Is The Bay Area Headed Into Another Bubble?
In the Bay Area, from San Francisco to Vallejo, we continue see to multiple offers on everything from single family homes in need of serious repair to fancy loft condos. We see real estate agents boasting mailers stating “Pending with multiple offers WAY OVER ASKING PRICE!” and “JUST SOLD $240,000 over asking!”
In the immortal words of Yogi Berra, “It’s like Déjà vu all over again.” Does this remind anyone of the time when then-Federal Reserve Board Chairman, Alan Greenspan, uttered the phrase “Irrational exuberance“? Although in that case he was referring to the stock market during the Dot-com bubble of the 1990s.
Writer Harry Dent makes a great case stating that despite this dramatic upswing in real estate prices that we may be in for another bubble. Ask most of the real estate agents in San Francisco why the dramatic up tick in prices and most will respond that the inventory remains low and the interest rates continue to sit at historically low levels.
Those facts may be true however Dent reminds us that the Japanese real estate market fell just below where its own bubble began in 1986. Over here in the U.S., home prices would have to cascade 55% – 65%, not the 34% we saw at worst in 2009.
Many of the greatest bubble areas developed here in California with a 170% rise in L.A., followed closely by San Diego and here in San Francisco. According to Dent some cities could see real estate drop 70% to 85%.
“Insulated” San Francisco Real Estate Market
Of course, here in the Bay Area and often in San Francisco you will hear talk about San Francisco being “insulated” or “Teflon coated” as far as the prices and a possible bubble. Sure San Francisco will remain attractive for buyers due to the scarcity of land and the overall desire to live in one of the best cities in the world but that only means that the bubble may be delayed somewhat.
It would not be wise to clump all of the U.S. or even California into this bubble talk. Real estate remains a local market. For those considering to buy, hold or sell, Dent recommends that the best way to gauge the downside potential of your home or commercial real estate is to determine the property’s value at the beginning of 2000 at best and the beginning of 1996 at worst. If those numbers don’t sit well with you, then consider selling now, then rent for three years and jump back into the post bubble market in 2015.
Data Chart courtesy of: National Statistics Bureaus, ECB, S&P/Case Schiller, HS Dent 2012