Ask Us: Will San Francisco again be immune?

Where readers ask and we try to answer:



Maybe its too negative as a topic, but the latest Business Week cover story could be an interesting thread. It predicts that “home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms.”

Do you think SF will again be relatively immune from this projected correction?


Who the hell knows! Really. Who knows? However, given the state of our market and the “relatively” buzzing activity at this very instance, I’d definitely say San Francisco will “again be relatively immune” over the next two to three years. But, “relatively”, is of course, relative.

Thanks for the email, sorry it took so long to post.

Kudos to “Business Week” for such an original topic and Headline: “Housing Meltdown”. Love it. Very original.

Housing Meltdown [Business Week]

24 thoughts on “Ask Us: Will San Francisco again be immune?

  1. Things are going to be great! Yahoo just started their layoffs, rumors of Cisco and Ebay being next. Who is going to be after that? Housing values are sure to keep rocking and rolling here!

  2. I’ve been trying to low ball several places i.e. (200-500,000 below asking) and the sellers remain quite stubborn. I really hope there is a meltdown in the $2mil+ range!

  3. Also, generally when you have major publications like The Economist or Businessweek publish stories, that is the contrarian indicator. I remember in 2002 when The Economist had a similar article about 6 months after 911, I quickly proceeded to buy a multi-unit place in Cow Hollow for $830,000. The rental yield is now about 18%, or I can sell it for $1.5 mil easy.

    I use the fear in people’s hearts an take advantage of them when I buy. I bring these publications to them and show them to get them down in price. It is a win win scenario. :)


  4. NoBubble,

    I never said things are going to be great, I said we’ll be “relatively immune”.


  5. yeah those big publications never get it right — like that enron story, or the worldcom one too. i really believe that the success of all of these RE blogs is not due to some random alignment of forces…. it’s directly fueled by the speculation of (1) Longtime Homeowners completely dumbfounded that they have a leveraged asset with massive appreciation, (2) Average Homeowners <3-6 years pretty exited to have made some unexpected gains, (3) New Homeowners <3 years that are legitimately concerned about their leveraged ‘investment’ (4) Renters who are basically priced out of the market for anything remotely close to generally accepted living standards. Housing is a big deal right now and everyone has some material interest in the matter.

    My latest thinking here that pretty much conforms to generally accepted housing axioms is that the real estate market does not move like a liquid asset and prices move up and down much slower — particularly on the down slide. But that is under normal economic conditions, not a bubble environment.

    The very simple fact here is that if your neighbor sells his house or condo for 85% the price you paid — you are screwed. I’ve stated before that I suspect that anyone who bought a house in the last 3 years cannot afford to take even a 1% loss on their property (factoring in transaction costs) and furthermore, a large portion of those same home owners cannot afford their mortgage over a 3-5 year term. So what do you think happens when these people lose their jobs. Sure not everyone is going to lose their jobs, but some people are going to take a hit. These people will default on their mortgages. This will drive inventory and overall market forces will be driving prices downward. Your neighbor of 15 years who is sitting on a 250% appreciation could care less if they sell for less than you bought 3 years ago. They are still taking home 225%.

    OK, so this isn’t a market prediction or anything, but this is a very real scenario. What no one knows is just how ‘immune’ SF is to the above scenario. One thing is for sure — you don’t see a lot of homeowners on these RE blogs or forums talking about how f’d they would be under the above scenario. You do see a lot of people posting about “bitter renters”. Perhaps we’ve moved from Denial to Anger?

    The “walkaway” home owners are what could really kill this market. If comps start coming in materially lower and home owners realize their under water on their investment and make the decision to walk-away leaving the bank to deal with the loss — Game Over. Sure we’ll continue to see bailouts and programs to help homeowners, but you can’t stop someone from walking away if their home is worth 200k less than their outstanding loan(s). I guess the only indicator we have to forecast that is the notice of defaults and other foreclosure statistics. It’s interesting to note that there are rumors of homeowners that are 7+ months in default that have received no “notice” of default. So you have to wonder if these stats are being skewed to manage market perceptions?”

