SAN FRANCISCO — The Bay Area job market will outperform the nation during 2018, but skyrocketing housing prices might imperil the region’s economy, two economists said Monday.
“The Bay Area is defying gravity,” Jerry Nickelsburg, director of the UCLA Anderson Forecast, said during a conference co-sponsored by the Anderson Forecast and UC Hastings College of the Law.
Total non-farm payroll jobs are expected to grow by about 2.1 percent this year in the Bay Area, by 1.9 percent statewide and by about 1.6 percent nationwide, the Anderson forecasters projected.
“The Bay Area is the most dynamic, most robust metro area” in terms of its job market and economy, William Yu, a UCLA Anderson economist, said during his presentation.
The employment upswing in the nine-county region has occurred as more and more regions in California are enjoying a boom.
“We are just growing like crazy in California,” Nickelsburg said. “California is at full employment.”
The U.S. economy also should see strong growth, the economists said.
One area of worry that could trigger an economic slowdown: the battered brick-and-mortar segments of the retail sector.
“We have too much investment in retail; we have too many retail jobs,” Nickelsburg warned.
Still, in the Bay Area, the technology sector’s extraordinary expansion will continue to underpin the region’s economy.
“High-tech companies are the main drivers of jobs, productivity and wage gains in the Bay Area,” Yu said.
Yu gave an example of the hiring of an employee by a tech giant in Silicon Valley that was akin to the economic multiplier often assigned to manufacturing jobs.
“Let’s say Google hires a new employee,” Yu said. “That may be one additional job, but it’s not just that. This new employee with a relatively high wage will live in a good place, go to a good restaurant, go shopping and buy services.”
Nevertheless, this tech-driven economy in the Bay Area carries plenty of risks.
“Tech jobs are much more volatile than non-tech jobs,” Yu said.
Yu reminded the audience that following the dot-com boom, tech jobs plummeted at a much steeper rate than jobs in the non-tech sector.
The expensive housing market was deemed to be perhaps the greatest peril for the region.
“High housing prices are a risk to the Bay Area economy,” Yu said. “It’s lucky that the the East Bay still provides affordable housing for people who work in Silicon Valley and San Francisco.”
Some panelists also expressed concern that the impact of the tech boom could create a wider chasm between economic haves and have nots.
“We have economic bifurcation” in California, Lt. Gov. Gavin Newsom said while leading a tech panel during the conference. “You have Palo Alto versus East Palo Alto. Here in San Francisco you have the Tenderloin and the Marina district. You have two different worlds in one city.”
Still, the outlook for the Bay Area economy remains bright, despite the challenges.
“Bay Area job growth and personal income are expected to remain resilient in 2018, but will slow down in 2019 and 2020,” Yu said.
It’s not an easy time to be young and low-paid in the Bay Area.
But most millennials are still making their own way — only about 1 in 10 in the region get help from their parents to pay rent, according to a new study by Apartment List.
Young people in the Bay Area face high costs of living — rental prices remain among the steepest in the nation, and you can easily spend $5 on a cup of coffee and more for avocado toast — but are more financially independent than peers in other metro areas.
Roughly 12 percent of respondents in San Francisco and San Jose said they received help from their parents, slightly greater than the national average of 11 percent. Young renters getting the biggest boost from family live in Denver and Phoenix, where about 15 percent still collecting a housing allowances from mom or dad.
Housing costs were generally lower in earlier generations. Since 2000, home prices have risen 75 percent and rents have climbed 61 percent, while income for people under 35 has grown 31 percent.
“Housing costs have become a much larger part of people’s income,” said Sydney Bennet, a researcher at Apartment List.
The Bay Area remains the priciest in the region. Average rent for a one-bedroom in San Francisco in March is $3,400, while a similar unit in San Jose costs $2,450, according to a survey by real estate site Zumper. Only New York City, where a one-bedroom goes for $2,900 a month, approaches local rent prices.
Apartment List surveyed 13,000 users across the country for the report. About 6,000 respondents were millennials out of school and renting.
When it comes time to leap into home ownership, young folks expect a little more help from family. About 1 in 5 renters surveyed in the Bay Area hope mom and dad will pitch in for a down payment.
With the average Silicon Valley home going for seven-figures in many cities, it’s a stretch for buyers of all ages.
What do millennials expect?
Estimated share of millennial renters, students and non-students, saying they get help from their parents to pay rent, according to a survey by Apartment List.
New York 13.6%
Los Angeles 12.0%
San Francisco San Jose 11.6%
National Average 10.8%
Washington, DC 7.1%
Source: Apartment List online survey of renters in major metropolitan areas.
