Ruth in Conversation with Bill Vlahos Partner at Jackson Square Financial

Ruth [00:00:26] I’m here with Bill Vlahos, who is my favorite financial planner, and he also does some lending. I love the combination of the work that he does because I feel like when people are thinking about a loan they also need to think about their entire financial picture. It’s very rare to do both. And so I love that Bill can take an organic approach to help my clients think through the process of getting a loan, but also just all of their financing in general. So I wanted to have a conversation with Bill and just find out what’s going on out there. What are people talking about with regard to financing? Also, Bill, do you want to introduce yourself?

Bill [00:01:29] I grew up in San Francisco. I went to school at UCLA and moved back to the Bay Area after graduating. And I’ve been working as a financial advisor for 25+ years. Our firm is 20 years old. There are fifteen of us – four partners and eight support staff. And as you alluded to, the core of what we do is investment management for individuals and families – understanding everything we can about a portfolio and then designing it based on a client’s income, trust situations, goals, risk tolerances, etc. And wrapped around that, we do financial planning, stock option planning, and estate planning. I’m also a licensed mortgage broker. So we provide mortgages and then we also have a big employee benefits practice. And because I’m a Gemini – not enough going on already – I also do some expert witness work. So I do expert witness work on suitability of investments, standard of care, fiduciary care, things like that.

Ruth [00:02:22] Yeah, you do have a lot going on. Like me, you’re probably feeling like a lot of your day right now is spent on the phone talking with clients. I’m talking with sellers mostly about easing some of their anxiety about the market. Your phone must be ringing off the hook right now with questions about the stock market. What are clients talking about?

Bill [00:02:46] Well, if you take a step back and first paint the picture of where we are… as soon as we entered into 2020, the stock market was trading at the higher end of its valuation. To explain further, a common multiple of valuation is a PE ratio – the price that you’re paying for earnings – and that number was just at about 20 (that’s historically high). Traditionally stocks traded at the ease of 17-18 in this interest rate environment. So I think the market, first of all, was susceptible to a pullback. That’s the first thing to keep in mind. I think the second thing to keep in mind is that we are in unchartered territory. So, as a young financial advisor, I lived in practice through 9/11, through the recession of the 1990s, through the Internet bubble, and through 2008. So I’ve seen a lot, but this is fairly unique. Initially, I thought this may not be as bad as 2008, but now I think it potentially could be worse because in 2008, you certainly had banks failing – Bank of America’s stock was at $3. So you had financial institutions failing, but now you have a complete seizure. The U.S. economy is primarily driven by the consumer, and that’s obviously been frozen. So it’s not just the restaurants and those sort of gathering places, but it’s the dentist who may have bought a practice, who has high fixed costs, is leasing his/her equipment, and has employees. This virus has really frozen the economy. But this will end at some point. And so I think the big question going forward is, how does a consumer behave when this is over? Will everything go back to normal? Will there have been so much damage that consumers don’t want to spend? I mean, a key component of economic growth is velocity – the velocity of money. How often does money circulate? And right now, it’s not circulating at all. But when this ends, and hopefully that’ll be soon, will people go out to dinner again? Will people get massages? Will people buy real estate? So I’m eager to hear what you think about this. To what degree does normalcy return? I don’t think anybody knows right now.

Ruth [00:05:01] I’m sure that one of the things that financial planners talk about is diversification of assets. So were they diversified with cash? Are they in a good cash position?

Bill [00:05:12] Yes. One thing that we are absolutely dogmatic about is – I like to say, “know thy bucket.” Every investor should have different buckets for their portfolio. So there’s a bucket of emergency money in case there’s a 9/11 or a pandemic. There should be intermediate money and longterm money. So we strongly encourage our clients that any money they have in stocks or real estate they shouldn’t need for a minimum of five years. I’ve been doing this for over 25 years and in my experience, the clients that have accumulated the greatest amount of wealth are those who never need to sell during the bad times. They can ride it out. So, for example, if you invested money right before 2008 and then experienced 2008 and experienced now, you’d still be dramatically higher than where you were. So most clients are not freaking out. Most clients know that this will recover. And I guarantee you that two, three, four or five years from now, stocks are going to be dramatically higher than they are now. I don’t know how long it’ll take or when. So I think it’s just really important that people who are paying a mortgage are not having that money invested in the stock. But it’s money that they have for their kids’ college or their retirement. So as long as people have it in the right bucket, they’re going to be fine.

Ruth [00:06:36] What percentage of your clients wanted to sell as the market started going down?

Bill [00:06:46] Almost none. Because I think people realize that, people who sold in 9/11 or 2008 sold at the bottom and they generally didn’t get back in. I think everyone realizes that in some ways it shouldn’t really matter – if you don’t need the money it doesn’t really matter. It’s painful, but it doesn’t really matter.

