The National Association of Realtors reported on Monday that the national supply of previously owned homes with respect to sales has reached a 15-year high. The last time the inventory numbers were this high was in 1992 at the end of the last big real estate bust.
While median prices have declined somewhat over the past 10 months, the large excess inventory suggests that maybe they haven’t declined enough. This could be especially true with mortgage rates continuing to climb and a potential credit crunch [from a tipster] resulting from the collapse of the sub-prime mortgage market. Is this sellers denial? Is the big price plunge finally coming? Does this matter in San Francisco?
∙ May Existing-Home Sales Show Market is Under Performing [NAR]
∙ Inventory of Homes for Sale Hits 15-year High [MarketWatch]
∙ San Francisco Housing Inventory Update: 6/18/07 [SocketSite]
∙ From ‘Bubble-Proof’ To ‘Bubble Territory’ In Six Short Months [SocketSite]
∙ Report: U.S. Banks To Curb Lending, Call in Existing Loans [The New York Sun]
I would say it matters if you bought a home in SF using some kind of mortgage that required you to serially refinance. With the credit tightening/crunch and stagnant (if not falling) prices recent buyers will have tremendous difficulty quailfing for the refi.
Considering the very high rate of ARM usage and other ‘exotic’ mortgages necessary to afford a home/condo in SF I can’t imagine who this won’t negatively impact the SF market.
I know there are all the arguements about SF being land locked, everyone wants to live here, and rising immigration saving SF and making it ‘special’. But those factors were already baked into prices before the latest runup.
The simple fact is if you look at affordibility indicators for SF now and compare them to historic averages for SF, the indicators are all still 30-50% above ‘the mean’.
Prices must adjust through some combination of inflation, wage growth, and price declines. All markets correct, even in SF.
bear, you seem to be forgetting that “they’re not building anymore land”
and also, everyone is rich!
Just curious, do the three of you own homes?
and if we are renters does that mean interest rates are NOT rising, foreclosures are NOT increasing, inventory, months of supply, and DOM are NOT trending higher, the Case Shiller Index is NOT declining, NAR CAR and Data Quick are WRONG when they declare when adjusted for sales mix the sales median in negative, billions of $’s in ARMs will NOT reset to much higher rates, etc etc etc
The last refuge of a market cheerleader … ‘you must be a renter’
Much bigger problem for SF: the foreclosure rate on Alt-A loans has shot way up. When that spigot shuts off, that will be a big problem.
The subprime spigot did not shut off with the rise in foreclosures, it just got turned down a notch, as some of the biggest banks stepped in to keep the gravy train running. With what just happened to Bear Stearns, however, that spigot keeps tightening. There’s no money flowing into that segment and lots of money wants out.
But Alt A was unscathed, which allowed the party in SF to keep going without any impact. Not any more. And SF has WAY more Alt-A than subprime. It isn’t in the “it’s going to close off for sure” range of foreclosures yet, but it’s heading in that direction. 6-12 more months and SF could start looking more like Sacramento: foreclosures everywhere and no buyers to step in.
Go ahead and keep waiting for the foreclosures to pile up here – it’s just not going to happen in anywhere near the same fashion as Sacramento. I know that many people here don’t want to admit that SF is a “world city” and it may not be in the same way that Manhattan or London is, but there are still A LOT of foreigners who are buying vacation places, etc here. A drop in price only encourages that more.
Also, we would need to see a huge tanking in the San Mateo and Santa Clara housing markets as well – a house costs nearly as much (not in terms of sqft or lot size, but total dollars) or more in those coutnies. Otherwise, the new vacancies created here would just be snapped up by Sili Valley commuters.
And one more thing – the average buyer from the past few years in SF may have been leveraging themselves in dangerous ways – but generally not in the same ways as the average buyer in Sacto. Many of the people I know here are worried about losing a ton on their housing, but they still have $200,000 in the bank, so they’re unlikely to head down the foreclosure road.
If the S.F. market took a 10% – 20% dive over the next year, I’d be upset about losing all that equity in my condo, but I certainly wouldn’t be headed to foreclosure. Almost every owner I know is in the same position. Plus for anyone who is interested in trading up in the market, a decline in sale price of your next home is worth more than the loss on your current home.