A: Bay Area real estate is quite varied. Rising costs present different challenges to builders of large tracts of new homes, remodelers of existing homes, or developers of high rise or multi-unit housing projects. Single-family homes in the Bay Area suburbs utilize very little steel and aluminum.
Aaron Terrazas, senior economist at real estate website Zillow, estimates steel and aluminum represent 0.5 and 1 percent of a new home’s cost. That means, a newly constructed million dollar home in the Bay Area might expect to see a less than $2,000 cost increase based on the proposed tariffs.
Lumber tariffs enacted in April of 2017 have been credited with raising the cost of lumber about 30 percent. These cost increases have been passed through to consumers in the form of higher prices.
Previous increases haven’t appeared to slow the red hot Bay Area real estate and remodeling market, and I wouldn’t expect the new tariffs to either. High rise and multifamily projects may feel the effects of steel and aluminum tariffs more acutely. Both these types of construction, especially high rise construction, rely heavily on the use of steel and aluminum. High land and labor costs, (San Francisco being the highest) combined with governmental set asides, have contributed to tight margins for developers who rely greatly on steel and aluminum.
US President Donald Trump on Thursday signed off on controversial tariffs on steel and aluminium, which will come into effect in 15 days.
Canada and Mexico will be exempt from the levies of 25% on imported steel and 10% on imported aluminium, while there is the possibility of modifying or removing the tariffs for other countries.
“A strong steel and aluminum industry are vital to our national security,” Trump said.
“You don’t have steel, you don’t have a country.”
Trump’s sudden push for the tariffs last week triggered fears of a global trade war and rattled financial markets.
Once the effects of these cost increases reaches the marketplace, two things can be expected. There will be higher prices and fewer projects being built.
Ultimately, the result will be tighter markets for new and existing housing in San Francisco and the Bay Area. Of course, tighter markets generally mean higher prices, a trend tariffs on lumber products has already demonstrated.
Mary Lou Castellanos, Sotheby’s International Realty, (415) 901-1769,
A: I am afraid the Twitter-in-Chief flunked Economics 101. The nation imports about 60 percent of the steel and aluminum we use in domestic manufacturing. Thus, when the components that go into our domestically made cars, planes, appliances, containers, pipes, and steel beams cost more, so will the end products.
Price increases put inflationary pressures on the economy, including pressure on real estate interest rates. Of course, initially the people employed in our steel and aluminum manufacturing industry—all 150,000 of them—will be better off.
But give it enough time: they too will be going to the grocery store and be faced with a lower purchasing power, they too will want to borrow money to buy a house and be faced with higher mortgage rates.
The above is just one of the many negative effects of tariffs. There are no simple answers, other than the inescapable fact tariffs are not to the advantage of domestic consumers, which is the reason economists oppose them.
Sadly, this negative effect will be felt in all sectors, including real estate. We can just hope the Twitter-in-Chief will continue to modify his initial stance and soften the blow.
Astrid Lacitis, Vanguard Properties, (415) 860-0765, email@example.com.
A: In my humble opinion, I don’t see much affect on our real estate market with these tariffs…..just yet. Canada and Mexico are spared from the tariffs, at least for the time being. Canada being the leading supplier of steel to the United States accounts for 16 percent of the import, which shields us for now.
At a macro level, trepidation of a trade war is in the air with China being the main target of the Trump Administration. Even though China’s import of steel is around 4 percent to the United States, according to a recent Politifact report. However, China is now the largest and most powerful producer of steel in the world. The majority of their steel is used locally, but they also sell it on the global market having more than abundant supply on hand. One nation having a heavy surplus could potentially affect other producers, including Canada.
If tension between the United States and China escalates, we the consumers will pay the additional costs of trade war. Not just in real estate, but everything else that uses steel or aluminum.
Par Hanji, Paragon Real Estate Group, (415) 307-5110, firstname.lastname@example.org.
When Nicole Nuss saw the little yellow house in Vallejo, with its white picket fence and huge yard for her beloved dog, she knew she wanted to live there more than she’d ever wanted anything.
But in a real estate market where homes fly off the shelf in days and buyers compete with cash offers that are tens of thousands of dollars over asking price, the 38-year-old owner of Cinnaholic bakery in Berkeley worried she didn’t stand a chance. So at the suggestion of her real estate agent, Nuss did something that, at the time, she thought was a bit weird: She wrote the seller a “love letter.”
The time-honored practice, in which prospective buyers pour their hearts out while simultaneously trying to flatter the sellers, has become an unofficial requirement of Bay Area real estate transactions.
