From Kenny on “What’s Going on in the Mortgage Market”, and indeed something we’d all like to know. Yes, median prices have fallen in some areas (mostly when talking YOY), but we’d like to know what you all think. The million dollar question:
“Whether or not prices will fall in SF…”
Indeed that is the question. What do you think?
[Update: Definitely make sure to read Dave’s Comment on this post. Very informative and very well stated. Nice job Dave…now about that foreclosure you picked up. ;-) ]
Assuming jumbo loans are above 500K (or whatever the price), that means that whatever is priced above 500K will have smaller impact from the mortgage danse than markets where most properties are under or at that threshold.
I’m not saying that there are no mortgaged properties above 500K – I’m just saying that above a price that I cannot “guess”, there are likely less mortgages at 90, 95, 100, 105, 110, 120% of the property value, and most mortgages are cushions by something as a garantee – thus some type of cushion toward foreclosures and imposible mortgages dead ends stories.
the most classical example being that on a 3M house, there is very often a (unnecessary) 1M mortgage only to take advantage of the tax deduction. And we can assume (and hope) that there are no or little 3M+ mortgages in the city based only on the buyer’s ability to smile (or plainly said – some hard cash counter value of the contract was needed at that time).
As slow as the upper market can be, we can assume that in SF there is an endless (as in “no end”, not as in “large number at a given time”) supplie of cash buyers for any amount. So Broadways properties will sell, eventually, with ZERO impact from current rates.
As for the lower market… some people WILL be squeezed. But those people could be squeezed by anything else (divorce, job loss… ). So I’m not sure it would impact the prices as much as the time on market – increasing DOM to a much more healthy level. (short DOM time hurts the potential buyers).
Last, San francisco is not the typical american city, if only by the number of foreign born home owners. Those homeowners do NOT behave like the predictible american home buyers – so we fall back in the SF nanomarkets. What is the most likely financial move of a russian born home buyer? -> gets some hints for the russian neighborhood. Same goes for chinese, indian, german, italian etc…. So again, there is no way to predict the “general impact on the SF mortgage market”.
Last … the SF assessor increases the property taxes by 2% on the good years. I’m assuming they will NEVER [b]decrease[/b] the property taxes by 2% on the bad years??? Damn… the market’d better not fall too much, or some people will pay 2% in property taxes – just like in Miami! (and we would see some musical chairs to reset the property taxes to normal levels – ie people moving to similar property ONLY to lower their taxes [something else that could actually be healthy for the market by providing a large supply of properties] )
Wow, I had a really hard time following Sophie’s commentary… Perhaps it’s over my head.
IMO, there are really two big variables: the economy and the availability of credit. It’s not inventory or the media or the SOMA condo boom. We’ve had two things that have kept up demand over the last couple years, even as other parts of the country faltered. We’ve had good, higher paying jobs (and high employment) and we’ve had ample borrowing capacity. There’s a lot of chatter around here (within this blog’s commentary in particular) that SF and the Bay Area are full of all-cash-buyers, but the typical down payment is somewhere around 7%, not 80-90-or-100%. The typical buyer borrows, and borrows pretty heavily, despite the anecdotal stories of people driving to open houses with suitcases full of money…
So far, the economy is hanging in there. The national consumer is getting pretty beaten up by heavy debt load and much bigger housing woes. And the job market here is dependent upon the US avoiding recession. So far, so good.
The credit side of the equation is more grim. The spigots have been tightened significantly for subprime and for jumbos. Will the secondary markets snap back or will it get worse? Unknown. There’s a lot of risk aversion right now, so yields are shooting north. That impacts affordability and can drop whole segments of buyers down into cheaper bands of the market.
The Bay Area has been heavily dependent upon the “affordability” loan products for the last several years, which have the unintended consequence of driving all prices higher. (More people who can afford = more demand.) That circular, confidence-driven logic feeds on itself until you have ridiculous (e.g. 20%+) YOY gains.
If we’re truly at the end of this credit cycle–yes, they all end, unfortunately and this one seems to be ending now–then you’ll see a repricing of risk. That can drive (and currently is driving) rates higher, even for those with good credit. That typically means lower prices (even in SF).
But just remember that real estate is typically very sticky on the way down. Sellers tend to hang on (when they can) and often refuse to sell at lower prices, unless forced to do so. That is why real estate busts (see SoCal in 1990s) don’t look too bad from the outside. Prices tend to stagnate and volume drops. Some stuff goes down and some stuff seemingly rises. Nominally, you get a flatline, even as inflation-adjusted prices decline. Kind of like what we seem to have now…
But housing busts can last a long time–that irrational spiraling upward of confidence can irrationally spiral down, too. And busts hurt people who need to sell fast. This is why it’s important to buy only what you can afford and avoid exposing yourself to too much interest rate risk right now, IMO. But if you’re waiting on rates to rise and drive SF prices down, remember that this strategy only helps cash buyers.
Dave. For a 1.2M mortgage (doesnt matter if it represents 60 or 100% of the house), monthly cost varies from 5.000 to 8.000 (depending on ARM, fixed etc).
I do dream that NO lender gave that amount on the only basis of a 120.000K total income (net paycheck is 6400/month in that case – so not even enough to pay the property taxes + water + garbage).
If those 1.2M mortgage exists – they MUST be backed up by something, somehow. Such as 20% cash, 120% in stock, (let’s drop the very high income as people who could virtually buy cash) etc. Unless we could analyse the exact strength of this cushion, we cannot predict the impact of the ripeness of the ARMs – because the timing of the ARMs doent not match with the timing of financial harship (later – as much as 2 years later).
So if all the “must sell” do not come on the market at the same time, they wont hit the market – only wave it.
makes sense?
gotcha…
It’s almost Sept 2007, and we keep on asking what will happen. It is very evident that properties in Pac Heights, Marina, Cow Hollow, Sea Cliff, Presidio Heights are UP close to 10%. These are the neighborhoods I track. I believe these neighborhoods will go up another 5-10% in 2008 after 2007 bonuses are paid. I have also heard Noe and Bernal Heights are also doing quite well.
As for the boondocks, or areas like SOMA where there is massive new supply, I think they will go down, or remain weak for another 3-5 years.
Alex, do you know anything about 2746 Gough St. #1? It recently sold, and I was wondering what the asking and selling price is for this 3bed/2bath. Thnx!
[Editor’s note: Will get this and your other question about Cherry up asap. Or you could get on the sfnewsletter, either from me, or your Realtor and know when and for how much things sell in real time.]
I believe prices here will drop over the next 5 years. Dave’s point about housing price declines being sticky on the way down is very true and people wont sell for a loss unless they are forced to do so.
On the high-end, even wealthy buyers will finance a multi-million dollar home. There are ways the super-wealthy can borrow against their assets to get a similar tax benefit as the mortgage deduction that is limited to $1M. It’s a common mis-perception that you can get a tax break on a loan and people borrowing more than a $1M that need a tax break are stretched too thin. People that are not in this situation (very wealthy) do not understand the tax benefits of the ultra-wealthy. So its not uncommon to see an “all-cash, no-contingency” offer actually get financed with a loan.
The issue here is that a lot of buyers have over-extended themselves. The increase in default notices is not arbitrary. It is real and lots of loans will reset and people will be forced to sell. What makes this market unique is there are a lot of very wealthy people, but they can’t bail out the market. Things could get rough; and prices will mostl likely fall. IMO