Ruth [00:07:09] That’s where we are as a family. It’s a bummer that we lost some money in stocks, but it’s there for retirement. So I know it’ll come back. I did go through 2008 and I was much younger then. So it was much scarier.

Bill [00:07:27] It’s important to learn these simple lessons. If you think about it, as a nation, these are scary times, but we as a nation we defeated Stalinisms and Naziisms and we went through a Cold War. We went through 9/11 and we went through 2008, and we have the strongest economy in the world. Stocks are a reflection of that economy and so, things will be dramatically higher down the road.

Ruth [00:07:55] Right. So for your clients that were wise enough to be in a good cash position, what are they investing in now? Are they talking about real estate at all? I’ve heard that from some financial planners that people were saying, “maybe we were a little stock-heavy and maybe it would have been better to be diversified into real estate.” So maybe now’s the time? Or are they too scared? Because now they would need to pull money out of stock and they don’t want to pull money out of stocks now to buy real estate.

Bill [00:08:28] That’s a great question. So if you have cash, is it a good time to invest? I think my gut is that you’re still going to see more weakness in the market. So typically there’s a period where the market is trying to find a bottom – I think what’s going on right now. It’s called backing and filling and the market goes up and goes down. It tries to find a bottom. So could there be another 10 or 15 percent down? Absolutely. But I think in some ways, for people with cash, it doesn’t really matter if you’re putting this money away for, especially 5-15 years. You know, 15 years from now, you’re not going to know if you bought today and it went down 10% more. Just keep in mind it could go down further. And I think real estate is a similar thing. When I bought my house, I never really thought about what the value was. And, for our clients, I don’t think they monitor the housing market every day like they do the stock market where you can see the valuation every day. I think that’s the nice thing about real estate is those values are a little less concrete. But real estate absolutely is an important part of a well-diversified portfolio. And I would suspect those basic principles are the same, that if you’re you don’t need this money for some period of time, it’s probably a great time to invest in real estate. Ruth, do you think that real estate has gone down materially? It didn’t seem in 2008 like Bay Area real estate went down that much, especially in San Francisco. So maybe just tell us a little bit about what you’re seeing.

Ruth [00:10:24] Yeah. I mean, I always use 2008 as a benchmark for a worst-case scenario because I felt like that was a really, really bad time. Could we actually see that twice in our lifetime? I don’t think we exactly know where we’re at in this position, especially because – as probably most of you know – we’re not able to sell real estate right now. We can’t actually show properties. And most properties in the Bay Area are not bought sight-unseen. That said, I was talking to my coach yesterday and I said to her something to the effect of, “I’m probably not going to sell a house for another couple of months.” And she’s like, “Really? Are you certain that’s true?” And I said, “Well, yeah. I don’t think I can sell a house sight-unseen.” And she said, “Well, could anyone buy a house sight unseen?” And I was like, “Well, actually, I’ve bought two properties sight unseen.” Granted, they were both investment properties and all I was concerned about was cash flow. So I do think there is a pocket of people interested in investing. However, the interesting thing about that pocket right now is, given that San Francisco has delayed rents, I don’t think investors are clamoring to get in and buy investment property when they may not be collecting rents. I don’t have any strong data points for you from yesterday because we haven’t gotten anything into escrow in the last week. But the weeks leading up were very strong even with the pandemic going on – coronavirus was still a thing a week ago – and it seemed like buyers were still just really ready to buy. We were having a pretty great spring. So I don’t know exactly what’s gonna happen. What I do know is that San Francisco in 2008 had about a 27% drop citywide, which, considering we had a lot of years where different neighborhoods were gaining 20% for multiple years in a row, 27% overall was not so bad. So in general, San Francisco has been a very strong place to invest and I think it will continue to be so. And, I wonder, as people are sitting at home if their houses are bursting at the seams – and certainly, some people are in that situation – and now they’re locked inside with their kids for days on end, are they saying, “Now, more than ever, we need a little bit more space!” I’m curious if you could name a couple of things that you think people could do now from a financial perspective that would help position them well for after this passes. I believe that there are opportunities in all periods of downtime.

Bill [00:14:41] Typically what markets do is that they undercorrect and overcorrect. So, for example, I said, at the beginning of the year, stocks were probably on the expensive side. And now you’ve seen a market decline by over 35%. Somewhere along this process, the market will be finding a bottom and it will probably overcorrect. So it will probably be a good opportunity. You know, the best companies really are in America. You don’t see Facebook or LinkedIn or Apple elsewhere. These are U.S. companies. So I think people can look at really strong companies. If they like individual stocks, I would suggest they look at strong companies with very solid balance sheets. You don’t want to buy stocks from companies that might need to raise money because, you know, liquidity will lock up to some degree. At the same time, be careful with their leverage and to make sure that they always have a decent emergency fund because I don’t think anybody saw this pandemic coming.