Regarding Alt-A mortgages, I also know many people, including myself, who used an Alt-A because other investments were tied up or earning good returns. Just because someone put less than 20% down, doesn’t mean they couldn’t afford 20% down. Alt-A mortgages can be a great financing tool in this era of low interest rates.
I’m glad to see these last few comments, which offer some balance on this discussion. As is typical with this site, the most vehement, opinionated and “right” contributions are offered by those with the least real-world experience. Everyone who purchases is SF is not hanging by a thread due to risky financing. I bought a condo late last year (near top of the market price-wise) and put over 40% down .Am I concerned about equity loss? Sure. Losing my home? No. And, this hefty down payment came through years of climbing the property ladder, not because I’m a super-earner or had other cash reserves. Maybe some of the upstarts on this site should stop pushing their theory-based analyses long enough to learn from some seasoned homeowners who have actually weathered some ups and downs.
Conversation overheard while waiting for my Oiishi Samurai Cheeseburger at Embardero 4:
Guy 1: “We’re going to buy a 2 bedroom/2 bath home in Marin.”
Guy 2: “Oh, really?”
Guy 1: “Yeah, the prices are down, like, 30% compared to a year ago… and you get a garden!”
Guy 2: “That’s great.”
Guy 1: “And I think I’m going to HOLD ON to my RENT CONTROLLED APARTMENT IN THE CITY”
Am I an odd duck for being a little disturbed by the last bit? Should rent control be in place for folks who meet some sort of income limit rather than allowing folks making big money to keep a place “on the side, and on the cheap” in the City in addition to their home somewhere else?
I’m glad to see these last few comments, which offer some balance on this discussion. Maybe some of the upstarts on this site should stop pushing their theory-based analyses long enough to learn from some seasoned homeowners who have actually weathered some ups and downs.
The “balanced” posts to which you refer are nothing but speculation and anecdotal evidence. Glad you liked them.
Here in the real world, the alt-a foreclosure rate has just shot up 300% in the last month or two. Is this one of the “opinionated” posts or a theory-based post to which you refer?
It doesn’t much matter what you and your “friends” are doing. All that really matters is whether the foreclosure rate is higher than or lower than anticipated. If it’s higher, the spigot usually shuts off, because no one trusts their models to price the risk. So they just put their money elsewhere. You can sit on your home forever and watch it sink if you’d like, but if no one can buy a different one, because the free and easy money is no longer available, anyone who wants to sell is going to find it rough going.
My concern isn’t that everyone will lose their homes in foreclosure. My concern is that the era of free and easy money is coming to a close. And it was that free and easy money that made it possible for millions of people to buy homes. When millions of people get shut out of the market, it doesn’t matter if supply goes up due to foreclosures, demand will be down.
The Alt-A foreclosure rate just shot up 300%. I’d say that isn’t the best sign.
Agreed seehee. When my wife and I were contempating buying last year, many older family members/friends (we’re 30) told us to buy “as much house as you can afford” for our first home. The idea from all of these long time homeowners is that over time being forced to save all that money in a mortgage is way better than assuming you will be super-disciplined and invest all of the “extra” money you save by renting or buying a cheaper place. Over the long haul, buying typically works out just fine, even if someone loses a little equity on their first purchase. Many people we talked to who have been long-time homeowners only regret that they did not buy an even better place when they started because it gets harder to trade up with appreciation and property tax increases (especially here in California).
Agreed also with Jaime. Along with rent control subsidizing affluent Russian Hill/ Pac Heigths dwellers who don’t need the help (I have always suspected that a lot of the market crash cheerleaders are in rent controlled apartments), the BMR program is also a ridiculous way to distribute affordable housing. I know a lot of people who got these units on their way up the income ladder- and some who end renting them out after they move out of the city!
An income test is a sensible way to distribute the benefits of affordable housing if we’re going to use rent control as our model. We should also force BMR owners to sell if they don’t live in the units.
tipster,
a 300% increase in Alt-a foreclosures sounds dramatic and all, but how many are we talking about in absolute numbers? In S.F.?
