Comment du Jour: Things aren’t so bad (relatively speaking)

From “44yo Hipster” in yesterday’s Stats & Numbers for Single Family Homes [edited for flow]:

Di’cha [Did you] check out the DQ #’s for sept…ouch!

And the #’s on this chart don’t paint a much better picture, especially with the financial/stock market/oil price melt down. Man, a lot (most) investors are taking a big hit on their portfolios. Even Kerkorian got his ass handed to him on his activist investment forays with Ford Motor Co. and just wait, the shit is going to hit the fan big time for oil rich nations (think: Russia, Saudi Arabia, Iran.)

So…I guess taking a 10% hit on SF investment property values (while the rents have continued going up) is *really* minor. I have friends who lost 30% of their stock portfolio in 3 weeks. and others I know who lost > 30% in RE investments in Southern California in the last 2 yrs. Those who own in SF should thank their lucky stars, methinketh.

We’d have to agree.

28 thoughts on “Comment du Jour: Things aren’t so bad (relatively speaking)

  1. well, of course there is the issue of gearing.
    with 20% down a 10% hit means that half of someones life savings would have been wiped out – before allowing for selling costs etc. I don’t think this can be called really minor.
    so someone who bought in sf say two years ago 20% down- better decision than buying in SoCal – undoubtedly yes.
    better than investing in stock market – probably not, no, due to the gearing effect.
    better than renting – clearly not, despite rents rising this doesnt depreciate your capital like a fall in property values does.
    and of course, its a 10% yoy decline. the fall from peak is higher than this. and the decline is clearly continuing, probably even accelerating.

  2. Precisely what makes up that 10 percent, though?

    I looked into it yesterday. As of last night, over the past two months this year, 96 of the last 367 SFR sales citywide wer D-10 sales. The D-10 sales went for 442 a foot, and the 367 total went for 574 psqft. Compare that to the same two months last year when 84 of the 371 SFRs sold for 512 a foot in 10, and the city-wide average was 625 a foot.

    So now, by only looking at 1-9 for SFRs, 8/21 thru 10/21/08, we see 271 sales at 630 ppsqft. Last year it was 287 sales at 668 ppsqft. That’s more like a 6 percent shift in both sales and price. Ironically (or not, as third quarters always seem to be when the S**t hits the fan) the third quarter last year also packed a whallop, news cycle-wise, which made people reticent to say the least.

    So for SFRs anyway, sales are up in the lower cost areas, and prices are way down. That’s just 15% YoY. From peak? Lower cost areas are probably down 30% or more from peak.

    I bet if I were to remove Ingleside and Oceanview the gap would be even narrower. Again, this is SFRs only. I think condos will show something else entirely. But I also think condos are something else entirely because there is a different supply-demand factor at work. Further, there aren’t a whole lot of condos in 10 or 3.

    I know some of you will cry cherry picking here. Hey, maybe it is, in light of charts from two years ago showing median spikes and whatnot. But it isn’t cherry picking here. Here, we’re looking at what’s happening right now. D10 and parts of D3 are inarguably the most neglected parts of San Francisco. They saw the greatest runup, and the fall has been precipitous. And they are clearly affecting mix for SFRs.

  3. addendum

    By subtracting only Oceanview and Ingleside as well the difference is:

    8/21/08 – 10/21/08 252 sales at 642 ppsqft
    8/21/07 – 10/21/07 276 sales at 672 ppsqft

    Volume indicates ~10 percent. Price? More like 5.

    What will all this amount to if everybody continues dumping 120 properties into the MLS every Friday for the next two months, and sales continue to stagnate?

    That’s the $100 question.

    Right now tho? Where are the GREAT deals, y’all? I’m looking! (And if you got something let me know.)

  4. I just feel bad for all of us renters, paying ever higher rents since ‘nobody can afford to buy”, and getting our investments DEMOLISHED in the stock market.