    Just in case there is any confusion — I wouldn’t recommend buying in the current market unless you can pay all cash and plan on staying in the home for quite some time to ride out the current market.


  6. eddy,

    that is why location has and always will be the most import aspect of real estate. i don’t care about much else. if you buy in antioch with a bunch of other over extended middle class folks, eventually you will get your ass handed to you.

    then you have the old adage about never buying the most expensive house on the street, unless you don’t care about appreciation.

    some folks don’t.

  7. I completely agree about location and firmly believe that SF will weather the storm better than most — but the potential for major issues in our back yard are real. What we don’t know is how many people took out toxic loans here in prime SF neighborhoods? I literally walked a $10M open house a few weeks ago that had one of those mortgage flyers talking about piggyback, neg-am loans. I couldn’t believe it, but I have to assume that loan brokers are creating these flyers for a reason — people take them and use them to buy hose they cannot afford.

    Unlike the auto-lease that has become common in the automotive sector for consumers to buy cars far exceeding their income levels — there is no residual value or other ‘factor’ to account for the outstanding balance of the car. And there is no dealer on the back end to take the car off your hands at the stated value. You own the house under the terms negotiated with the seller and your bank.

    Again, I’ve no idea about how this will play out in SF, but it’s logical to assume that homeowners in SF have more resources to avoid defaults and we are not seeing wide spread price declines. But all of that changes if people start losing jobs. Jobs are the key to this whole thing IMO. People with jobs will pay bill cause that is what rational / responsible people do. This will keep the markets healthy enough to sustain moderate liquidity levels and prevent a burst.

    If people lose their jobs — all bets are off. I’ve been saying this for close to a year now. What is starting to really concern me is that we are hearing lots of rumors of high profile bay area layoffs. If the high profile guys are considering it — it’s probably already happening in smaller, lower profile companies. Or you could make an argument that the higher profile firms are quicker to react to market changes. Not sure. Either way… The only thing I watch these days are the jobs reports. I personally believe that is the key to real economic and real estate health.

  8. Eddy, most bubblists would disagree. They would say buying with a lot of cash is precisely the very worst thing imaginable.

    It all comes down to your example of the neighbor selling for 85%. It is not happening. Whether I should qualify that by saying “it is not happening yet” or just leave it alone is unknown. I’m speaking as a homeowner here and not a renter. I have a two unit+ with two car parking, views, and a yard in Bernal Heights. I’ve been keeping a steady eye on the market, this micromarket, as a homeownern. And my own equity has been steadily increasing throughout the teeth of this storm. That goes to what James said.

    Backing off of that, and putting on my realtor hat, I can venture outward and say this. That’s judged by properties clients have tried to buy, properties I’m trying to sell, and daily observation of the MLS and other data. As of yet, most of SF hasn’t taken any sort of equity hit.

  9. Yeah, I agree about your jobs point. Are people really losing their jobs around the city? I haven’t really seen it within my circle of friends.

  10. Interesting to me that so many of the people contributing here wouldn’t want to somehow reference OBAMA…..mccain….??? anyone think this may impact things in our future

  11. On jobs, locally — Levi’s just came out with some great numbers. I will probably get slammed for this too. But I and a lot of others wonder about the biotech wave that’s supposedly to be coming to Mission Bay. Anybody know what’s going on with that?

  12. My spouse is in the tech industry and is stating that he can now get a job that pays 40K+ more than his current salary because his position is in such high demand. That doesn’t sound like things are going downhill to me.

    As for SF immunity, only time will tell even though many people would like to believe they hold the crystal ball to the future. Personally I’m glad I sold 3 years ago because I couldn’t get squat for the house now due to all its flaws. My spouse and I had a gut feeling the market was slowing down so we thought sell now, buy into a place we can stay for a while, and boy am I glad we did! Frankly, when I see comps to the house I am in now, I don’t see that I overpaid at all. It still feels like I got a pretty good deal by… SF standards of course.

    And paying cash for a place is just plain stupid given the market trend – why put all your eggs in one basket like that?

  13. I know people in prime Marina who bought in the last few years using no-doc, option-arm loans and taking the small downpayments out via a heloc on different properties.

