Recession Strategy: What Can 2008’s Data Teach Us About When to Buy and When to Sell?
Introduction
Real estate is cyclical. No matter how endless the run-up in prices may seem right now, San Francisco and Silicon Valley are no exceptions. Analyzing historical price patterns in the Bay Area can’t tell us how to time the market and make money, but it can tell us what to expect.
The image below shows us how the median price per square feet in San Francisco homes has behaved since the early 1980s. In this post, we delve deeper into 2008 and then take a step back to come up with actionable recommendations.
Delving Into 2008’s Recession
For each year, we scrutinized the 2008 recession’s impact on the median price per square feet (median PPSF) of condos and single-family homes in the city.
We observe three important facts from these graphs:
- Home prices fully recovered by late 2012. If someone bought a house at the very peak of the recession in 2007 and held the property for 5 years, they made money in appreciation after 2012.
- It took 3.5 years for the recovery to begin after the recession began. A lot of buyers who bought in 2008, 2009 or 2010 saw their home prices decrease before the recovery started in 2011.
- Condos deprecated by only 12%, while single-family homes depreciated by 19% after the recession. After they hit their respective bottoms, they started quickly appreciating.
How Did Different Neighborhoods Survive 2008?
The graph above looks at all of San Francisco, but the city has class A, B and C neighborhoods (this post explains what classes mean). Neighborhood classes weather recessions differently.
For this reason, let’s take a deeper look into different neighborhoods in the city, seeing how they did before and after 2008.
Single Family Homes in Pac Heights, Hayes Valley and Noe Valley
When we observe the recession’s effect on different neighborhoods, we see that the rise and drop in their prices are highly correlated because
Most buyers in the city look at every neighborhood before deciding
This prevents one specific neighborhood from dropping in
In 2011, prices bottomed out, single-family homes in
- Pacific Heights lost 18%
- Noe Valley lost 16.6%
- Hayes Valley lost 22.2%
- San Francisco overall lost 19%
of their value, but immediately reverted back to 2007 prices within a year. This shows us how hard it is to time the market.
It is impossible to predict when prices will bottom up and accidentally not wait too long.
Condos in Pac Heights, Noe Valley, Hayes Valley and SOMA
Unlike single family homes, condos show less variance. Other than Pacific Heights, most neighborhoods trailed San Francisco prices until around 2013 when Hayes Valley and Noe Valley started being more “premium” neighborhoods in buyers’ eyes.
At the bottom of the market around 2011, Pacific Heights, SOMA and Noe Valley lost 15–17% of their value.
Surprisingly, condos in Hayes Valley have appreciated more rapidly than SOMA, which is commonly known as the most rapidly developed neighborhood in the city in the 2012–2016 timeframe. I attribute this to there being less development and a restriction of supply in that area.
Palo Alto As a Case Study
I believe that if there is a future recession, Palo Alto in 2008 will be also a great case study of what will likely happen in San Francisco. This is because San Francisco in 2018 is as big a tech hub as Palo Alto was in 2008. Back in 2008, Palo Alto arguably had a stronger tech presence than San Francisco.
This staggering graph shows that condo and single-family home prices dropped by only 12% at their worst, a significantly smaller drop than the prices in San Francisco and a faster recovery. A lot of tech buyers held their homes and didn’t sell during the recession. By 2017, prices have doubled compared to 2007, the peak before the recession.
I expect to see a similar pattern in the future in San Francisco — a smaller drop in prices and a quick, staggering recovery.
Should I Wait Until the Next Recession to Buy or Upgrade My Property?
Problem 1: Hard to Guess the Bottom
When we look at past cycles in San Francisco, we see that
- 1991–1994 Bust: Took 4 years to bottom out
- 2000 Dot Com Bust: Took 1 year to bottom out
- 2008–2011: Took 3.5 years to bottom out
When the next recession hits, you will need to prophetically guess when prices will bottom out. If you wait too long after a downturn hits, prices can shoot back up fairly quickly, like they did after 2001. If you are too fast, prices might drop another 10–15% right after you buy, something that a lot of buyers experienced during 2008 and 2009.
Problem 2: Lending Landscape Will Change
When the next recession hits, it will be very hard to predict (a) what the interest rates will look like, (b) how hard it will be to get a mortgage, (c) what your personal finances will look like: what will happen to your stock portfolio?
Problem 3: Hard to Guess the Top
We have been hearing that a recession is coming for the last 3 years now. Prices have been increasing between 20 to 30% in the city every year since 2014. Waiting an extra year amounts to an equal loss to the highest depreciation during the 2008 recession.
Problem 4: Inventory Shortage
San Francisco currently has a very short supply of good housing. In most residential neighborhoods like Noe Valley, Cow Hollow, Pac Heights, there are close to no constructions on the horizon. While prices might drop during a future recession, as long as San Francisco is a metropolitan hub, neighborhoods with inventory shortages will continue to do well.
General Conclusions
- If you buy or already own a home in a class A neighborhood, such as Pacific Heights, Castro Heights or Russian Hill, your home will lose less of its value during a future recession. If you own in a lesser desirable neighborhood, your home price will take a bigger hit.
- There is no way to time the top or the bottom. The key to winning is Warren Buffet’s strategy of consistently investing in real estate on a periodic basis.
- Due to the housing shortage in the city, San Francisco stands to appreciate significantly faster than other markets in the United States in a future recovery. This is strongly backed by Palo Alto’s home prices after 2008.
Conclusions for Homeowners Looking to Sell
- Selling and buying during a recession might not be feasible: Days on market on every listing tends to shoot up drastically. You might not be able to sell your property quickly or at all during a recession.
- Price fluctuations: Prices change rapidly in recessionary times. You need to be fairly careful, not having a large amount of time between when you sell and when you buy in order to avoid losses.
- Selling and buying pre-recession is a more effective strategy: Most people sell their property to upgrade to a nicer location or to upgrade their home. Nicer locations weather recessions better in general, so upgrading before a recession is usually a financially sound strategy.
Authors
Deniz Kahramaner is a Luxury Property Specialist at Pacific Union. He formerly led data efforts and was an Advisor at Accompany Inc, which was acquired by Cisco for 270 Million Dollars in May 2018. He holds a BS in Electrical Engineering and an MS in Computer Science from Stanford University.
Email: deniz@deniz.io
Phone: 650–770–3100
Jeremie Young is a Real Estate Marketing Professional at Pacific Union. He is a marketer by day and a big data analyst who seeks to uncover useful insights in real estate by night. He previously held positions at Redfin and ZeroCater.
