Bay Area Housing Shortage

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It’s a law of supply and demand. When demand outstrips supply, prices invariably go up. When it comes to housing, this can be observed in the form of higher rents, or an increase is property value. As a landlord, there’s absolutely no better situation to be in than to own property in a high demand location.

The Bay Area has always been notorious for expensive homes, and that is no different today. If anything, things are really starting to get out of hand again, and it will only be a matter of time (if it hasn’t already happened) when the average white collar worker won’t even be able to afford owning a home…

Real estate is very much local, and what goes on in one location can be the polar opposite of what happens somewhere else. I can’t say that I’m an expert in all markets, but I do live in the Bay Area, so I monitor this specific one rather closely.

One thing that clearly separates the Bay Area apart from other markets is the fact that it is nearly impossible to build here… Too many zoning laws and restrictions, not to mention the HUGE cost for even a tiny morsel of land.

Here’s a KQED article with more details:

New research from the real estate service, which is based in Seattle, found that only 193 housing permits were issued for every 1,000 new residents in the Bay Area, making the region second-worst in the country — and just as unaffordable as it seems.

Zillow’s survey analyzed population growth for 2013 and 2014, and housing permits from 2012 and 2013. Nationally, the average was 384 permits per 1,000 new residents. If things get much worse in the Bay Area, the region could surpass Los Angeles County, which issued a mere 187 permits per 1,000 new residents.

Zillow’s analysis said Bay Area residents can expect to pay a whopping 44 percent of their income on rent or 39 percent of their income on their monthly mortgage payment.

Pittsburgh was at the other end of the spectrum from L.A. and the Bay Area — 42,258 permits were issued per 1,000 new residents, despite the fact that people aren’t exactly flocking there.

“In San Francisco you have a great job market, and it’s booming,” Gudell said. “So you’re attracting a lot of new people. But you have growing pains because you’re not able to keep up on the housing side of things. That’s a real challenge right now.”

In the massively lucrative game that is real estate, I’m nothing more than small potatoes. I own a few measly units, but as I’ve witnessed over the last few years, each miniscule unit is worth its weight in gold. Today, the market is as relentless as ever, and houses are still regularly being bid up above listing prices… which are already inflated from the start, relative to recent sales comps.

Things are getting ridiculous, and buyers are losing their senses. Even in my own circle of friends, many folks are in a frenzy to win ANYTHING because there’s this huge fear of missing out (FOMO), which is a usually a recipe for disaster in this game.

Here’s how expensive things have gotten locally:

The Bay Area was tops in the country, at $715,800, in Zillow’s February calculations for its home value index — the median of estimates of what homes are worth. In this category, Los Angeles ranked second, coming in at $533,700. Detroit, at the other extreme, was $114,400. And the U.S. median was $178,700.

Meanwhile, Zumper, a website that lists and analyzes rentals, has just released its national rent report for March, which found that San Francisco is still the most expensive city in the United States — although rents dropped by 1.7 percent to a median of $3,400.

Oakland is now No. 4 in the country, with a median rent of $2,000. It’s tied with Washington, D.C., and trails New York and Boston.

I can’t say I have much interest in partaking further in this craziness, right now (outside of deeply discounted pocket listings). As an investor, it’s far better to be investing in a time of fear as opposed to a time of greed, which is where the current market is clearly at.

As a landlord, however, it’s an enviable place to be. When there is too much demand and not enough supply, you win either way. You can raise rents and increase cash flow, sell for a tidy profit, or sit back and do nothing… Just tune out the noise and carry on as normal.

I believe the key to long-term success is to not get too greedy. I’ll admit, that can be extremely tough to do at times, but what goes UP, UP, and only UP, usually comes crashing back down… at some point.

Still, it’s good to know that the local market that I’m investing in is in such hot demand by everyone: homeowners, investors, even foreign buyers.

Speaking of which, the interest in Rental Property SH #3 has been better than I expected. Right now, I’m pricing the unit at the high end of market rent, but I’ve still managed to secure multiple showings this weekend. Actually, I have an appointment later this morning, which I need to get ready for…

Good times in the Bay Area… Will it continue?

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My Dividend Pipeline
5 years ago

FI Fighter, I have never been to San Francisco. Seven years ago my wife and I took a long road trip from Houston to California so we could drive up the PCH. Unfortunately we ran out of time since we were only alloted the customary 7 day vacation. We did make it up to Monterey and spent the day at the aquarium there. I truly can see why people pay the price to live out there. The whole trip was wonderful and I can’t wait to do it again. Next time our excursion will take a couple of months so… Read more »

No Nonsense Landlord
5 years ago

When the frenzy gets that bad, expect a crash. When people cannot afford to buy homes or rent, and the tax man comes with a vengeance, it is only a matter of time before the bottom falls out.

5 years ago

issues for CA are coming. already in the third or fourth year of drought. JB will try to pass laws down to the city level to force them to tighten water. this will be the summer we say goodbye to our lawns

5 years ago

Wow… thats crazy….sounds a lot like sydney real estate though… there’s been talk of a bubble there in Australia for years, yet prices just keep going up…. i guess at some point things will revert back to the mean, but the market can stay irrational much longer than you can stay solvent!

Financial Samurai
5 years ago

Let’s hope for 3 more years. Uber, Pinterest, AirBnB, and Dropbox are all going public by then, creating thousands of new millionaires looking to buy property.