For the fourth fifth time (in as many months) the National Association of Realtors has revised their forecast for the performance of residential real estate in the U.S.
“[NAR] now projects that the median existing home price for all of 2007 will be down 1.4 percent, which is slightly worse than its previous forecast of a 1.3 percent drop….[and] is looking for a 2.6 percent drop in new home prices for all of 2007. That is also worse than the previous estimate of a 2.3 percent drop in prices.”
And for those of you sitting patiently on the sidelines, the forecasted national market “recovery” has been pushed back to the second quarter of 2008 (for now).
Housing slump gets longer, and longer … [CNNMoney]
Whoops, They Did It Again (NAR Revises National Forecast Once More) [SocketSite]

50 thoughts on “NAR’s New New National Forecast (Yes, Another Little Cut)”
  1. I have a question for others in this forum, who seem to know a bit more about the everchanging market conditions.
    I am living in San Francisco (Rincon Hill area to be specific) and currently renting, but looking to purchase sometime during the next few years (most likely in a newer condo development in Rincon Hill, South Beach or Mission Bay). Given that interest rates are rising, housing prices are holding steady or declining and inventory is rising, it doesn’t take a rocket scientist to understand that now isn’t the best time to purchase. However, if someone on here “in the know” were to estimate the optimal time to purchase (i.e. both housing prices and interest rates have hit rock bottom), can someone tell me what time frame I may be looking at? I’ve heard varying accounts of anywhere from 1-5 years.

  2. Bear – Do you think this downturn will be for a similar time? I mean, this downturn really has nothing in common with the last one – the reasons are entirely different – what’s your forecast?

  3. “The last downturn lasted a total of 54 months and we are about 9 or 10 months into the current down cycle.”
    We also had a market downturn in 2001-2002, but that was brief, and followed by a another round of big price increases.
    There’s no reason to be sure that current conditions will mimic either the long downturn of 1989-1995 or the brief one of 2001-2002. As Greenspan said, we know whether there is a bubble in retrospect.

  4. My 2 cents is that this downturn is likely to be at least as deep and long-lived as that in the early 90s. Prices this time have risen much more for reasons that have less to do with economic value (driven more by funny loans and speculation), and prices have become much more disconnected from income, rent prices, and affordability levels. I.e. there is a much longer way to drop before any semblance of sanity is reached.
    I would not even attempt to predict the precise point of time the bottom will be reached. But I would predict/guess that prices 3 years from now will not be any higher and very well might be considerably lower. I’d keep renting (I own a place and don’t have a dog in this hunt).

  5. Brutus 12:10
    Honestly, I don’t know that I have a forecast but more an opinion (and you know what they say about opinions)
    The way the data charts, it looks like a correction was underway in 2001 after the bust. However, Greenspan took the prime rate to 1% and held it there flooding the markets with money. After 9/11 investors went looking for a ‘safe harbor’ and they thought they found it in real estate inflating “the bubble” to unprecedented heights.
    The only thing I know is all markets correct and they always return to prices supported by economic fundamentals. The latest affordability indicators (from Q4 2006) for the Bay Area show prices 30-50% above historic norms.
    So, through some combo of wage increases, inflation, and price declines the housing market, like all markets, must correct to levels supported by economic fundamentals.
    I think the bigger question is not how much (because if you look at affordability that is fairly clear), but how long it takes.

  6. “currently renting, but looking to purchase sometime during the next few years (most likely in a newer condo development in Rincon Hill, South Beach or Mission Bay)”
    You didn’t say what you’re in the market for and that could make all the difference regarding your timing. If you’re in the market for a studio or Jr. 1, get over to 170OffThird now because the window of opportunity is closing quickly. If you’ve noted that their advertising of late features 2 BR units (as does Artera’s) it’s because those aren’t selling at the pace of the rest of the development. The market for 1 BR and 2 BR units could soften further, particularly with everything in the pipeline. But there could be further price compression on a condo or Jr. 1 vs. a 1 BR in the future based on demand and supply.

  7. anonN-
    I would be looking at a 2 bedroom unit, most likely.
    I’ve seen good deals at some of these buildings. However, I don’t foresee us purchasing anything sooner than 2 years, because we don’t yet have enough savings for a substantial down payment.

