What a buzz-kill, but does it apply to San Francisco?

Thanks to our Reader DL for sending this in. We we were not going to post it, because we really don’t feel it has any bearing on the current San Francisco market (things could always change), but it is another point of reference for you.  What do you think?

“California’s Real Estate Crisis Will Be Worse Than Most Analysts Realize, With Home Prices Falling 15 To 30 Percent During The Next 36 To 42 Months

Source: PRNewswire

Publication date: 2007-06-21

SAN FRANCISCO, June 21 /PRNewswire/ — California’s real estate downturn will be deep and long lasting, with home prices falling 15 to 30 percent during the next 36 to 42 months, according to a prominent real estate expert.

Bruce Norris, who correctly forecast both the real estate boom that began in 1997 and the subsequent doubling of home prices, said the downturn will reflect a perfect storm that includes record numbers of foreclosures, a sharp decline in migration to California, substantial increases in unsold inventory, and, of course, falling prices.

“We are in for a very rough ride in California’s real estate market, which is likely to be far more severe than analysts, state officials and real estate industry associations have acknowledged,” Norris said, adding, “Foreclosures alone are likely to be more numerous than anything we’ve ever experienced, with bank repossessions ultimately accounting for as high or as many as 25-30 percent of all homes sold during the next three years. But like any storm, this, too, shall pass.”

Speaking to more than 100 real estate investors, brokers and analysts attending a Bay Area Wealth Club meeting at the Mill Valley Community Center, Norris said prudent investors need to arm themselves with the facts and come to terms with the fact that analysts, state officials and the California Association of Realtors are either not being frank about the severity of the coming crisis or they simply aren’t looking at the right categories of statistics.

But while Norris’ outlook is gloomier than most observers for the short term, he expects California real estate prices to again rebound in 2011 as foreclosures decrease, the number of homes for sale declines to a manageable level and as California again experiences a net increase in population migration from other states.

“There is light at the end of the tunnel,” Norris said, “but we have to be very careful in this market environment. Homeowners need to know they can no longer treat their homes like ATM machines because the market will no longer provide them with the appreciation levels they enjoyed in recent years. They need to know that the payback on real estate investments is going to be much longer than they’re hearing on news reporters. Investors, for their part, need to know that marginal deals are no longer acceptable. The market will no longer cover their investment mistakes. If they don’t know what they’re doing, they need to stay out of the market until conditions change.”

The trouble with the analysis given by most real estate observers is that it’s based on flawed assumptions, including the widespread belief that interest rate adjustments can somehow hold back the looming real estate crisis. “Interest rates alone do not determine the direction of prices,” Norris said. “Look what happened the last time we had a real estate downturn in California. Interest rates were actually lower in lower in 1997 than they were in 1990. Yet prices declined by as much as 35 percent in some areas. “

The most reliable indicator of a downturn in California is low affordability. Historic affordability lows signaled the previous two real estate recessions and prevented inventory from selling quickly. “We still have strong employment and historically low interest rates,” Norris said, “yet we continue to see the inventory of homes soar, even as builders lower prices and give huge sales incentives. This change in the market caught economists off guard because they said that without an increase in unemployment, you can’t have a real estate downturn. That wasn’t true!”

Centex Corp., Hovnanian Enterprises, Pulte Homes, Lennar and D.R. Horton together have written off more than half a billion dollars worth of land option agreements during the past year, Norris said, citing published reports. “If prices were heading upward and if demand for housing was strong, they wouldn’t be walking away from these land option agreements,” he said.

Most people, however, are still being misled my misinformation that is being fed to the news media.

“Many economists and real estate observers and even government officials continue to offer rosy assessments because they are under political pressure to say nothing or because they are simply looking at the wrong statistics. Trouble is, there are many investors, including builders, who have been misled by their commentary,” said Norris, who himself serves as a hard-money lender through his Riverside, Calif.-based company, The Norris Group, which has provided nearly $150 million in loans on residential properties in Southern California.

Various organizations are deliberately misleading investors and the general public, Norris said, adding that the National Association of Realtors (NAR) launched a $40 million ad camping in January of this year in which they told buyers that now is the perfect time to buy a home.

Even more recently, Jeff Davi, commissioner of the California Department of Real Estate, is quoted in this month’s issue of California Real Estate Magazine saying that California continues to need another 250,000 single and multifamily housing units to be built each year.

“If this was truly the case,” Norris asked, “why are we seeing vacant properties, increasing housing inventory and builders walking away from millions of dollars in land options? The reality is that the real estate market in California is going to get a lot worse before it gets better.”

The good news is that the market should turn upward again in 2011. By then, Norris said, prices will be low enough to lure many people back into California again, lenders will have again adjusted their lending guidelines and investors will again re-enter the market, sensing bargains and opportunities for additional profits and equity growth in the years ahead.

Bruce Norris is an active investor, hard-money lender and real estate educator who serves on the Board of Directors of Chapman University’s Roger C. Hobbs Institute for Real Estate, Law and Environmental Studies. A popular talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Crash, was released in January 2006 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars is available at www.thenorrisgroup.com

8 thoughts on “What a buzz-kill, but does it apply to San Francisco?”

