Bay Area Real Estate: the OG of HODL

TL;DR: Buying real estate in the Bay Area feels like you’re selling a kidney. But if you plan to make a life in the Bay, you should get yourself ‘real-estate neutral’ by buying the home you want to live in. Prices have rarely gone down even during the most extreme financial crises. The fundamentals driving this are not changing, so there’s no good reason to believe the pricing pressures will ease up anytime soon.

If me and Future hadn’t made it with this rappin’ 

We prolly be out in Silicon tryna get our billions on 

6PM In New York, Drake

These days we hear a lot about how Bitcoin enthusiast’s are HODL (holding on for dear life). The idea being that despite the ups and downs of the currency, if you hold on for the long term, good things will happen. Well, the OG (original gangster) of HODL has been Bay Area real estate. When it comes to property in the Bay Area, my mantra is pretty simple: Never sell. If you know much about me, you’ll know that I’m a strong proponent of owning the home you live in. This is the ultimate low-risk, ‘inflation protected’ investment that does wonders for bringing you one step closer to Ramen Retirement. You’ll be ‘real-estate neutral’, so no matter how expensive your city’s housing becomes, you’ll have the biggest living expense locked in for life. This sort of ‘inflation protected’ asset is particularly useful in the Bay Area.

I’ve heard too many stories of families that left the Bay for work, sold their home at the time, only to return years later and be priced out of the market, both financially and emotionally – and don’t discount the emotional factor. If you sold your home for $800K back in the 90’s only to return in the mid Aughts and find it going for $1.6M, even if you could afford it, could you sleep at night if you did?

It’s a tough market. Prices aren’t going down. A lot of people want to move here, and we have failed to create enough new housing. It’s economics 101 – supply and demand. It’s not an ‘affordability crisis’ … whatever that even means … It’s a lack of housing supply. To illustrate the madness from 2011 to 2016 the Bay Area added 480,000 jobs, and only 50,000 housing units. Yup, that’s your problem there.

The tough part is that it’s hard to imagine what would have to happen to put a dent in things. Remember the dot com crash? Between early 2000 to late 2002 the Nasdaq went from ~5,000 down to ~1,200 (a decline of almost 80%). SF and San Jose housing barely had a single month-over-month decline in the median sale price of a home over that same timeframe. That thing called the 2008 financial crisis – worst recession (depression?) since the 1930’s? SF housing peaked in mid-2007 at $825K and bottomed out in early 2012 at $620K. A decline of 25% during the worst financial meltdown in living memory.

If we want to see price moderation (or even decline?) something will have to give. We either derail the freight train that is the tech industry (and blunt housing demand), or we figure out how to build more housing, fast.

To derail the tech behemoth sounds daunting. There are simply too many massive businesses in the Bay Area with incredible economics. These business models are natural monopolies, and they are able to monetize accordingly. Even breaking up the FANGs wouldn’t really put a dent in the demand for workers, and the amount they’re getting paid… arguably it would increase the demand for workers, as each of the newly broken up businesses would need to hire more folks to keep the lights on.

Building more housing is absolutely possible, but politically challenging. The NIMBYs are strong. All the political fiefdoms up and down the peninsula want to pass the burden on to someone else. It’s ironic that people who fashion themselves as progressive individuals fight so hard to hold back a region that has given them so much. Put simply we need to build up, and burrow under. We need more multifamily buildings, and a massive investment in mass transit options to support those buildings (i.e. a transit system to rival New York or Tokyo). If we’re not angling to look a lot more like both of those cities, then we’re going to fail at slowing the freight train of housing prices.

So all of that is to say that a decline in Bay Area real estate is not likely. That’s why you’ll be well advised to get neutral real estate if you’re planning to stay in the area. That means you need to become an owner. The best advice I’ve heard was from a seasoned software dev to a junior dev fresh out of college – his words of wisdom were:

  • Buy as big a place as your base salary will afford (up to the limit of what you will reasonably need for you family… no need to get a mansion)
  • Live frugally
  • Use any bonuses, options or RSUs to pay down your mortgage
  • As your salary goes up (which is highly likely if you’re junior in your career), put half towards your mortgage and the other half is yours to spend
  • HODL – i.e. never sell

While buying as much as you can afford without some sense of value is always dangerous, it has proven to be a pretty good heuristic for the last 30 years. If you have the down payment, and can afford the monthly payments, it’s likely a good idea. Over time, your mortgage and taxes will remain flat (thanks to Prop 13!), while your earnings should go up, and if you have a few good windfalls you might pay off that mortgage sooner than you think. Once you can do that, not only is it a low risk investment with a guaranteed return (you are your own tenant!), but the value of knowing you don’t have to pay any sort of monthly payment will give you the freedom to take the chances and risks that can change the trajectory of your life.

Give it some thought, and remember – enjoy the journey!

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