  8. I rent out office space (not my primary job – we sublet space we don’t need), and I’ve had two very prominent economists (each unrelated to the other, from different firms) come in looking for office space in the last 3 months. I’ve asked them both what they thought the housing market would do. Both of them replied that a) they didn’t want to say, and b) they just sold their homes.
    People will buy homes they absolutely cannot afford if given the opportunity to do so. In the past, the only thing stopping them was the friendly savings and loan officer who understood my first point quite clearly and paid a hefty price for not understanding it.
    But this was a period in which people who didn’t understand something (investors not understanding the mortgage market) handed a lot of money to people who took a cut (loan originators) because there was a whole industry (bond rating agencies) standing behind them who purported to understand things cheering them on.
    Where have we seen this before? People who didn’t understand something (investors not understanding the Internet) handing a lot of money to people who took a cut (investment bankers) because there was a whole industry (stock analysts) standing behind them who purported to understand things cheering them on. At some point, the investors catch on and stop handing out the money, taking only a fraction back in return.
    When the easy money shuts off, people will stop buying houses they can’t afford. For a lot of people, that means they won’t buy any house. Only then will prices fall. For subprime loans, it’s really just starting.
    Wait for the stock analysts to get outed, whoops, I mean the bond rating agencies to get outed. They just today (!) figured out that those subprime loans were risky? That smells awfully funny. There’s a Pulitzer prize waiting in there for some smart journalist, and then the game is over. Until then, Alt-A loan money will continue to pour into the bay area keeping prices lofty, even if they fall bit by bit. And I wouldn’t doubt that the Realtors are doing their share to prop up the market for a little longer as well.

  9. Then I think when you buy depends on how long you intend to hold the property. One lesson from One Rincon Hill is that some of those who got in early did very well for themselves. So if your window is on the order of 2 years, you might try targeting developments that begin resales well in advance of occupancy. This could enable you to lock in on a loan before rates escalate, although in a market that’s likely moving sideways there may not be much potential for appreciation between deposit and closing. We’ll be neighbors by then so good luck!

  10. Good point about the pre-sales. I don’t think we’ll see a shortage of any of these in the future, with all the developments either under construction or planned for the area. Perhaps in 2 years it would be good to purchase something that will be available another 2 years into the future. This could also help minimize the risk of the market not appreciating.

  11. Is there any solid analysis of how Prop 13 has distorted the supply in California? I see a lot of people quoting affordability statistics, but as I see in my neighborhood, there are a lot of people who’ve been in their place for a long time because they can’t afford to move as their tax-basis would jump up dramatically for just downsizing.
    My sense is that there could be a non-insignificant chunk of homes in SF owned by people who conceivably could not buy in today’s market, but are already homeowners because they bought 10-20 years ago.

  12. If I was new to the market and I was looking for a good investment I would not buy in any new developments. You pay a premium for new construction and then you pay exorbitant monthly association fees which will only go up. The competition is more fierce for units in older established neighborhoods but they hold their value in the long run. There will be hundreds of new units for resale someday and I doubt they will hold their value. I know a lot of people want “new” but new is going to be old in no time at all.

  13. Bear – I agree with most of what you’re saying, however, I think that many of the doomsters (not saying you, necesarily) are depending too much on “historic norms”.
    Markets change all of the time. Someone from 1950 looking at the historic stock market P/E’s would tell you that prices of stocks have vastly overpriced for the past 30 years. The market changed as more common schmoes, as well as other sources (countries, foreign investors, pension funds, etc) pumped more and more money into the stock market. That doesn’t mean that all stocks have been overvalued for the past thirty years, it means that market fundamentals have changed.
    Isn’t at least some of the same (market fundamentals changing) true today over what was true 15-20 years ago? Demographics are changing considerably – baby boomers that can afford to retire have started to, young couples are waiting longer and longer to have kids – and then having fewer of them. Isn’t it possible that this could cause the average person to be completely comfortable with spending a larger amount of income on housing? For years and years, the US has had a significantly lower percentage of income go towards ownership housing than have Europe and Japan – could the gap be closing? Could the history of the last 50 years look nothing like the history of the last 20, the next 20, or the next 50?

  14. Turnover of homes is much less in SF than in many other cities. Prop 13 could be part of it, but the turnover of homes in SF is much less than in LA, which of course is also under Prop 13, so there must be other factors.