“I am writing to say I have fallen absolutely in love with your cottage and would be beyond honored to call it my first on-my-own home,” Nuss wrote this past summer in a two-page note that included a photo of her giving her dog, Bailey, a belly rub.
It worked. The seller accepted Nuss’ $325,000 offer, even though it wasn’t the highest one on the table.
In today’s super-charged market, these love letters are becoming increasingly common as wannabe buyers desperately try to stand out from the hordes of people fighting over the Bay Area’s few available homes.
“You have to write,” said Oakland and Berkeley-based real estate agent Debra Alber. “If you don’t write them, it kind of shows the sellers that you don’t care.”
And to land a home in this red-hot market, you have to care.
In January, 96 percent of homes sold in Santa Clara County and 89 percent of homes sold in Alameda County received multiple offers, according to Redfin. In San Francisco,86 percent did. And selling for more than the listing price has become the norm. In Oakland, 75 percent of homes sold for more than asking last year with a median of $51,000 over the listed price, according to Zillow. In San Jose, 72 percent of homes sold above their asking price with a median of $50,000 over, while in San Francisco 69 percent sold above asking with a median of $155,000 over.
Even though an over-the-top offer generally wins out, especially if it’s all cash, in situations where the money is close, a personal letter can help the seller make an otherwise tough decision. That’s because selling a home where a family has lived for years and made countless memories is an emotional process, said San Jose-based real estate agent Mike Gaines.
“A lot of sellers want their homes to go to families and to be treated the same way that they treated the home,” he said.
Writing the perfect letter has evolved into an art form, with how-to guides offered by real estate websites such as Trulia and Redfin. Some prospective buyers use special formatting and computer graphics to make their letters stand out. Others record video testimonials.
Kevin Cole, president of the Santa Clara County Association of Realtors, remembers one offer that included an ultrasound photo of the pregnant buyer’s unborn child. While representing a client selling a four-bedroom, two-bath home in Campbell, Gaines recently received an offer that included a letter written by a buyer’s kid on yellow construction paper.
“Your house is beautiful and neat,” said the letter, written in colorful, childish handwriting. “We want to know whether we could or could not buy this house.”
When writing love letters, Oakland-based realtor Kerri Naslund-Monday, who represented Nuss when she bought the little yellow house in Vallejo, recommends clients include specific details they appreciate about the house. They also should share personal information about themselves and their families.
“If they’ve ever rescued an animal, that should go in there,” Naslund-Monday said. “Anything that could potentially make the seller say, ‘Oh these are really great people’.”
Some light social media stalking can uncover a seller’s favorite sports team or vacation destination, agents say, which can help buyers forge a connection. One of Naslund-Monday’s clients tried to bond with a seller over the fact that both were dog lovers. The buyer took a photo of the seller’s dog from Facebook, had it turned into a caricature and attached it to the offer.
Other clients use their professional connections to sweeten their offers, Naslund-Monday said. One offered the seller Blue Bottle coffee delivered to their door every two weeks for the next year. Another offered the seller a lifetime discount at a garden store in Berkeley. Others have offered to pay a portion of the selling agent’s commission.
But there are risks in attempting to turn the buyer-seller relationship into something more personal. A love letter that includes photos of the potential buyers and their family could invite discrimination based on race or other characteristics — even though it is illegal under state law. That’s why realtor America Foy discourages his clients from sending photos or using their last names and other information that’s searchable on social media.
Tess Coyne, who sold Nuss her dream house in Vallejo, said the love letter made all the difference. Coyne, 61, received 11 offers for the 700-square-foot house, eight of which came with letters. Nuss’ letter stood out in its level of personal detail — she wrote about her family and her upbringing in Pennsylvania.
“It was quite revealing,” Coyne said. “So I felt like I knew something about her before I even met her.”
The yellow house was the first that Coyne, a real estate investor, bought after moving to California from Alaska. She put a lot of care into fixing it up before renting it out, including choosing the perfect shade of yellow for the exterior. So when Coyne decided to sell as she wound down her real estate business, she wanted a buyer who appreciated it. That buyer was Nuss.
“You could just tell how much she wanted it, from the letter,” Coyne said.
Nuss wanted the house so much partly because she had long ago promised a yard to her 17-year-old dog, Bailey. Once Nuss fulfilled that promise, letting Bailey take a test romp while she picked up the key, the senior dog died right before Nuss moved in. Now Bailey is memorialized, standing in her yard, in a portrait Nuss plans to hang on her wall.
That love for her pets came through in the love letters Nuss wrote to Coyne — one with her initial offer, and a second when she became a finalist.
“They may have been corny,” Nuss said. “They probably were — I’m a little bit corny. But they were just completely honest.”
