The California Real Estate Boom Is Over. What Now?

If you had invested in a property in San Francisco five years ago and cashed out in 2019, you would have made a 50% profit, never mind the rental income. But if you had bought a year ago and sold today you would have made exactly zero.

The California boom is over and investors need to switch to Plan B, which is the answer to the Jeopardy question: How do you deal with a market that at best will be moving sideways, but could also drop 20%?

The end of the boom in California also poses 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, as it did in 2008, pushing an already weakened national economy into recession?

Is it just the Bay Area?

No, Southern California is right behind. Home prices in the LA basin were up 3% in the past year, but 9% the year before and the trend is clear. The LA economy is not as tightly tied to the tech sector but it has been weak, with job creation on the low side, even as home prices in the past five years surged 40%.

Throughout much of California prices are now 20% to 30% higher than the ‘income’ price—the price that relates to local income—which always leads to a market correction.

Blame it on the tech economy?

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. We’ve even seen it before in California, with the dot.coms of the late 1990s.

And now we’re seeing it in the Bay Area, in Seattle, Denver, Boise, Austin, Provo, even in Raleigh and Atlanta, where tech is less important.

The cycle is the same. People with new money bid up real estate until builders produce more or everyone who wants it has enough. Then nobody is left to pay the astronomical asking prices and these have to come down.

What about the other tech markets?

Seattle is in pretty much the same situation as San Francisco, as home prices were up just 1% in the past 12 months. But other markets are still in decent shape. Prices were up 5% in Denver, 6% in Austin, 9% in Provo, and 12% in Boise as tech expands in markets with lower costs. The average home price is over $1 million in San Francisco, a $500,000 in Seattle, but only $300,000 in Boise and Provo.

I do expect these other tech markets to follow the same path, however, especially Denver, Boise and Austin, which are over-priced about 30% right now.

And other boom markets?

Phoenix, Portland, Miami and the rest of South Florida, Tampa, Houston, Charleston, and Salt Lake City are over-priced, and Las Vegas will join them pretty soon. Prices have slowed only mildly in these markets and the local economies remain strong.

But this is where the national economy comes into play. No local real estate market can prosper long if 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 1.5% right now. Any lower and the economy is headed for trouble.

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?

In the 2008 recession we saw home prices drop in almost every local market in the U.S., as much as 50%. That won’t happen this time 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 over-priced.

More likely is that the economy eases towards recession and that home prices in many of the boom markets come to a soft landing—they drop a bit but they mainly go sideways.

That’s partly because the tech boom is not just a temporary surge in 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 bankers, lawyers, stock brokers, office landlords, security companies, caterers, the whole eco-system of an industry that will probably change radically in the next few years but will not be going away.

In markets that are not over-priced you’ll see a tremor, but no wholesale selling because this time there’s no systematic distortion (like sub-prime mortgages) that affects real estate supply and demand everywhere.

What can investors do?

Mainly, don’t buy now in the markets that are over-priced. Consider selling now in the boom markets that are still in good shape. Don’t raise your rents in expensive markets, you’ll have poor luck finding higher-paying tenants when the economy slows. Elsewhere just sit tight and, unless you’re over-extended, don’t worry too much; even in a recession most markets will do just fine. Real estate, and especially rentals, will continue to be a good investment.

This post first appeared on Forbes.com. To see the original, click here.