  14. Anon – your high tech spouse probably knows how fragmented the job market is. Sounds like s/he is in a lucky niche that is in high demand right now.

    Not everyone in tech is in a high demand niche. When companies downsize they keep the high performers and those with specialized needed skills (those two groups are not necessarily the same people :-) Some will lose their jobs. All it takes is a small percentage of layoffs to have a big effect on the market as this will directly affect the margins.

  15. Love to stir some healthy debate. :-)

    For the record, I have no predictions on what is going to happen — I only have my observations and stated points on what I think will impact the market. And I think jobs are the biggest variable right now. And I do think the elections this year will stave off a lot of bad market news; and neither party wants a meltdown in the election year so pretty much any stimulus package will pass.

    The thing I’m most confident about is that they risk of getting further priced out of the market has been pretty much eliminated.

    One good data point waiting in the wings is 2021 Webster. 2004=$1.95M 2007=$2.229M Currently on the market at $2.849 down from a laughable $3.495 listing price and a hefty DOM @ 195 days!!!!! Clearly these people are fishing for a foreign investor or the proverbial “last fool”.

  16. the only high folks that will struggle to find new jobs are the ones in positions like product marketing or it helpdesk support. pretty much anyone else will get scooped up in days. especially if they can write code or if they can sell. they might even get raises while they are at it.

  17. I do not thing we are immune and i think we are getting hit now even though the numbers do not ‘say so’. for example suppose SF appreciated 3.4% last year or whatever the current number is. That number does not take into account DOM but more importantly it does not take into account properties that went for sale and then were pulled because they did not sell. So maybe you still had positive appreciation, but maybe that is because more desired houses still sell well. Also, longer DOM can hurt sellers who need to sell or need to move for whatever reason. There could be financial impacts to the sellers that are not revealed in the sales stats. It all gets ‘hidden’ in the stats.

    To the ‘jobs’ issue. I work at a smaller (350 people) tech company and we can not find anybody suitable to hire, from the front desk, to marketing, to software and most people I work with get called constantly by head hunters, across all groups. I think most people working in tech who are *good* will get fine jobs, maybe paying better then currently. I think it is more aligned with competence then being in a ‘niche’. Most good people can still get a great job as of today. There are simply more jobs then qualified people right now and venture capital is still going strong. Strangely enough.

  18. Eddy – I don’t agree with your ‘anybody who bought in the past 3 years’. If you bought in SF 3 years ago, to this day, for example, you are up 25-30%. Two years ago to this date, perhaps about 10%, and one year to this date, flat to up 5% in SF.

  19. All good points and thanks for the input. If you’re up 10% and you have to sell at 6% commission, plus 1-2% related costs (staging, transfer tax) plus any neg-am on your loan than you break even. 3 years guys are certainly better than 2 or 1 years homeowners but the margins are thin.

  20. you’re speaking to people who are only buying. when you are buying AND selling it doesn’t matter what the market is like because you sell/buy high or sell/buy low. I see it more as a lateral move. Plus you can wait on the sidelines forever and say the market is unpredictable because it is..always…until hindsight chimes in. that’s the beauty of RE.

  21. Eddy – Why talk about people who bought last year or two years ago? These folks aren’t the people selling. Those who do, will obviously have more difficulty making a financial return. Thank goodness for the internet, and compressing commissions. And at the end of the day, you have to compare against the return on renting, which is -100% in after tax money.

    BTW, I change my stance on The Greenwich. Now I do think #504 will sell for over $2mil at only 1,500/sqft, and #604 will get $2.295 mil, also the same size. It’s crazy. A lot of old money, older couples, rich Venture Capitalists…. it’s just silly. Let’s discuss again next week.

  22. Anon, I agree with sell low buy low etc.

    I also want to point that, SF is SF. And there is one thing we cannot undo: fixing properties.