  15. I’d wait to buy a home until
    1. you can easily afford the payments, even if you were to lose your job or take a pay cut for quite some time.
    2. owning a home costs LESS than or at least is comparable cost to renting an equivalent space. (after you factor in taxes, insurance, interest, as well as mortgage deduction, as well as the loss of interest on the money you use as a downpayment)
    3. you plan on staying in the area for a long time (at least 5-10 years).
    SF just experienced it’s fastest RE runup of all time these last few years (it’s never happened before).
    Thus, I’d really buy a home as a HOME, and not as an INVESTMENT. As lots of “homeowners” (really just people who rent their home from a bank) are finding out, houses are expensive and they often DON’T go up in value, and even fall… yes even in desireable areas like SF (and San Diego, and Boston, and Sydney, and Tokyo, and Barcelona/Madrid, etc)
    You’re not “throwing away your money” on rent. Rent is simply a way to purchase lodging.
    In the same way, buying a house is really a different way to purchase lodging, but you also “throw” a lot of money away that will never come back, including:
    -taxes (you will only get up to 1/3 back due to mortgage deduction)
    Let’s say you spend $750,000 on a condo. Just interest, tax, and insurance on that would be $45,000+ per year in interest plus $7500/year in property tax plus at least another $4000/year in insurance. that’s $56,500/year (or 4700/month) that you’re “wasting”. (the principal doesn’t even go down after spending so much!)
    if you’re in the 33% bracket, you get back $15,000 of the mortgage interest… so you still “waste” $41,500/year (or $3458/month)
    If your rent was $3000/month, then you “waste” less by renting.
    do the math yourself for your OWN personal situation. Don’t listen to the NAR, or to realtors or homebuilders… they are simply salespeople who try to convince you to buy their product… just like Apple tells you that you “need” an iPhone.
    The RE downturn may last 2 years (like in 2001-2002, highly unlikley IMO) or it may last for 18 YEARS like in Tokyo from 1991 to present… who knows?
    (and I’m sorry to say, Tokyo is at least as desireable as SF, it has LESS land, it has MORE density, it has NO LAND TO BUILD on, and “everybody wants to live there” etc, and yet it still has lost value for over 16 years)
    I personally am waiting until it is common knowledge that “Real Estate Sucks”. that is when it is a bargain again, and worth buying. I anticipate it’ll be about 5-7 years or so, but who knows???
    good luck!

  16. Humorous post, ex-SF-er, and I agree completely especially with regards to the “throwing away your money on rent” – that one has always cracked me up.
    One thing though – Tokyo is different for many ways – one, the real estate runup in Tokyo was about a million times worse than here – picture a dump in the Bayview selling for $20 million and you have Tokyo late 80’s. And secondly, Japan’s population has been falling for all of those 18 years – never a good thing for long-term real estate health.

  17. Some interesting tidbits about Japan’s Mortgage market which isn’t anything like here. Still, can’t help but note the parts about high savings rates, strict lending standards and higher defaults for highly leveraged loans:
    “Japan has a very low mortgage rate of 2.375%.”
    “Although the unemployment rate rose and wages fell in the post-bubble years, the impact was moderate and slow, allowing obligors to continue making loan payments. Japanese traditionally place significant importance on home ownership, and thus work hard to avoid foreclosure.
    Household savings rates in Japan are relatively high compared with those of other developed countries, providing a cushion for mortgage holders. In some cases, retirees transferred financial assets to their children to aid in paying off debt.
    The BOJ started to loosen its monetary policy in late 1991, and average mortgage rates declined to 2.4% from 8.5%. The lower rates benefited borrowers with variable mortgage rates and allowed others to refinance at lower cost.
    Government Housing Loan Corp. (GHLC), which had more than a 40% share of the mortgage loan market, applied relatively strict lending criteria, as it was not seeking profits. For example, GHLC granted no mortgages with a loan-to-value (LTV) ratio of more than 80%. Given GHLC’s strong market presence, its criteria became the market standard.”
    “Though overall mortgage defaults remained low, they were higher for apartment loans and mortgages made for investment purposes. Banks advanced apartment loans mostly to high-net-worth individuals wanting to build income-producing properties, primarily to achieve tax savings. At the same time, speculators purchased condominiums hoping to sell at higher prices. Both types of borrowers had high leverage ratios and fewer incentives to continue debt payment compared with ordinary mortgage holders.”

