"Bubble-proof markets."
Recently I ran across a CNNMoney.com article bearing the above title, and claiming to have identified the national real estate markets that offer the best return to investors. Of course, what's good for real estate investors is also good for the everyday homeowner who hopes to accumulate wealth through rising home prices. It's that "potential" many buyers look for, usually in vain, because it usually doesn't exist.
I took this article, as I take any mass media look at real estate, with a grain of salt the size of Rhode Island. Yes, "bubble-proof" is an intriguing claim that challenges the current "the sky is falling" attitude about real estate. "Bubble-proof" is also a claim you may have heard from the agents who tell you all is well in the marketplace. It's the official industry line. In this area, it also happens to be true, at least for the moment.
So CNNMoney.com got it right. But I'll still put a big disclaimer on "Bubble-proof markets".
The first clue that it might be written more to attract eyeballs than inform the public is the catchy but simplistic "bubble-proof". Anyone who's read a book or two about bubbles knows that what we've had, throughout most of the country and particularly in Silicon Valley, isn't a real estate bubble. It's the upward slope of an old-fashioned market cycle. A bubble, on the other hand, is driven by speculation and, except for places like Las Vegas and Miami, it's not speculators who've boosted home prices, it's John and Mary Homebuyer putting those low interest rates to work. But "bubble" is sexier than "cycle", so "bubble" it'll be.
The other tip-off that this article might be something less than serious analysis is that its source of information isn't identified. Maybe it was a hot tip off a spam fax?
Despite these huge red flags, "Bubble-proof markets" is worth reading and maybe even believing. The five markets touted as "bubble-proof"—San Francisco, Los Angeles, Seattle, Boston and New York City—are "safe bets for investors" because "income trends and development restrictions" will keep price appreciation above average.
CNNMoney.com's analysis of San Francisco deals with the real estate environment peculiar to that city, but I think its take on Los Angeles applies equally well to the suburbs of the San Francisco Peninsula and South Bay:
"Along with San Francisco, Los Angeles was the first major metro in the United States to become 'filled up' during the 1960s and 1970s because of geographic constraints and political restrictions on building. Three-quarters of new construction is now in-fill development, and much of it is high end. The gentrification is pricing out middle and lower income families, who are moving in-land."
That's us in a nutshell, which explains not only above-average price appreciation in San Francisco, the Peninsula and South Bay, but also the resiliency of prices in those areas during the current slowdown.
Sure, they've been building homes in the Bay Area as fast as they can, but the large-scale development has been way out in the boondocks, on the eastern fringe of the East Bay, which has felt the slowdown far more than the West Bay. And the wide open spaces of Tracy, Hollister and Sacramento, where new construction has been galloping along for several years, have been hit even harder.
In fact, another CNNMoney.com article identifies "10 overvalued cities (that) have run their course", with "home prices...expected to drop over the next year". Right at the top of that list is the Central Valley: "Bakersfield, Fresno, Merced, Sacramento, Stockton". According to this article, "Home prices shot up here by as much as 60 percent during the past two years as big homebuilders, squeezed out of the Bay Area and Los Angeles by lack of space, arrived in search of raw land at bargain prices." But "low-paying jobs" and "chronically high unemployment" make those prices unsustainable, according to one Fresno builder, who says, "This market is going south".
But that's there, and there is not here.
"Bubble-proof markets"? "Safe bets for investors"? These are big—no, huge—claims, and they don't come with a money-back guarantee.
But they do come with a kernel of truth. Like we agents say, "They're not making land anymore." At least not here, where people really want to live.