Ruth [00:15:44] What do you think is a decent percentage for an emergency fund?

Bill [00:15:50] If they have a business that requires a lot of capital, maybe a couple of years’ worth of liquidity. If it’s a family, probably at least a year or two in tax-exempt bonds or liquid assets.

Ruth [00:16:01] So if I don’t have that liquidity – a lot of my friends are business owners – what do I do now?

Bill [00:16:09] Make more sales.

Ruth [00:16:10] What if I can’t sell anything?

Bill [00:16:12] I mean, I think that there are programs that are starting to come out of the state, the city, the federal government. I haven’t reviewed them yet – a lot of them are still proposals – but they’re all coming out right now. You’re probably going to see the TARP programs, which were very successful in 2008.

Ruth [00:16:31] What about like a HELOC? Is that an option?

Bill [00:16:34] Sure. A HELOC is definitely an option. But keep in mind that these HELOCs and lines of credit are being drawn on right now. I talked to a banker just yesterday – they may be harder to obtain now, but I think going forward, people should think about these secondary liquidity needs in the future. I’m not saying it’s too late now, necessarily.

Ruth [00:16:58] For those people who don’t know what a HELOC is, can you explain how that works?

Bill [00:17:02] It’s basically a loan against their primary residence.

Ruth [00:17:05] So if you have a little bit of extra equity or a lot of extra equity in your home, it’s a way to access that?

Bill [00:17:11] Right. And then talk to your CPA, because some of these various liquidity programs may or may not be tax-deductible. Question for you: Do you think landlords are going to work with their tenants?

Ruth [00:19:02] I don’t think they have a choice.

Bill [00:19:15] Speaking more boldly, prior to the pandemic, how is homelessness affecting people’s attitudes toward real estate in San Francisco?

Ruth [00:19:20] I do think that the homeless situation is becoming more of a detractor than it has in years past. I have recently heard a lot of sellers say to me that that’s one of the reasons that they’re leaving. I would say 18 months ago, I never heard anyone mention that. And in the last 18 months, I probably have had 10 sellers tell me that. That’s concerning. That’s probably a good 30% of my listing clients saying, “We’re just done with the mess.” So I don’t know what the answer is to that. You know, I try to do some things at the grassroots level. There’s a school called De Marillac Academy that I am active with. It’s 100% run by the community through donations. Only kids that live in the Tenderloin go there. And it’s a free education for them where they’re oftentimes put into Sacred Heart or other fantastic schools in the city. And so, the school follows these students through their education and then they’re really teaching them these values about coming back and reinvesting in their community. I think 90-something percent go to college, which is amazing considering their backgrounds. It’s higher than normal graduation rates and then I think like 80% of them come back and work in the community to give back. And so even though programs like that are not sexy because they take 20 years to really materialize – these are the programs that I think could actually really change things. I think that everybody wants a really quick fix. I mean, I’ve been living here now for almost 20 years and we’ve been talking about this since I moved here. And it doesn’t seem to be getting better.

Bill [00:21:41] Right. I guess the one nice thing is there’s a big bay in the way. So they’re not really building any new single-family homes in San Francisco. So it seems to me that to some degree that real estate should always do OK.

Ruth [00:21:53] Yeah, I mean, it’s a 7 by 7 city. And I think that we’re in a fortunate place where we’re in the heart of Silicon Valley. So there’s just a lot of really, really top talent and some of the smartest people in the world that live here. And these companies that you’re talking about – the Facebooks and the Googles – they have offices everywhere, but I think their headquarters are always going to be here. So we have been able to really benefit from that in the housing market, and I think we’ll continue to do so. You mentioned blue-chip stocks, so are those a good route to buy right now?

Bill [00:22:51] Yes, sticking to blue-chip companies is solid. I think you’re going to robustly benefit if you’re buying those ETF now or in the next month or two and you’re putting that money away for 5-15 years. I think you’re going to do really, really well.

Ruth [00:23:11] That’s like an index fund, right?

Bill [00:23:12] Index fund or a Vanguard fund. I don’t think it makes that much difference as long as you’re well-diversified. It’s not really going to make that much difference.

Ruth [00:23:22] So if I’m a person who hasn’t gotten involved in the stock market, but I happen to have $100k sitting on the side and I have a secure job and I don’t feel like I really need it then I could just maybe buy a little bit of stock day by day? What’s the best way?

