The Bay Area along with San Francisco has well over 40,000 companies and over 10,000 investors. The region is also home to over 80 Unicorns. In 2018 alone the Bay Area housed 18 Fortune 500 companies. Out of the FAANG grouping of stocks, Facebook, Apple, Netflix and Google are all based in the Bay Area. That’s right, 80% of the FAANG’s are located between San Mateo and Los Gatos. These companies have tens of thousands of employees making six figure salaries right here in the bay. Stock options and all. This precious sliver of land that reaches from SF to SJ is also home to Stanford and Cal blessed with the most perfect weather imaginable to a Homo Sapien.
Since around 1990 we have had 3 major busts: 1991, dot com bubble of 2000, and the September 2008 housing crisis. Even though predicting market movements is difficult we do know with certainty that markets crash from time to time. And even though markets do crash, they bounce back with vigor and then some. The SP500, Dow, NASDAQ and Bay Area housing markets all have a cyclical nature of growth and bust. It’s insane how prolonged the 2011 to 2018 bull market has been for Bay Area housing as seven years of appreciation seems like an eternity. It takes many months, and often over a year to have a subtle inflection point materialize into something that we can actually feel. March 2018 was an inflection point for the Bay Area as housing began to cool off. Bay prices stopped increasing at the rate they were increasing and housing has seen fewer multiple offers. Only in the Bay Area can we safely say that whatever goes down, must come up.
Below is one of my favorite charts about the housing boom and bust cycle. We can see that the Bay Area market has seen a few busts, but what’s amazing is that every single rebound has broken past previous highs. Look at the 2001 to 2008 growth. We saw prices increase 59% and then had a massive crash that reduced prices by 27%. One would think that this would be the end of growth for a very long time and that prices would stagnate for years. But in 2011 the Bay Area market did an 80% increase over the next 7 years. Where else in the world can we see a graph like this? Probably only a handful of cities. Most of the graphs resemble climbing Mount Everest. You have highs and dips, but the end destination is always the summit.
Mortgage Rates Are Generally On The Rise
I’ve noticed a lot of people rushing to buy houses because the interest rate is on the rise. That’s definitely a good reason to lock in a cheap rate. For example, if you are borrowing $500k, an increase from 4% to 5% interest rate will cause your mortgage to jump $300/month. That’s a decent difference, but not a life changing difference. Many of us guilty Siliconites spend that on lunch at work every month. Interest rates are creeping up but also note that housing prices are beginning to decline as well. You may come out further ahead if you buy a cheaper house with a slightly higher interest rate. Do a few calculations of buying now vs later at higher rates and see what you come up with.
This graph is from Jan 2016 to Feb 2019. You can see that the interest rates have started to go up since September 2016, but recently have been coming down since Nov 2018.
Bay Area Counties Performance
Santa Clara County and San Mateo County are the most desirable counties to purchase in. I would put San Mateo County ahead of Santa Clara County in terms of desirability which in turns makes it more expensive. Everyone wants to be on the Peninsula! The average median house in California is $538K, where as San Francisco County is more than thrice expensive. Remember median means half way, so 50% of the homes are cheaper, and 50% are more expensive than the figure below:
It’s 2019 Should I Buy?
If I have to make a call, I’m going to say that it’s not the best time to buy. Prices are not increasing at the same rate as they have been. Multiple offers have cooled down and the stock market has taken a dip but rebounded back to some extent.
I would say if you can fulfill all of the criteria below then it makes sense to make a purchase today. Still, I would really wait till the end of 2019 as I don’t see prices increasing through the end of the year:
- You plan to live in your house for the long haul, about 5 years or longer. This way if you buy at the dip, you can hold the house long enough to come out in the positive.
- You can put at least 20% as a downpayment on your house/condo/townhouse. You don’t want to be stuck with PMI. Also, if you can’t put 20% down, you will need to borrow a huge sum which means a big mortgage and a lot of interest cost.
- You have an emergency fund (remember this article?) that has at least 6 months worth of savings to pay all of your bills. You need to have this after putting your 20% down.
- You can comfortably pay your mortgage, property tax, HOA, home repairs, and a million other necessary bills and still have some savings left every month.
- You and your spouse have stable incomes that can pay for massive Bay Area mortgages