I wonder- maybe someone knows- what percentage of homes in S.F. have a mortgage. Is it similar to or greater than the 50% of homes nation wide that have no morgage?
I have a hard time picturing a significant number of foreclosures here. Imagine someone in a decent place loses their job or has their ARM reset and cannot afford it or whatever, and they need to unload it. If the price is discounted enough someone will buy it. We’ve already seen a number of successful short sales in S.F. As a condo owner, any concern I have about price reduction is based much more on the flood of new condos than any overall trouble of San Franciscans being suddenly unable to afford homes. After all, only 30% of resident own anyway. And I’m not that concerned about the new construction because construction costs (and all other costs) keep going up so much that the prices on all of this new construction is well above what I paid.
And didn’t Dataquick’s most recent numbers show a healthy median price increase for S.F.? Dataquick certainly isn’t perfect, but I think it does a better job than Case-Shiller which only tracks single family homes and includes a larger metro area, or OFHEO which only includes mortgages under $417K.
Posters here on the extreme sides who argue back and forth all seem to not have much long term experience in markets general and in San Francisco in particular, and I wish we could get off this “world class city” thing.
If you want to see loss of value in a “world class city”, study Tokyo, 1985-1995.
The oft referenced “world class cities” have even more elaborate rent control and below market ownership schemes. You want the price point of New York with the social support network of Houston?
Remember, the actress Mia Farrow lived in her grandparent’s rent controlled apartment for less than $250 a month well into the eighties. She payed her rent for the decade of the ’70’s in her first hour on the set of Rosemary’s Baby.
The biggest event in your life as an investor in SF real estate will be the next earthquake.
I would like to second redseca2’s comments regarding the whole “world class city” nonsense. Yes S.F. is desirable, but no it is not the most important place in the universe. ENOUGH!
“If you want to see loss of value in a “world class city”, study Tokyo, 1985-1995.
The oft referenced “world class cities” have even more elaborate rent control and below market ownership schemes. You want the price point of New York with the social support network of Houston?”
I hope this puts to rest the whole nonsense that we should be as expensive as the Upper East Side or Mayfair/Belgravia or Shinjuku.
Rent controlled apartments for millionaires… fantastic.
It’s interesting to watch the psychology shift among the bulls on this site.
First it’s, real estate only goes up!
Then it’s, real estate will go flat at worst – SF is different!
Then it’s, well even if thing go down SF owners are different they can easily afford it.
I wonder what the next stage of capitulation will be?
a 300% increase in Alt-a foreclosures sounds dramatic and all, but how many are we talking about in absolute numbers? In S.F.?
I must not have gotten my point across, so let me try again. My prediction on the number of foreclosures in SF is ZERO. That’s right , ZERO.
But unfortunately, 100% of the country’s alt-a loans do not originate in SF. And the rest of the country is starting to hurt.
Now, as the rest of the country experiences higher levels of Alt-A foreclosures, the number of investors willing to invest in those loans will drop dramatically. And the money available for Alt-A loans anywhere will dry up. So the amount of money available to SF buyers will dry up.
So even if the number of foreclosures drops to zero, without alt-a mortgages, there will be no buyers at the level that supports the current prices.
Now, if I’m wrong and the number of foreclosures in SF increases to a number above zero, prices fall further.
Got it? It doesn’t matter what the absolute number of foreclosures is. Neither does it matter what the percentage of foreclosures is.
All that matters is the percentage of foreclosures experienced relative to the percentage of foreclosures expected. The expected percentage of foreclosures was priced into these loans and no one is going to care if that percentage of foreclosures actually occurs.
But, if the actual percentage is higher than what was expected, it means that the formulas used to price them are wrong, and the actual proper prices are UNKNOWN! And therefore, no one plunks their money into the pool that gets loaned out to homeowners because they don’t know what the risk premium should be. And as Alan Greenspan famously opined, history has not been kind to those investors who did not demand sufficient risk premiums.
And when the money dries up, so does 60% of the SF market.
So even if there are ZERO foreclosures in SF, because the mortgage market is largely national, when Florida sneezes, SF catches a cold. If the percentage of national Alt-a foreclosures rises by more than a couple of percentage points, a good chunk of the 60% of the SF market that was counting on Alt-A loans is going to evaporate.