  1. This type of article and underlying assessment is the exact reason I stepped away from the market about 12 months ago and decided to rent. The warning signs all point to a troubling future; and I don’t think sales prices of 15 to 30% lower than peak prices are that far out of alignment for certain parts of California.

    But after coming to appreciate the SF market and the underlying dynamics I now believe that the city of San Francisco will not experience these types of decreases. The caliber of buyer is much higher here and the ability of current owners to sustain a prolonged down market is better here than elsewhere. I do believe that certain outer districts that have boomed could see some downside (Noe, Bernal, Sunset/Richmond); and I strongly believe that sales activity could cool off dramatically if the overall real estate market tanks.

    As a result, I do not see housing in SF as a good investment. And unfortunately, when the rent vs buy metrics are so out of alignment as they are here in SF, you can’t really accept the general axiom that you buy a house to ‘live in’. You are putting up to much leverage on something that is not likely to experience significant gains, and presents enough of a risk (and known transaction costs) that you have to make a good decision.

    It’s one thing if you are rolling equity from another property, but if you’re a first time buyer or highly leveraging yourself into a property and counting on a positive return that you might question the need to buy now.

    Eddy

    [Editor’s note:: For those that missed it, here is a very cool NYTimes interactive Graph that you may use to calculate whether you think it is better to rent or buy.]

  2. Yes, I think it does apply and it’s important that we not have our heads in the sand with respect to what’s going on all around us. I applaud you for posting this report, despite your initial reluctance.

    First of all, independent of what the median price is doing, the market is definitely softer. Volume is off by 20% since last summer, 11% in San Francisco. Volume is the lowest in 12 years. The buyers are evaporating before our eyes as easy financing starts to go away. (It’s currently only tightened for subprime borrowers, killing that market entirely.)

    While we all like to believe our “investments” are safe here in SF, you cannot have prices drop dramatically in the East Bay and the Peninsula without that having some impact on demand here. Ultimately we are all in the same market because at “some” price, those properties become reasonable alternatives.

    I know for a fact that prices are softer than they were three years ago when I bought my house. I regularly see single family homes in Bernal for under $700k. Those didn’t exist two years ago. I’m not saying that the sky is falling but it would be nice for all of us (homeowners and realtors alike) to be a little more realistic about the market. A $5m home selling for $100k over asking tells us nothing.

  3. All I know is that first year analysts (22-23 years old) at every single investment bank is going to make $100,000-$130,000 after one year of work, as bonuses are paid next month.

    If you’re talking good areas in SF, prices have continued to go up this year and +$1,000/sqft asking prices are now oh so common.

  4. Thanks, Boomtime. It’s comforting to know that investment bankers are going to singlehandedly prop up a market that’s been driven by low, low teaser rates and adjustable loans. Thank goodness.

  5. Let me follow this up with an additional comment. Let’s take this fictitious investment banker who makes somewhere in the neighborhood of $10,000 per month. If you go to bankrate.com and plug in that income level into their mortgage calculator, do you know how much house that person can afford (using traditional calculations)? Assuming $100k downpayment, the recommended price is: $567,016. So if investment bankers with big sacks of downpayment cash can barely afford a place that’s 200k below median, how do you justify prices at their current level? Because it’s going to keep on appreciating at 20% a year, right? Because some dummy is going to pay me more next year. There will always be a greater fool, I suppose…

  6. Dave, don’t worry there is also a legion of Googlers flush with cash looking to make sound housing investment decisions in Soma near the new SFGoogleplex ;-) They will be propping up the market for some time to come.

    E.

  7. Dave,

    It’s all about perspective. Sure, the 23 year old first year out of undergrad banker can only afford a $500,000 place, which is 200K below the median, but what is the median buying age? I would venture to guess somewhere between 28-32 for first time home buyers in SF. So, this 23 year old is 5-9 years younger than the median age.

    You do realize that by the time this 23 year old finance person is 26, s/he will probably be making around $200,000-$250,000 right? And let’s say he/she meets another 26-27 year old making $80-100K, that’s 300K+ already at 27-28. You don’t think these people can afford to buy a million dollar place together? SURE THEY CAN! It’s not like they stop working at 27! Their biggest earnings power comes in their 30’s and 40’s!

    Dave (13:19:54) :

    Let me follow this up with an additional comment. Let’s take this fictitious investment banker who makes somewhere in the neighborhood of $10,000 per month. If you go to bankrate.com and plug in that income level into their mortgage calculator, do you know how much house that person can afford (using traditional calculations)? Assuming $100k downpayment, the recommended price is: $567,016. So if investment bankers with big sacks of downpayment cash can barely afford a place that’s 200k below median, how do you justify prices at their current level? Because it’s going to keep on appreciating at 20% a year, right? Because some dummy is going to pay me more next year. There will always be a greater fool, I suppose…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s