Low inventory in the residential real estate market helped drive up the area median home price in Mesa County and resulted in a drop in sales throughout the

Will house prices go down in the Bay Area?

Prices went down about 11.5% from the March 2018 peak. But prices are rebounding in 2019 as mortgage rates went down, the S&P 500 went back to an all-time high, and the tech IPOs are coming.

But there is some weakness in rents as new inventory/supply comes online.

House prices are determined by rents and rents have softened due to the large construction of luxury condos. I know this first hand because I’ve been a SF landlord since 2005, and most recently tried to find renters in May 2017 and December 2017.

For my 4 bedroom, 3 bathroom rental house in May 2017, I was receiving $9,000 a month. After 45 days on the market, the best two offers I got were for $7,500 a month = 16.7% decline. Instead of trying to rent it out for much less, I sold the house for $2,740,000 = 30X annual gross rent. I wanted to hold it forever, so my kids would have something to manage or somewhere to live just in case, but I just couldn’t take being a landlord anymore.

For my 2 bedroom, 2 bathroom condo rental, my previous tenants found the new tenants for me so I kept the rent flat at $4,200/month. In retrospect, I should have tried to raise the rent to $4,300 or $4,400 to cover the rising HOA and property taxes, but I didn’t want to risk losing them (landlord mentality now vs let’s raise the rent). The only “benefit” I got was not losing a month or more worth of rent looking for another tenant.

Here’s a more detailed chart highlighting the rents in the SF Bay Area from a couple sources.

I ended up reinvesting $550,000 of my $1.8M SF rental house sale proceeds in in much cheaper real estate in the heartland through real estate crowdfunding. The prices in non-coastal cities are closer to 10X – 15X annual gross rent (versus 30X annual gross rent in SF), and yields/potential returns are 8% – 13% vs. -5% to +2.5% in SF. In other words, for 1/5 the amount of risk exposure I’m taking, I can earn the same amount of income.

Buyers of SF real estate and coastal real estate should be pickier now. But knowing how people lose their heads bidding on properties, I suspect there will continue to be huge overbids at peak prices. Remember, leverage is your friend on the way up, and your mortal enemy on the way down.

If you only have your primary residence, then keep on holding and enjoying life. If you have two or more properties, you might want to consider selling because there are plenty of better money making opportunities out there.

It is too early to tell how much the $10,000 SALT deduction cap and the $750,000 new mortgage interest deduction cap will affect Bay Area home prices and other expensive coastal city markets. But at the margin, it’s not good. I’d much rather invest in the heartland of America instead.

Beware of what the stock market is telling us in 2018. Many tech stocks have corrected by over 20% from their recent highs, meaning that expectations for corporate profits and therefore jobs are at risk. Leveraging up to buy a huge asset in this part of the cycle is very dangerous.

Related: The Real Estate Investing Rule To Follow: Rent Luxury, Buy Utility

Regards,

Sam, Financial Samurai