Podcast 277: California Real Estate Boom is Over

Housing markets have stalled in some of the hottest markets in the country…

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Show Transcription:

Eric Worral: (00:00)
Hey everybody. Welcome back to another episode of RentPrep for Landlords. This is episode #277 and in this week we’re going to be talking about the California real estate boom and the fact that it’s over. And we’re also going to have some other recent news, uh, coming out from Minneapolis and also some rent control that has been recently, uh, launched. And we’ll get to that right after this.

Voice Over: (00:24)
Welcome to the RentPrep for Landlords podcast and now your hosts, Steven White, and Eric Worral.

Eric Worral: (00:31)
So we’ll get through this relatively quickly because we’re going to bookend this episode with talks of California. So I teased that there is some rent control that has launched recently and that is of September 14th, 2019. I’m reading this article from times of San Diego. He says that landlords, developers, okay. With California’s landmark rent gouging law. So millions of California runners are about to receive some of the nation’s strongest protections against rent hikes and evictions.

Eric Worral: (00:59)
And the primary advocacy group of the California landlords is okay with that says that state legislators today passed a B one four eight two a bill from Assemblyman David Chu, a Democrat from San Francisco, which limits annual rent increases to 5% plus the rate of inflation, which is typically two to 3%. Now you may not have property in San Francisco or California, but this is why this is important because it said that this particular bill was modeled after a first in the nation Oregon measure adopted earlier this year. The bill also requires landlords to provide a just cause for evicting tenants and in some circumstances pay for tenants to re-locate. So we see this all the time, something some state is the first of its kind, all other states washed. I see how it unfolds and then they do it as well. Right now we’re seeing rent control being very popular as we’re seeing that happening right now in New York as well in New York City.

Eric Worral: (01:53)
So looking further into this article, the one interesting caveat takeaway here, and once we get to the euphemism of the article, which is that the assemblymen has been very careful, the frame, the measure as anti rent gouging as opposed to typical rent control. And he said that, um, the reason he says that is that there is nothing preventing landlords from raising rents when a tenant leaves a provision called vacancy control. And that is often associated with how rent control work decades ago in places like Santa Monica and Berkeley. So that is a very worthwhile thing to mention that when you’re looking at rent control, there’s probably two variations of it. There’s one that includes, um, some sort of vacancy provision. So, uh, even if you have a tenant leave and another one comes in, you can’t raise the rent on that next tenant, uh, by more than in this case, 5%.

Eric Worral: (02:42)
Uh, but with California, it’s saying that that’s not the case. It’s just more so, which I like, uh, is protecting the current renters from a more than 5% rent hike. And in my opinion, that’s a much, a much smarter way of doing it, right? Cause you’re just gonna if you have a control to where you can’t even opt the rent on a new tenant, uh, that’s not going to be good cause they’re not going to get people that want to develop there or buy properties there. So that’s a really interesting story. Uh, and piece of news coming out of California, we have an article from the StarTribune.com uh, Minneapolis Council. Uh, Your City Council Passes Limits on Tenant Screening by Landlords. So, he’s one of our favorites here at attendance screening podcast. Uh, rent-prep uh, this is by Marissa Evans and it was September 13, 2019.

Eric Worral: (03:30)
Basically Minneapolis landlords will face new limits on their ability to reject tenants because of their criminal history, past evictions or Credit Scores Under a new ordinance that passed the city council unanimously Friday. So this comes after the affordable housing crisis and, and now renter majority city. And it goes on to talk about some of this. Bill prohibits landlords from turning away prospective tenants because of older criminal convictions. And eviction actions and number of other cities have adopted tenant screening protections, including Seattle, Portland, and Washington DC. Landlords who have mobilized against the ordinance worn that taking away their discretion to screen tenants will lead to higher rents. So the new rule is sweeping a public policy change that failed to consider many, many questions that should have been asked. It said Cecil Smith, principal and managing broker with cornerstone property professionals

Eric Worral: (04:19)
So she is a lot, and I’ve actually seen this come up in forums and different groups. Basically the landlord is going to say, you know what? This property is no longer $1,000 a month and a 30% rent to income ratio is now a 40% rent to income ratio and it’s going to be $1,100 a month. And that’s going to phase out a lot of people that can’t afford to live there because rent to income is still illegal screening metric that a landlord can use and they’re at their disposal. So that’s what happens with a lot of these rent control. We talked about this before, when people introduced rent control, a lot of times people stop buying property in that state because they’re investors and they’re looking to make money. So, uh, there are, uh, there’s always fallout that can happen with these kinds of initiatives.

Eric Worral: (05:00)
So it’ll be interesting to hear what happens in Minneapolis if history repeats itself. I would fully expect landlords to push back and there’d be some sort of litigation around this because there’ll be something that is considered unconstitutional or something that’ll pop up because we’ve seen that happen in Seattle. It’s happening right now in New York, actually, 400 landlords and a different, uh, different real estate, uh, investors showed up at a casino turning stone casino in New York to talk about the new rent control laws and, uh, rent laws that went across New York state within the last couple months. So they are meeting right now. There was an attorney there who’s actually been on this podcast before, uh, and they’re thinking of ways that they can fight back on these new laws that have come out. So you’re gonna always see this. There’s always the tip for that tat and then uh, it’s just gonna kind of continue to build, but that is neither here nor there.