    In a suburb with 2000 identical floor plans, when they get hit, it comes down to the property with new carpet vs the property with not so new carpet – the late one with a high risk of stalefishdom. (or stainless steel applianced vs old brown appliances etc)

    in SF however, there are things that cannot be undone. A house that was fixed from 2/1/0 into 4/4.5/2 cannot be restransformed into an “empty lot”. Sure, if the house sold new at 2.8M, there is no garantee that it’ll sell for more, or even for more than 2M everafter (factoring that the house will NEVER be new again it should actually be a normal pricing policy!). But a good house on a good lot in a good location will stay that way – and will still sell faster (read higher) than the house next door which is on the same good lot, but maybe doesnt have a garage).

    Now there is a real risk- that’s the coming down of the whole city as in: invasion of low income not paying occupants (in the pattern seen in the past century) along with the exil from rich occupants away from the city. And unless downtown goes away, the island status of the city will always make some part(s) of the city desirable (now which ones? that’s the question).

    I’m not that worried. I’m worried for people who couldnt afford their house in the first place, but I’m not worried for the overall health of the city. Just the flu season ahead – not the pleague.

  23. hi-tech jobs: Yes, Yahoo is laying off some people, but that has more to do with their longer-term strategy and re-organization than the current economy.

    I am a techie .. and we have been struggling to fill open positions with qualified candidates.

    Strangely, a sister company under the same corporate umbrella, is moving their tech office here from So Cal because they can’t attract talent there, either. Our dabbling with outsourcing has not proven effective .. we want talent in the office that can interface with the business side of the house.

    I am not worried about tech jobs in the Bay Area. I do hope Yahoo pulls through. Remember last year Google and eBay opened vast offices in SF because that is where their talent wants to live. Let’s hope to see more of that trend!

  24. From Anon “Things are going to be great! Yahoo just started their layoffs, rumors of Cisco and Ebay being next. ”

    Please stop hitting the panic button. The local economy is not going to hell in a hand basket. If there are local companies that are having layoffs at present, it is because of dodgy business fundamentals or restructering, not an economic downturn a la 2000/2001. The tech industry seems to be doing surprisingly well in light of the difficult macro-economic environment. That combined with the fact that Bernanke recently reaffirmed that the US does not appear to be going into a recession– all signs look ok for SF Bay Area businesses. If Yahoo is laying people off, its because they have been struggling as a company FOR YEARS. Why do you think they just switched CEOs? For fun? The company is in serious trouble, thats why Microsoft thought they could make a bid for them to bail them out. Re: Cisco –I have folks who work there and there is absolutely no chance of layoffs in the near future. They just had a stellar quarter. And today, HP beat their earnings and raised their forecast today for the next fiscal quarter. And like Kenny mentioned, Levi’s is going strong.

    With Bernanke’s prediction coupled with the current performance of SF Bay area businesses in a down macro- market – people are not going to be loosing their jobs like in the dot com bust. So fundamental base salaries will not be affected. Now what isn’t acting healthy is the stock market which is more affected by emotion and macro/global trends. And that does affect local people’s disposable income and ability to get a loan. Google base salaries, for instance, are notoriously stingy and below their competitors; They have been able to do so because of the lure of options gains. A year ago my 28 year old google friend, 3 years out of grad school w/almost no savings– based on the value of his unrealized options gains alone– was granted a 1.85 million dollar home loan. But what now when options granted at present may be under water a year from now? People are going to stay employed, but they are also are going to stay in their current homes. Google may adjust their salaries, but an extra 5K a year isnt going to buy you that Victorian with the trendy modern interior in Noe. That is absolutely going to affect the local, San Francisco housing market.

    To what degree I don’t know. Less than the national 25% that Business Week predicts? I would think so— considering that SFH prices declined 27% in San Francisco from 2000-2002 when the SV/SF Bay Area basically lead the nation into a recession and had mass layoffs (these stats are from the site i cant mention, anyone can give better ones if they have ’em). The exodus of people and money was pretty significant then. Right now it just looks like middle and lower management will be loosing their monopoly money and may keep Indiana Avenue rather than moving up to Park Place.

    That notion, coupled with everyone’s third aunt getting shaken out of the flipping game, the loss of the concept of a house as a short-term sure growth investment , combined with the over-extended folks who might decide to just walk away … 10-15% decline in prices?

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