And, by the way, when are the One Rincon loans due to be funded?
It makes sense that the market crash cheerleaders are renters– they aren’t owners, and didn’t buy at any time in the past 10 years of rapid appreciation, so a looming market crash rationalizes their decision and makes them look smart. For the same reason, homeowners soft-pedal the idea of a crash: a healthy market ratifies their decision and makes them look smart.
Of course, neither group has a magic crystal ball. Who knows what the national market, or the SF market, will look like in 5 years? Real estate is an investment, and no investment is foolproof save a federally-backed savings account. No risk, no reward.
Full disclosure: I JUST bought a TIC, and we moved in last month. So I am not bias free. I agonized about buying in a rapidly slowing market. But in the end, I fell in love with my apartment, I can afford it, and I can see myself living there for 5-8 years. I can still save cash while paying my mortgage (principle and interest, if you must know) every month. So the market slowdown won’t kill me.
If they’re right, the market crash cheerleaders may get their carnage. Some of them may even pick up some housing bargains and join us on the other side of the homeownership fence. Regardless, I’ll be sitting safe, snug, and happy in my beautiful apartment in a great neighborhood, writing off my property taxes and interest, and living the good life.
You really expect Alt-A loans to dry up? I think it is more likely that interest rates on these loans will go up to account for some increased risk, but there is still a lot of demand for mortgage backed securities- particularly given low bond yields and a stock market that many people consider to be due for a correction. While increasing interest rates hurts affordability, I don’t think it has as big of an effect as requiring a 20% down payment would.
I think the increased competition in the mortgage industry will keep Alt-A on the table for those with good credit (though income/investments may become a larger factor). The cat is out of the bag on the less than 20% down payment, and while interest rates for these loans might increase, there is simply too much money to be made to expect the entire investment world to walk away from buying these loans.
I’m not going to predict where the SF market is headed but just anecdotally I’m always surprised when I go out socially to find out how much affluence / financial wealth is concentrated in this little city of ours. This is not scientific but I always get the feeling that there is some serious dollars out there that will at least keep the middle to upper tier of the market moving along, albeit at a much slower speed. Poorer quality properties that were being snapped up during the 2002-2005 frenzy are certainly going to be impacted. There is lots of short sales activity already going on in the Bay Area and it would be foolish to think that at a minimum the lower tier of the SF market will not be affected.
As someone who’s been putting in offers on SFR’s in the past several weeks, this conversation might test the nerves. But I’ve been reading the various Mortgage Crash blogs for the past two years all the time I’ve been dipping my toe in the housing market here. During that time, as they keep predicting an impending crash referencing hard data and luminaries, appreciation has kept a step-ahead of me. It’s been weird having conversations with civilians (those not in the market) saying it’s a good time to buy in SF with prices going down when I’ve come off a lost offer where the winning bid went $225k over. This may be the last wind before it all drys up but my experience has been that things are still solid in the SF SFR market. I also don’t see the anyone just letting the spigot shut down to 0% as portended but it may get tight.
Regarding the comment about 50% of homes having no mortgage: the situation in the USA is actually not good by this metric. The total equity homeowners hold in their homes nationwide, expressed as a fraction of the total outstanding debt on the purchase of those homes, is now at the lowest point ever recorded. So while more and more Americans are home “owners” the actually people who own the homes are bond investors.
I think there will be a bifurcated market. Transitional neighborhoods will suffer, the high end not so much, perhaps not at all. The premium properties will be insulated from the collapse of Alt-A. The Excelsior and Bay View and the like will decline dramatically. Perhaps that is as it should be – those are neighborhoods for middle income people. They should be affordable for families making under 100K.
Here’s an important question, one whose effects anono partially touched upon: In light of the subprime scare and news of nationwide rising Alt-A foreclosures, where do you think interest rates for non-prime jumbo mortgages will go?