  18. “SF just experienced it’s fastest RE runup of all time these last few years (it’s never happened before).”
    Not true. The price run up for houses in SF in the last few years is much less than in 1988-89 and much less than in 1998-2000.
    1987 2730 247,901
    1988 3039 313,230 26.4%
    1989 2766 362,438 15.7%
    1990 3858 361,772 -0.2%
    1991 3454 345,520 -4.5%
    1992 2718 338,346 -2.1%
    1993 2786 329,087 -2.7%
    1994 2894 328,748 -0.1%
    1995 2511 343,006 4.3%
    1996 3027 365,276 6.5%
    1997 3319 394,354 8.0%
    1998 3372 476,793 20.9%
    1999 3458 561,176 17.7%
    2000 3106 729,749 30.0%
    2001 2694 751,361 3.0%
    2002 3098 751,211 0.0%
    2003 3393 810,998 8.0%
    2004 3305 948,260 16.9%
    2005 3027 1,088,166 14.7%
    2006 2614 1,125,719 3.4%
    Annual Average: 8.7%
    1987 899 235,379
    1988 1169 248,581 5.60%
    1989 1088 295,371 18.80%
    1990 1643 318,322 7.80%
    1991 1454 308,344 -3.10%
    1992 1075 305,437 -0.90%
    1993 1120 289,245 -5.30%
    1994 1287 306,490 6.00%
    1995 1161 313,776 2.40%
    1996 1665 315,050 0.40%
    1997 2031 343,011 8.90%
    1998 1986 415,213 21.00%
    1999 2255 493,977 19.00%
    2000 1959 652,364 32.10%
    2001 1637 620,778 -4.9%
    2002 2462 612,777 -1.3%
    2003 2886 612,823 —
    2004 3184 714,201 16.5%
    2005 2917 835,236 16.9%
    2006 2429 841,178 0.7%
    Annual Average: 7.4%

  19. “ex SF-er” (at July 11, 2007 2:25 PM)
    is right on. Read and digest ex SF-er’s post.
    In addition, this is 2007, and there are lots of on-line tools to inform yourself. You don’t have to rely solely on what the real estate agent is telling you. Not saying that they are evil…just verify what they are telling you…whoever they happen to be. Even if we’re talking about laying out $250,000 (which is laughable to folks in the Bay Area), that is still a lot of money in my book. I don’t let loose of it without being informed. What you do with yours is your business.
    Also, as has been posted as well, even with today’s rising rates they are still great rates! My first mortgage was 12% in the day of 18% mortgages…friends didn’t believe me when I told them it was 12% back then….that is how high rates were.
    One more thing, OWN your decision–buy or rent. If you choose to buy, don’t whine for a tax payer bail out if a year from now, your $800,000 condo is worth $600,000, and that “teaser” rate that got you into that thing is now somewhat higher. Likewise, if you choose to rent, don’t gripe if some one makes a bundle on a property that appreciates in value.
    Be an educated consumer.

  20. I don’t think anyone has truly understood how big the S & P news is. I believe we will look back at yesterdays announcement as the “tipping point” towards a new real estate period. I don’t think there is going to be a crash, but the days of making 12 to 18% a year on your Soma condo overlooking the railroad tracks is over. Although subprime lending may not have been huge in San Francisco, it was the fuel that caused the real estate madness in places like Manteca, and this WILL eventually even hurt us here in the city.

  21. Aw come on, Rich. It’s not San Francisco unless you can whine about something. Taking responsibility for one’s actions is just not in our city’s DNA, unfortunately.

  22. ex SF-er: great post. Finally someone with common sense and the ability to explain it. But watch your back. The realtors frequenting this site (shall we say the microcosmistas) are going to hunt you down…..

  23. Hate to disagree with ex SF-er’s excellent post, but very few 750K places rent for $3K. The place I moved out of about a year ago rented for under $3K and sold for over $1M. The differential is far more than ex SF-er stated. Otherwise, great post.

  24. Hate to disagree with you tipster, but I have a friend who is renting a house on prime Lake Street for $3200/month. Although the house is not huge, I’m sure it would sell for at least $1.1M. They moved in within the past year.

  25. The $1MM+ South Beach units is see for rent on craigslist are going for over $4k a month minimum.
    Dan, good post. The only thing I’d add is I don’t know how many people get mortgage insurance (you mentioned $4k annual) any more. My bank suggests a 2 loan financing instead as it is cheaper that way (80% mortgage and additional remainder is 2nd mortgage).
    I’ll say again, unless you get an interest only, a mortgage is an incredible forced savings plan. I don’t personally know of any renter who is putting in the bank 1/10 as much as I am paying down in principal. Instead they are going on vacations etc. and have nothing to show for it after 10+ years of living in SF. On the other hand people who have bought and investing also are on their way to becoming millionaires.

