you need to be nimble and flexible with your ability to learn.

And there are so many instances of people being priced out with great incomes.  But manias go beyond the rational.  Take a look at the increase in prices below:

sf real estate prices

Home values seemed insane in 2007 when the median home price was $900,000.  But just look at how things have turned.  Now the median price is $1.3 million and the common response is “I wish I bought a crap shack then!”  It is funny that this is viewed as “safe” yet taking a “risky bet” on say Tesla over the same time is just plain crazy:

tesla

Do the math here.  Let us say you are a genius and bought at the dip in 2010 or 2011 when the crap shack cost you $700,000:

Down payment:                               $140,000

Equity gained:                   $600,000

We’ll even say that this person bought with an interest only loan to keep the math simple.  Now say you invested that $140,000 in Tesla:

$140,000 in 2010 would have bought you 5,600 shares of Tesla.

Those 5,600 shares today are now worth $1,533,896.  Even after tax gains, you are way ahead making the risky bet on Tesla.

I mean that is the problem with real estate manias.  Even when people rewrite history, they fail to mention all of the other alternative investments that would have made sense.  And this is Tesla!  These tech people are buying them left and right in San Francisco.  You didn’t need to be a genius to know this company was going to do well.

Yet that is my point here.  For whatever reason, real estate is viewed as ultra-safe even though you are putting down a big amount of money that is locked down and can’t be used for other investments.  This is the true nature of opportunity cost.  Now is that crap shack worth $1.3 million today?  Do the math here:

Down payment:                               $260,000

Mortgage:                           $1,040,000

mortgage

You are paying almost $6,000 a month after putting down a sizable down payment.  Here is what $1.3 million will buy you:

house sf

And this place even gives you a bit of rental history:

rent history

Notice how renters don’t stay that long?  Could it be that other opportunities come along?  Or do you want to be stuck here for 30 years with a big mortgage?  And you can’t assume prices will simply keep going up but they can in a mania.  But that is as risky as betting on the next Tesla.  Then again, some like to believe there is no risk in buying a home in a mania.  Try telling that to the 7,000,000+ people that lost homes in foreclosure over the last 10 years, 1,000,000 of those in California.