If the same pool of bond buyers sticks around to finance Alt-A mortgages, with the only difference being a 1% increase in risk premium, the amount of principal that the 200K dual-income couple can comfortably finance (say payments of $6000/month) changes by about 10%:
@ 6%: PV(0.06/12,30*12,6000) = ($1,000,749.69)
@ 7%: PV(0.07/12,30*12,6000) = ($901,845.41)
You can correct me with more appropriate interest rates, but the result is basically the same. Rising interest rates, whether through the Fed, skittish Asian investors, increased risk premiums for non-prime jumbo mortgages, or any other theorised cause/effect, will make the amount of principal that Alt-A mortgages can finance to fall. Assuming the same percentage of home buyers in SF will continue to finance home purchases instead of paying cash, buying power will go down. If, in addition, only the hypothetical 200K couples who have also saved 10 or 20% down can now get this financing, there will be fewer potential mortgages going to open houses in the city. Market forces and home sellers will then have their long, drawn out showdown, similar to what is happening now in some subprime markets.
So, any thoughts or observations on interest rates from those who have been shopping loans lately? To me, Alt-A interest rates are the key to understanding this housing market. You can list ways in which SF is different or special, but the interest rates will be the same as anywhere else.
The comparison to Japan is intersting, but it’s also pretty unfounded. Here’s an interesting quote that I found on the Japanese housing crash on the internet:
“Prices were highest in Tokyo’s Ginza district in 1989, with some fetching over US$1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. By 2004, prime “A” property in Tokyo’s financial districts were less than 1/100th of their peak, and Tokyo’s residential homes were 1/10th of their peak, but still managed to be listed as the most expensive real estate in the world.”
If this is any indication, we still have alot of appreciation left to do before our crash! I say this sarcastically, but the point is the Japan crash was totally different than anything we’re seeing here.
So if the market became magically flooded with inventory (thus causing a price drop), where would all those people go? We bought because renting isn’t cheap either…and unless everyone vacates wholesale around here, I don’t see the rental market for 2 bedroom house with a yard and a reasonable commute dropping to $600 a month anytime soon.
Interesting discussion. One thing I’ve noticed is that everyone assumes the bay area economy remains static in the loan tightening situation: i.e. the high paying jobs will still be here, the stock money will still be here, etc.
What happens if the Alt-A tigtening also coincides with another tech recession and another downturn in high flying tech stocks? Will things still look good here? Even NYC suffered from a serious property decline in the late 80s.
Anecdotal evidence usually goes a long way. Like the shoeshine boys giving stock tips in 1929 or financial analysts justifying multi hundred $ stock prices for pets.com in 2000.
I think Zephyr summed up the current state of the San Francisco real estate market pretty well in a city wide add: “Buy, Sell, Repeat, Retire”
Fasten your seat belts and enjoy the ride!
I think there will be a bifurcated market.
Haha, you’re my hero! I love that statement.
When the loans dry up, and the only people who have 20% to put down can’t sell their homes, exactly how do you think they’ll move up and buy the more expensive ones?!
“Since 1993, San Francisco median home price has increased by nearly 96 percent,” BUT “According to the Association of Bay Area Governments (ABAG), between 2000 and 2020, San Francisco will experience additional growth with an increase in household income by 23 percent – roughly $76,400 to $94,300 annually. ”
From SFChamber of Commerce
My concern is, as mentioned in the site, with median incomes only reaching 94,000 by 2020, how would they ever be able to catch up to the medain house priced TODAY in the city?
anon,
Median income doesn’t need to catch up to median price, because the vast majority of the residents of this city rent.
Median income and median home price are apples and oranges. They are not really related. Median income is the middle income of the WHOLE population. Median home price is only the middle price of the homes that have sold for a particular period of time. The relationship would only really be relevant if you put all houses on the market at once and everyone wanted ot buy a house. Then things would sort themselves out according to income. As it is house prices sort themselves out by supply and demand. Demand is goverend by income as well as credit cost and availability. When the supply is small the median price will not be accessible to the median income, only higher incomes will be able to afford the median price. It skews upward.
Does that make sense?
What is the difference between Median and Average? If the average family income in the Bay Area is forecasted as $94,000 (in the year 2020), is that the same as median? The post above is reporting the average Bay Area family income for communities from San Rafael to San Jose.
anon, you’re confusing median and mean. Mean is average, median is the level that equal numbers of people are above and below that level.
