Goodbye Bay Area Housing Market
The Bay Area is a strange (and difficult) place to buy a house. Purchasing in San Franciso and its surrounding towns feels a bit like getting on some sort of carnival ride from a hell- a roller coaster where they blindfold you, don’t give you any seatbelts, and at the bottom of the first dip is a pool filled with sharks followed by big rusty spikes. Overall a very pleasant experience. Suffice it to say that we’re happy we’re now out of the SF housing market.
We only had to go through one cycle of buying and selling. And I’ll be quite honest here – we got lucky. Some part is skill, knowing when to buy and when to sell. But what I really want to talk about here is the luck involved in any journey. Sometimes the dice roll your way, sometimes they don’t. In this case, they rolled our way and we came out about $500k richer for the experience.
Why we purchased
I would love to say that we purchased purely because of our drive to maximize our net worth and snap up fantastic investment opportunities – that would be a lie. We had no grand real-estate investing plans at the time. No plans to live in a fixer upper before flipping it two years later, no plans to hack our way into a multi-family unit while living in one of them. None of the very popular real estate investment hacks were on our mind. When we purchased we were, to a certain extent, a couple dumb kids just looking for a house for our family. Tired of living in a one-bedroom apartment by the train tracks and flush with pretty high incomes we decided to board this particular roller coaster.
The year was 2013, I was two years out of Business School. Grizzly Mom was 3 years out of Law School. We both graduated into the worst recession in the last 50 years. We landed good jobs, but everything was still very uncertain. If folks think back to those days you’ll hopefully remember the feeling – a nascent recovery had just taken hold, things were looking up, but not that far up. We both remember worrying that we were at the top of the market even then. Port-a-johns on the Embarcadero in SF were already going for a cool million. Knife fights broke out at apartment showings. Every house had a baker’s dozen all cash buyers from China. It looked as bubbly as anything a few years earlier in 2006-2007.
But interest rates were awesome – we were approved for a $1M VA loan at 3.25% with $50k down – and we made a bet that the Bay Area still had some room to improve from the downturn. We decided to bite the bullet and buy, figuring even if everything turned south again we could ride it out.I wish the story was different, I wish I could claim divine insight. Many successful investors do claim divine insight after the fact. Most of them are probably giving themselves too much credit. Humans like to think of ourselves as smarter, more clairvoyant than we actually are. But much of our success comes down to luck. We were two kids who got lucky buying a house at the right time.
The bay area has some truly terrible real-estate. 95% of the houses we saw at our price range had one of the following conditions – in the flight path of SFO, bedrooms so small they doubled as Iron Maidens, previous owners were actual rats, or the worst – they were Eichler Homes. Eichler was a deranged madman back in the 50’s and 60’s who designed some truly terrible houses. Some may think they’re great, but most of them look like somewhere you’d throw a 70’s Key Party – complete with shag carpeting, avocado green appliances, and the sound track from Boogie Nights.
We looked for weeks before finally finding our diamond in the rough. A great little 4 bedroom (Master, future baby bear nursery, office, and guest bedroom). It was right next to the 101 freeway, but we actually liked that – made our terrible commutes a little better. It was painted a god-awful robin’s egg blue. But we also didn’t care about that – we called it our “Big Blue Bear Cave of Dreams” (that’s actually what we put down on the spreadsheet we used to track the houses we looked at). Ask was $970k. We offered $1.035M. We wrote a glowing love note about the house, our story, our future family, laid it on as thick as possible. Offer accepted. The owners actually said the little love note was what put us over the top – they’d been there for 30 years, raised two kids there. We were $15k under the highest bid. Sometimes little things like that help.
What followed were some of the most dizzying gains in any housing market over a four year period. The above is the Zillow index for our zip code. We purchased right as the hockey puck started to swing up in 2013. Over the next four years, we saw a total gain of almost 50% in the value of our house. A 50% gain on a 95% leveraged asset is about as good a return as you can get in this world without doing something illegal. To put it mildly, the Bay Area housing market saw MASSIVE growth over the last few years. My next post will be a much more detailed look at the current national and Bay Area housing markets, along with some of my opinions (bubble…cough…bubble, again, unfortunately) if you care to read them. But this is just our little story for now.
And that is the story of two very happy, but also very worried, bears. Seeing those types of gains can be frightening. So much paper wealth that can be vaporized in an instant. During the recession, bay area prices dropped by almost 50% in some areas, and a leveraged bet works the opposite way on the downside. We saw our gains, and we saw several years saved on our little plan to freedom. But was it worth it to wait longer? Another year? Another two years? Get a little more?
Why did we sell?
Discretion is the better part of Valor. At the end of last year, we started seeing worrying signs. The first was a spike in the bankruptcy practice at Grizzly Mom’s firms. It reached a level they hadn’t seen since the last downturn. The second was revenue at my own company was drying up – we’re a fairly large advertiser and so the trend was troubling. The third was the Case-Shiller Housing index levels crossing the peaks seen in 2006. And last, we just started hearing worrying things all around us. Everyone had real-estate on the brain again. You couldn’t escape it. Every person in my office was renting out an apartment on Airbnb. Everyone was trying to snatch up investment properties or quickly flip a condo. It had that indescribable FEEL that we’ve experienced a few times before in various asset classes over the last few decades. A feeling that never seems to end well for those left holding the bag.
Yes, we could have waited another year. Perhaps we will see prices rise still further. Perhaps we’ll be wrong and the SF market will be 100% higher five years from now. But we won’t regret our decision to sell. Ultimately, we made off with $500k of profit by living in our house for 4 years. I’ll take that deal any day of the week. Someone else can take the last 20% of price appreciation, the Grizzlies are perfectly happy with the first 80%.