The conversation that is going around the real estate industry water cooler is, “Are we in the bubble in the Bay Area and when is it going to burst?” Are Newark residents now playing poker with their mortgages? Instead of giving my opinion, I have gathered some of the top minds in the real estate world and asked them “is the Bay Area real estate bubble real?”
“This is not a bubble,” says Chris Thornberg, an economist in Los Angeles. “The money flooding the Bay Area isn’t built on speculation like the last boom. These are people with real money, with real incomes. They have enough money to live in whatever cities and neighborhoods they want, so if there’s not enough high-end housing, they’ll just gentrify lower-income neighborhoods.”
Fitch Ratings’ Managing Director Grant Bailey has no doubt that homes here are overvalued and pointed to a fairly recent run-up to describe the current market.
“The last time the Bay Area experienced this kind of home price growth was during the dot-com era from 1997-2000,” Bailey said. Prices continue to go up in many markets throughout the country, but home prices in the Bay Area have “risen to a level unsupportable by area income,” according to Fitch Ratings which also found that San Francisco home prices “hit an all-time high in third-quarter 2015 and are now 62 percent above their post-recession low in early 2012.”
Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, said, “The high-tech boom we have is unsustainable. Job growth is unsustainable. There will be, in the next three years, a correction. These unicorns (private companies valued at more than $1 billion) will have to cut jobs. That will have by far the most important impact” on the housing market. The only question, he said, “is whether it’s a minor decline or something more substantial.”
“I can safely say that the pace of growth we are having is not sustainable,” said Cynthia Kroll, chief economist with the Association of Bay Area Governments. “I don’t know if we are poised for the kind of bust we had in 2000 or 2001, but at some point this has to at least slow down.”
Big investors and hedge funds have largely left the building when it comes to investing in residential real estate. They started in 2014 and largely made a full exit in 2015. Today, you have a bunch of aspirational house humpers trying to make their money on the edge of a frothy housing market. Flippers are flipping and families are overextending. While the tech sector hits a snag, you have the median-priced house in San Francisco selling for $1.2 million. Many millennials, the next large group of potential house buyers, are unable to buy because they are simply broke. They are living with parents as grown adults or have become one of the 10 million new renter households over the last decade. At this point, with sky-high home prices, house lusting families are willing to do anything to buy even if this means they are setting themselves up for the next wave of foreclosures. Quicken Loan is pushing the rocket mortgage which you can “Push Button, Get Stuff” — sounds about right for a marketing slogan for a Twitter addicted audience that probably has totally forgotten the sins caused by the first Great Recession. Now you can get a mortgage while sitting on the can or going zero down up to $2 million. What can possibly go wrong? So feel free to buy that $1.2 million shack in San Francisco with a 30-year $1 million mortgage. I’m sure that startup will be around in 30 years.
Adam Modzeleski is a real estate professional with Rainbow Funding and Realty, located in Newark for more than 30 years at 6658 Thornton Ave.