    I’d much rather have all my money in prime District 7 property, happily collecting rent or paying a mortgage than losing it all in this illusion we call the stock market!

  5. -10% is not a big problem? Let’s say some guy buys a $1mm house at top of market, with 20% down (or $200,000). He owes the bank $800,000. After a year the house value decreases by 10%, so it’s worth now $900,000. But he probably still owes the bank around $800,000. If he were to sell the house for $900,000, then the bank would get the $800,000 that’s owed to it, and the home owner would get back $100,000.

    So his $200,000 investment becomes $100,000. That’s a 50% loss.

    The reverse is true though if the house were to increase in value. A 10% increase in this scenario would make the guy’s original cash investment grow by $100K too (sans the transaction cost), and that’s a 33% increase in investment.

    The leverage amplifies the increase and decrease in home values. But in a leveraged situation, decrease in value is more amplified than increases.

  6. Yeah, anon8mizer, but this is understood as a matter of course. Also tacit is the risk of a short term hold.

  7. I don’t think it is understood as a matter of course though. I don’t think 44 y/old hipster understood it by stating that a 30% fall in stocks is worse than a 10% fall in price houses.
    It is, but only if you own 40% or more of your home.
    the risk of a short term hold is greater in housing too. you need to make monthly payments, andif you cant you have to sell ie are forced into a short term hold
    housing is lumpy, so for divorce, death, relocation you may be forced to sell at a time when you are facing a loss.
    not so for a diversified stock portfolio.

  8. 40 y/o renter has been hit harder than most by all of this. He just aged four years right before our very eyes!

    (I think our middle aged friend gets it and I think he likes to push buttons is all.)

  9. There is always the last bubble to pop; and maybe that burst is a little softer there. But the reality is that SF has remained resilient for a lot of unique reasons. Many of those reasons are “really” disappearing now. Sure, SF will always be unique for the geographic reasons we all understand; but a lot of the economic reasons our beloved city has remained afloat are, and will continue to diminish with the rest of the economy. The real estate market here is changing and starting the have some of the same forces acted upon it that have hit the rest of the country for the past 18 months. The two biggest factors here will be the unemployment rate (anecdotally judged by the publicly announced layoffs) and the amount of foreclosures in San Francisco. I believe the massive levels of Inventory will continue to rise on the MLS and will be followed by increased foreclosures over the next 12 months. This would absolutley lead to a decline in average prices.

  10. Actually anon8mizer, after you take into account the cost of sales, his $200,000 investment becomes more like $50,000. But that is only if he has to sell in the down market. Buying and selling after holding for short periods rarely works, historically speaking.

  11. By the same token, if you don’t sell your stock investments, you are not losing 38% from beginning of this year, either. So in a way both points are moot…

  12. It’s just accounting boys. If you have 500K in the bank, you can put 10-50% down on a 1mil house, it DOESN’T matter. Generally, I like to always put less and get max leverage, and max tax up to 1.1mil mortgage.

    I put down 100K, and have 400K in cash.. same difference as if i put 400K down and had 100K.

    Boys and girls, it’s all about buy assets in this soon to be inflationary environment!

  13. fyi- when i said 10% is minor for SF RE investors, i meant that for people who are holding their property and have cashflow. i.e. stabilized properties. and in my case, i already made alot in appreciation in the last few years, so even a 10% reduction means i’m still up from when i brought.

    but the same can be said of a stock investor who had big gains in the last few years. no one likes to be down, but it’s all relative, and specific to your personal situation.

    also, a down market gives people the opportunity to buy cheap, if they get in at a good time.

    i’m hoping that investment property in SF takes a hit next year (it has not yet), so i can buy something that i think has potential. right now the prices are still crazy high for investments.

    fluj- thanks for the analysis on the sales #’s. but, the DQ #’sa for SF are still worrisome, -12.7%. your #’s show a -10% citywide, and about 5% minus d10/ingleside/oceanview. so maybe subing the DQ #’s would mean a -7% to 8% in the central parts of the city?? i’m OK with -5 to 7%…could be worse…

  14. Yeah. Things are typically selling for less. To be honest I don’t even know if I can realistically say it is 5 %. But let’s call it that. That’s 5% less than spring 2006 or spring 2007, right? I’d say those two times represent the pinnacle for SF. (Spring of 2007 being, of course, at least a year and a half longer than most bears predicted.)