Mr. Thiel’s criticisms were echoed by Michael Moritz, the billionaire founder of Sequoia Capital. In a recent Financial Times op-ed, Mr. Moritz argued that Silicon Valley had become slow and spoiled by its success, and that “soul-sapping discussions” about politics and social injustice had distracted tech companies from the work of innovation.
Continue reading the main story
Complaints about Silicon Valley insularity are as old as the Valley itself. Jim Clark, the co-founder of Netscape, famously decamped for Florida during the first dot-com era, complaining about high taxes and expensive real estate. Steve Case, the founder of AOL, has pledged to invest mostly in start-ups outside the Bay Area, saying that “we’ve probably hit peak Silicon Valley.”
But even among those who enjoy living in the Bay Area, and can afford to do so comfortably, there’s a feeling that success has gone to the tech industry’s head.
“Some of the engineers in the Valley have the biggest egos known to humankind,” Mr. Khanna, the Silicon Valley congressman, said during a round-table discussion with officials in Youngstown. “If they don’t have their coffee and breakfast and dry cleaning, they want to go somewhere else. Whereas here, people are hungry.”
This isn’t a full-blown exodus yet. But in the last three months of 2017, San Francisco lost more residents to outward migration than any other city in the country, according to data from Redfin, the real estate website. A recent survey by Edelman, the public relations firm, found that 49 percent of Bay Area residents, and 58 percent of Bay Area millennials, were considering moving away. And a sharp increase in people moving out of the Bay Area has led to a shortage of moving vans. (According to local news reports, renting a U-Haul for a one-way trip from San Jose to Las Vegas now costs roughly $2,000, compared with just $100 for a truck going the other direction.)
For both investors and rank-and-file workers, one appeal of noncoastal cities is the obvious cost savings. It’s increasingly difficult to justify doling out steep salaries and lavish perks demanded by engineers in the Bay Area, when programmers in other cities can be had for as little as $50,000 a year. (An entry-level engineer at Facebook or Google might command triple or quadruple that amount.)
When you invest in a San Francisco start-up, “you’re basically paying landlords, Twilio, and Amazon Web Services,” said Ms. Bannister of Founders Fund, referring to the companies that provide start-ups with messaging services and data hosting.
Granted, California still has its perks. Venture capital investment is still largely concentrated on the West Coast, as are the clusters of talented computer scientists who emerge from prestigious schools like Stanford and the University of California, Berkeley. Despite the existence of tools like Slack, which make remote work easier, many tech workers feel it’s still an advantage to be close to the center of the action.
But the region’s advantages may be eroding. Google, Facebook and other large tech companies have recently opened officesin cities like Boulder, Colo. and Boston, hoping to attract new talent as well as accommodating requests from existing employees looking to move elsewhere. And the hot demand for engineers in areas like artificial intelligence and autonomous vehicles has led companies to expand their presence near research universities, in cities like Pittsburgh and Ann Arbor. Then there is HQ2, Amazon’s much-ballyhooed search for a second headquarters, which seems to have convinced some tech executives that cities between the coasts may be viable alternatives.
Continue reading the main story
Venture capitalists, who recognize a bargain when they see one, have already begun scouring the Midwest. Mr. Case and Mr. Vance recently amassed a $150 million fund called “Rise of the Rest.” The fund, which was backed by tech luminaries including Jeff Bezos of Amazon and Eric Schmidt, the former executive chairman of Alphabet, will invest in start-ups throughout the region.
But it’s not just about making money. It’s about social comfort, too. Tech companies are more popular in noncoastal states than in their own backyards, where the industry’s effect on housing prices and traffic congestion is more acutely felt. Most large tech companies still rate highly in national opinion surveys, but only 62 percent of Californians say they trust the tech industry, and just 37 percent trust social media companies, according to the Edelman survey. So you can start to understand the appeal of a friendlier environment.
During the Akron stop of the bus trip, while the Silicon Valley investors mingled with local officials over a dinner spread of vegan polenta pizza and barbecue sliders, Mr. McKenna, the San Francisco venture capitalist, told me that he felt a difference in people’s attitudes in cities like these, where the tech industry’s success is still seen as something to celebrate.
“People want to be in places where they’re the hero,” he said.
Correction: March 4, 2018
An earlier version of a picture caption with this article misidentified the mayors of two cities in Ohio. Mayor Jamael Tito Brown of Youngstown was on the left and Mayor William Franklin of Warren was on the right.
An earlier version of this article misstated J.D. Vance’s status as an investor in tech start-ups. He is currently a venture capitalist, not a former investor.