Bill [00:23:46] Yeah, I think that’s really prudent. For people who make systematic investments, called dollar-cost averaging – most commonly through their 401-K plan – it really works to their advantage for the markets to be down because especially if you’re making a systematic investment, a certain dollar amount every payroll or every month allows you to actually buy more shares when the price is down. It actually works to your advantage for the markets to go down, especially if you’re making systematic investments either through your taxable or your 401-K because then you’re accumulating more shares. As long as it eventually rebounds, you’re going to do a lot better having lived through these periods, even though they may be a little unpleasant. One of my final questions for you is for new buyers, are there certain neighborhoods that you think represent especially good values? For example, I grew up near West Portal and my understanding is you can get a lot more for your money there. And I think it’s a great community. Thoughts on neighborhoods and your strategies for people who want to maximize their real estate purchases?

Ruth [00:24:53] I love West Portal. I think it depends on what your price point is. So we actually do sell a lot of houses in West Portal and it’s generally a client who is trying to get into Noe Valley and they wanted to get into Noe Valley for like $2.5m and buy a three or four-bedroom house. A good pricepoint in Noe Valley for a three to four-bedroom house is $3-5m. Given that, we would encourage them to look at areas like West Portal and St. Francis Wood, where the houses are bigger. So it kind of depends on the pricepoint. The average price per square foot in Noe for a nice house is anywhere between $1300 to $1600 a square foot. Whereas, in West Portal, you can get $1000 or $1100 a square foot. So your money does go further there. My guess would be that we’ll see some softness coming out of this. We’ve been seeing good values in condos because of all the building that’s happening – there’s a lot of inventory. So the condo market has been softer than single-family homes. Even within the condo market, there are some subsectors. Condos that are nice Victorians might sell for more than something that’s more of a box-type condo in a high rise with more supply. It’s all just about supply and demand. It’s interesting to see that there are markets within markets. I was having a call with a seller today and they were saying, “Maybe we don’t want to do all this work that you recommended we do to sell our house because we’re worried about the market.” And my answer to them was, “First of all, I’ll do whatever it is that you want me to do. I will support you and your decision, but you also hired me to give you my professional opinion.” And what I’ve seen in the last 10 years is that there’s been a lot of ups here. The graph looks like it’s gone in one direction for housing. But actually, there have been these microclimates where it’s been down for a season and then it’s popped back up. So we’ve had some softer markets in the last 10 years. And what I noticed every time that we’re in a softer market is there tends to be a divergence between the perfect homes and the ones that can look deficient if they’re not staged. And the perfect homes will oftentimes sell for yesterday’s prices and then the not-so-perfect ones will sell for even less. Those are getting massively more discounted. So what we want to do in prepping a home is to make it look so good that even if there are imperfections, you forget about them. But it will be interesting to see… Ultimately, it’s the seller’s money. It’s their decision. I think you will start to see – as people are worried about the pricing – people really pull back on that prep work that they do in homes. I totally understand what they’re going through. They’re thinking, “I don’t want to spend money if I’m not sure I’m getting it back.” When the market is doing well, you feel a lot more certainty that you’re going to get it back. Even if the market is not doing well, it’s more important than ever to make those updates. But it’s scarier.

Bill [00:30:56] One thing we should talk about is interest rates. The Fed is cutting rates and that will help people with the affordability of buying new purchases or refinancing. It is interesting that last week’s mortgage rates went up… There’s such a demand. A lot of the big banks are backed up on mortgages. So there’s a huge demand for mortgages. Also, the CMBS – not to get too technical – but the CMBS market was really messy last week – the mortgage market. I think it’s somewhat unfounded, but there is some concern about banks and liquidity. Are there traces of 2008? I do think that the market will firm up, and I do think that’s a good advantage for people to either purchase with lower rates or to refinance soon. I do think you’ll see those mortgage rates come back down a little bit, which could support buying.

Ruth [00:31:51] I was curious about whether some of that backlog on the banks will clear up if there’s not a lot of home-buying going on. Because I know even last fall, it was taking like 20 days to get an appraiser in the house, when it normally should have taken two days. Rates were so low and all the banks were just backed up. The appraisers were backed up. You never waited that long. And it just was the same answer from every bank.

Bill [00:32:38] For the refinancing, oftentimes you don’t need an appraisal if the owner has a lot of equity in their house. But you’re right. And right now my understanding is that appraisers are not allowed to work in San Francisco.

Ruth [00:32:52] Yeah, I’ve heard different things from different banks on that.

Bill [00:33:23] Well, I can tell you that all the clients that I’ve worked with you love working with you and they love your professionalism and your attention detail. And they also that you have a whole team around you.

Ruth [00:33:33] Awesome. Thank you, Bill. Likewise, my clients love working with you, and it’s good to have a good team of professionals around to refer them to. I love being able to have these conversations with you so that I can keep educated. Thanks for educating me and my clients today. I really, really appreciate your time.