Eric Worral: (05:53)
As I’d like to get to next article from forbes.com courtesy of Ingo Windsor and I like that name a lot. And the title of it is the California Real Estate Boom is Over What Now? So this one’s really interesting, even if you’re not in California, thinking about investing in California because it talks about how you can see trends developing from other areas and what that means to maybe where you’re investing or areas that you’re thinking of investing in. So it starts out by saying, if you had invested in a property in San Francisco five years ago and cashed out in 2019 you would’ve made a 50% profit. Nevermind the rental income. That’s just appreciation. But if you bought a year ago and sold today, how much would you have made? Well, exactly, $0 million the California boom is over and investors need to switch to plan B, which is the answer to the jeopardy question.

Eric Worral: (06:41)
How do you deal with a market that at best will be moving sideways but could also drop 20% so does the end of the uh, boom in California also opposes troubling questions for investments elsewhere in the country. Will other tech economies follow suit? What are the prospects for booming markets in Arizona, Nevada, Utah, Texas, and Florida? And will panic selling drive down prices everywhere. So it did in 2018 pushing an already weakened national economy into recession. So it’s saying, is this just the bay area? Well, it’s not. If you’re looking at the bay area that had a 0% increase in home prices in the last 12 months, silicon valley 0% Sacramento, 3% La base and 4% San Diego, 3% but when you’re looking at other tech markets, right? Seattle, 1% that’s after the previous year was 13% a Denver 5% down from 10% the previous year. Boise 12% not bad, but down from 16% uh, you’re seeing every one of these tech markets is down substantially.

Eric Worral: (07:42)
And like I mentioned earlier, the bay area was up 12% last year. And then 0% this year. So really see in this a, across the board in the tech economies, it’s saying, can you blame it on the tech economy? Well, the boom and bust cycles get started when the demand for real estate outstrips the supply, which can easily happen when some people suddenly have a lot more money. We’ve seen it in energy markets in Texas, in financial markets, in the northeast, and recently in shale oil towns in the middle of nowhere talking to you, North Dakota. Well, we’ve seen it before in California with the dotcoms of the late 1990s and now we’re seeing it in the bay area in Seattle, Denver, Boise, Austin, Provo, and even in Raleigh and Atlanta where tech is less important. The cycle is the same. People with new money, bit up real estate until builders produce more or everyone who wants it has enough, then nobody’s left to pay the astronomical asking prices.

Eric Worral: (08:33)
And these have to come down to, what about the other tech markets? Well, we mentioned earlier in Seattle, same situation. Uh, and then also looking at Austin, uh, Denver. These are all scary places to invest in right now. What about the other boom markets? So Phoenix, Portland in Miami had been doing great along with the rest of south Florida. Tampa, Houston, Charleston, and Salt Lake City are all overpriced and Las Vegas will be joining them pretty soon. Prices have slowed only mildly in these markets and the local economies marine strong. But this is where the national economy comes into play. No local real estate market can prosper long at the national economy slows. And that’s what we’re seeing as the rate at which new jobs are being created has fallen from 2% at the beginning of the year to one and a half percent rate now any lower and the economy is headed for trouble.

Eric Worral: (09:18)
If that happens, the real estate market will make things worse. As construction stops, home buying stops and high housing costs push consumers to spend less on other things, what’s the likely outcome? Well, it’s sending the 2008 recession. We saw home prices dropping almost every local market in the US as much as 50% but the author here believes that won’t happen this time. Uh, even if we’re hit with a full recession, only a few markets like Miami where the boom has been driven by foreign investors are heavily overpriced. More likely is that the economy eases towards recession and that home prices in many of the boom markets come to a soft landing. So that’s probably because the tech boom is not a temporary surgeon wealth. It’s created large numbers of jobs for people who made and still make good bucks. It’s not just Google programmers with 200,000 salaries, but also the bankers, lawyers, stockbrokers, office, landlord, security companies, caterers, and the whole ecosystem would have an industry that will probably change radically in the next few years, but will not be going away.

Eric Worral: (10:12)
So in markets that are not overpriced, you’ll see a tremor, but no wholesale selling because it’s time. There’s no systematic distortion like the subprime mortgages that affects real estate supply and demand everywhere. So what can you do as an investor? Well, it’s saying, you know what, real estate is actually a pretty good investment, so you can kind of sit still, uh, you should be fine, especially with Reynolds in a recession, uh, and that you’d be all right. But, uh, right now, don’t buy in markets that are overpriced, which goes without saying, consider selling now in the boom markets that are still in good shape and don’t raise your runs and expensive markets. You’ll have poor luck finding higher-paying tenants when the economy slows. So I like to thank Ingo Windsor for that great article on forbes.com. Uh, I found that one really interesting and hope you guys did too. So that does it for this week’s podcast. I look forward to catching up with you guys next week, share some of the recent news in the, uh, in the industry from the last week and, uh, until then, have a great week and take care.