    I am not an apologist. I’m not pigheaded. I’m not an out and out bull. In the end I’m bullish on SF as a place much more than as a market. Because believe, believe, believe me I would be making more money right now if the SF market wasn’t some sort of odd Mexican standoff. But it is. Where are the deals?

    In my opinion the reality is this. We have the best economy in the state. The state happens to be the fifth or sixth largest economy in the world. This economy has experienced a sea change since the last true SF r.e. downturn. So where does credit bubble end, and new local economy’s buying power begin? The first people to answer that question correctly will succesfully time the market.

    To use an analogy, I think two big waves came in at high tide. So now that the tide is going out, where is the shoreline really supposed to be? Meanwhile, Cisco is confident the world will continue demanding video. Noe Valley definitely isn’t going to go back to being a blue collar neighborhood. Bayview, a large swath of land, has bottomed. And normal earners, people who could afford $1.2M a year ago, are now looking at ~900K type buying power.

    It’s interesting to say the least.

  15. i agree, it is interesting. i was surprised to see several investment properties (3-6 units) still go for a premium this year, which goes to show that there are plenty of investors with lots of equity on their hands. and they believe that they will make more money in the future where they made their money in the past:in SF RE.

    there is a loose bunch of SF investors that seem sold on SF, and the city only. and i guess i’m one of them. a friend who invests in oakland was telling me, “forget fixers in oakland. you can buy downtown condos that will cashflow w/10% down.” yeah, but, it’s oakland.

    my favorite example is: jack london square vs. SOMA. 10-12 yrs ago both hoods saw city initiatives to renovate these neighborhoods. if you brought early in jack london, you did okay (but have probably taken a big hit this year.) but imagine, if you brought in SOMA 10 yrs ago…probably 3-400% appreciation! so i am leary of oakland. or as my friend also said, “some ares of oakland are just never going to improve.”

    i hope that 2009 is the year that even SF investors begin to shy away, and we get a market more like 1994- where stuff moved slowly. i plan to keep my properties for a long time, so i welcome a price dip, so i can buy value again. sometimes patience is everything.

  16. I am in that exact boat 44yo. I am looking for a deal on units now, and would love to see the prices I got in 1998. But, I don’t think I will. There are too many of us looking for cracks to fill, and like you said, lots of people ahead of us will to pay a little more.

  17. sparky-so ru also only looking in SF? would you go outside of the city easily, or do you believe that SF will bring the best long term appreciation?

  18. Leverage can make or break you…case in point Bear and Lehman. Do you really want to lever up in this environment? Even if you can get a loan?? SF is going to see some drastic drops. I dont care if it is Noe or Marina or Bayview. Keep your powder dry.

    **disclaimer, I am a financial advisor**

  19. Are any of u looking at east bay properties as rentals? There are some amazing deals and some seem to have positive cashflow if the rental market holds up.

  20. I think fluj has the best / most honest radar of the “now” market and Alex does the same for the most part. There is a standoff. Deals are not getting done outside of a few high profile / top notch listings that don’t represent the broad market. It’s really less of a standoff as I think the ‘buyers’ are not ‘ready to pounce’.

    The market will be defined by foreclosures and those owners with massive equity from pre-2002 that sell at market prices. My guess is we will not see any real movement / activity until 1Q 2009. Owners here have far greater financial means to be patient.

    This is going to be interesting.