This is somewhat off topic, but an aside point to mention is that there are foreclosure sales in SF, it’s just that there are not a lot, and the sale of said properties is often unpredictable. How many of you (like me) have gone to the City Hall steps to check out a property to bid on and the property is suddenly no longer available? And let’s also not forget that to even purchase a foreclosure in the city, you need to have cash in hand at the auction. It’s certainly not a very user-friendly process and the amount of people who have $500K+ in liquid cash that’s immediately available might not be a large number.
In the last building where I lived, there was a short sale (around 6 months ago). A very immature “flipper” had purchased the unit with 100% financing, done a horrible amateurish renovation on it, and priced is ridiculously high. It went off and back on the market a few times, underwent some price drops and restagings, and finally became a short sale. When it did, however, a small bidding war ensued. Ultimately, it sold for a fair market price, probably what is should have been priced at in the first place.
With regard to many other comments on this string (particularly those from crash cheerleaders), the missing equation seems to be that a property purchase for many is about owning the home you live in, not must making a financial gain. And, those who are already in the market and have earned equity are in a somewhat different position than first-time buyers, who are more impacted by market and financing changes. I don’t think SF is immune to overall marketplace dynamics, but I do believe different areas of the city, and different types of properties, are affected at differing levels.
There are 96 foreclosures listed in SF, and an additional 363 pre-foreclosures. A pretty small number.
Bidding on foreclosures on the steps of city hall is generally useless. The bank holding the first mortgage is almost always the winning bidder.
economacator said:
“Median income and median home price are apples and oranges. They are not really related. Median income is the middle income of the WHOLE population. Median home price is only the middle price of the homes that have sold for a particular period of time. The relationship would only really be relevant if you put all houses on the market at once and everyone wanted ot buy a house. Then things would sort themselves out according to income. As it is house prices sort themselves out by supply and demand. Demand is goverend by income as well as credit cost and availability. When the supply is small the median price will not be accessible to the median income, only higher incomes will be able to afford the median price. It skews upward.”
I have been trying to make this point for a while now.
Considering 70% of the SF residents rent, if we put every residents in the market to buy, and all homes on the market to sell, only the top 30% income households will be able to buy. Guess what, that translate to about 15% of the WHOLE SF household can afford the median income home. The real number (13%?) is not that far off from the 15% in theory.
Anono 2:18
Mentioning Japan real estate in the 1980s??? Pul-lease! No offense but that is just outright ridicoulous. Prices in the most expensive areas were topping out at $20,000 a square foot (Yes, at that price my condo would be worth $20 million dollars)! 20+ years later, it is rare it see square footage at 1/10th that price in SF.
Japan in the late 80’s may not be relevant to SF today, but it does illustrate how dramatically markets can change. Japan’s asset markets (real estate and stocks) were huge, relatively open, and governed by supply & demand and other fundamental factors. Yes, many factors that don’t exist here were at play in the late 80’s and early 90’s in Japan, but the fact is that a giant market got superheated and then popped suddenly and unexpectedly (and has never recovered).
Oooh good point. In my opinion, SF reminds me of Holland years ago with tulips.
I didn’t mention the Japan real estate market, for it is indeed a ridiculous example.
Also noticed that mortgage interest rates dropped again and are lower than they were a year ago. Also noticed that the new subprime lending guidelines just came out with such new requirements as: make sure people can pay back loans.
Anyone looking for a trackhome in Valejo or Sacto can probably get a good deal, but I don’t think the so-called credit crunch will have much effect on this market. People with decent credit scores and high income will be able to get loans with a small down payment. There is simply too much of a financial incentive for all players involved to make the loans, and the buyers of the loans will continue to buy, though perhaps with a higher risk premium.
SF real estate just like Holland and the tulip bubble? You must be joking. You can’t live in a tulip. Housing is a necessity– whether it’s rented or owned– and therefore the value of an apartment or house in SF will NEVER go to zero (unless the whole city sinks into the sea). That is a ridiculous comparison.
And the Socketsite Nazi strikes again. Thanks for the great censure you are providing. Always a pleasure to post here.
[Editor’s Note: We honestly have no idea what you’re talking about, it’s been well over a week since we clamped our black boots down on anyone. Perhaps you were the victim of a spam filter?]