  21. I think we all need to hold on tight. San Francisco, Manhattan, Omaha. . .it really makes no difference at this point. Banks are not lending to banks. . .we have had a small loosen up over the past few days as libor dropped and credit spreads decreased. The reality is overbuying the past few years, too much supply for the current conditions, and not enough demand, or the buyer can’t get a loan.

    SF is not immune.

  22. I do pity and question those who are listing their homes on the market NOW. Seriously, some serious foolishness. Sharks are swarming, and I’m one of them.

  23. I don’t know. i think many listing now are being smart.
    they predict (and i agree) that their house may be worth say 20% less over the course of the next year, know the resets are coming, are worried about job security etc etc
    if they bought long enough ago they may still make a profit – just not as much if they sold a year ago – but more than they would make by selling in a year. many people may be trying to cash in.
    i believe even after closing costs you could sell now,rent and buy again in say 18 months and get a better, bigger place.
    i think san francisco has been in denial stage for a while but has now entered fear. i think, as with the rest of the the bayarea, capitulation will shortly follow.

  24. the main advantage of the SF (city) market is that it is one of the last to fall in the bay area, and will probably be one of the first to rise again. i personally don’t think the central areas of the city will fall more than 20% max, and they may level of at -10%. that is my personal belief.

    as for oakland, i just spent the day w/a friend there. i think temescal is interesting/gentrifying, and a good rental bldg there may make sense. but i also looked at, get this, a victorian fixer duplex on 35th st and mlk, for $142,000! the problem is that not only is this a marginal area, but the bldg is right across from the freeway overpass. sure, you could fix this to rental condition and get cash flow, but i doubt it would appreciate much, and the tenants you’ll get will always be marginal, and you’ll have constant hassles managing it.

    coming from a SF perspective, where you can rent a decent unit in a decent area to a quality tenant, i’m suspicious of marginal “deal” areas in oakland. you could sit on a avcancy for 3-4 months, or end up renting to a lower level tenant w/poor credit/job history, etc.

    anyone have experiece w/inexpensive oakland rental properties to comment??

  25. Is the relative strength of San Francisco caused by the so called economic stregth of the city, OR, is it ALSO because of artificial controls on housing construction, rent control, and apartment building owners (such as myself), not being able to convert rental units into ownership opportunities for tenants? We all love to talk about the high cost of housing here as proof of the strength of this city, but I fear this is not the right long term approach.

    My brother, a doctor, left his 1bd, no pkg., condo in 94123 for a position in Chicago, where he was able to buy a Victorian HOUSE in Lincoln Park (Think Pacific Heights north of Sacramento) for the same amount of money. Not everyone works in tech., and not everyone is going to be willing to stay here at these prices. I think a price correction would be long term positive for San Francisco.

  26. I just feel bad for so many people like me, who are 30-40 year old renters who missed out on the boom these past 10 years. But, i feel worse for the disciplined few who are just getting POUNDED in the stock market.

    The stock market has shown us that wealthy is illusory. Money doesn’t mean anything. The only thing money is good for is to consume things, and buy assets.

    This is where landlords are just killing it.

  27. Morgan,

    When you said. “OR, is it ALSO because of artificial controls on housing construction, rent control, and apartment building owners (such as myself), not being able to convert rental units into ownership opportunities for tenants?”

    The thing about the factors you mention there is that they are a constant between the last downturn and this one. They are problematic, no doubt, and work to lessen supply. But they were there in the last downturn, and they will be around for the next one. They’ll probably remain until the day SF ceases to be a leftist/renter voting body that places obstuctionists in city council.

  28. morgan- why would there be a long term price correction in SF? SF will continue to have a strong long term job base, not only in high tech, but also in biotech & alt energy. and the attributes that make the city desireable (natural beauty, diversity, urban ammenities) are not going to go away.

    if anything, once we get past this global recession, SF will continue to become more and more expensive.

    also, you can offer your tenant ownership opportunities-just sell them the units they own as TIC’s.

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