  26. AC – you are certainly right that some people can’t save unless they are forced to – but seriously, that’s just stupidity on their part – not some reason for any individual to buy.
    I know plenty of people who rent and save 30-50% of their income every month, without the need for a mortgage to force it. Should people also fill out their W-4 in such a way that the government “helps” them save by taking far more out of each paycheck than they will actually pay – meaning a big tax refund each year?

  27. Based on my personal experience, I’m going to assert that the variance in prices for similar rental units is as great or greater than the variance in prices for condos. Just like the owner’s market, the rental market is complicated by location, age, and fashion. For about $2500 a month you can rent a spacious top floor 2 bedroom apartment with parking between Lake and Califorina. That money won’t buy so much on Green or King streets.

  28. ex-SFer — yes, great explanation on buying vs. renting. The only counterpoint that I would make is that if you go to sell the property and purchase another one (as opposed to moving from one rental to another) chances are you will have profited from your purchase. Obviously you won’t have any sort of profit from renting. Of course, this likelihood is a lot less if you don’t stay in the property for at least 5 years.
    However, way to go in telling it like it is in terms of money spent. Even the tax deduction can negate the benefit of purchasing because in the end it doesn’t make a huge difference.

  29. Brutus, I can see how underwitholding could help in saving….but a lot of people just blow the tax refund though (woo-hoo new plasma and a trip to Hawaii). Not to mention the IRS doesn’t pay interest on any excess that is refunded.
    So ideally I’d say it would be best to have funds automatically invested each month into some kind of savings vehicle….and either owe the IRS a bit or be pretty much even when it comes to APril 15th.

  30. Re: renting vs. owning: rent control is the only reason that places are renting for less than they would sell for. People who are moving into rentals now are paying a lot more than they would two years ago. We were paying $1725 for a huge, badly maintained, mouse- and cockroach-infested dive in the Mission that we moved into in 2006, and when we moved out in May the landlord jacked up the rent to $2250. That’s a nearly 30% increase in ONE YEAR. For a DUMP.
    Sad as it is for SF, the fact that rents are rising has brought me a great deal of comfort as a recent buyer (we closed beginning of June). The 2-bed condo across the street (similar to mine in size, plus and minus a couple of amenities) is renting for $3250 per month, which is basically what we’re paying in PITI minus the tax breaks. AND that condo is NOT rent controlled. We are paying more for our mortgage than we were paying for our last rental, but our place is MUCH nicer than our rental. I feel quite content at the prospect of living there for 5-7 years, even if all this market crash cheerleading makes me feel a bit spooked.

  31. Sorry guys:
    I did not mean to insinuate that a $750,000 condo can/will fetch a rent of $3000 per month.
    I chose that arbitrarily. The actual rent could be more or less…
    I have seen some rentals in SF where the rent is $2500/month, and the price to own is WELL over $1,000,000… and I’ve seen some places (rarer) where rent of $4500 is fetched for a place that would sell for $750,000. My last apartment there rented for $1800/month, and it could have sold for over $900k (in inner sunset area near Parnassus)
    in general, I’ve found that from a cash flow (NOT APPRECIATION) standpoint, it is cheaper to rent than own in SF, and has been for some time. I haven’t found a “cash flow positive” property in SF since maybe 1997 or so…
    many people thus buy in SF as they “expect” a certain appreciation, and that level of expectation is often high (in the 10%/year or more range) when the true forward appreciation may be far more or far less. In my opinion, far less… this expecation is due to almost a decade of spectacular RE appreciation that had never previously been seen before, even in the Bay area.

  32. That said, I would STRONGLY caution you all (even in SF) to watch what is happening in the financial markets VERY CLOSELY. (the “Bear Stearns” debacle, and also the downgrade 2 days ago by Moody’s and S&P)
    Mortgage rates ARE NOT SET BY THE FED. They are set by the capital markets (I elucidated this in an earlier thread).
    Right now there is huge turmoil in the capital markets. It is highly likely (NOT CERTAIN, nothing is certain) that mortgage rates will go higher (7.5-8-9-10%), and also likely that lending becomes very strict due to this turmoil.
    When my parents bought their first home, the guidelines were:
    1. Maximum mortgage must be LESS than 3.5 x annual CONFIRMED documented salary
    2. the payment could not be more than 32% of TAKE HOME pay
    3. we HAD TO put down 20%. No piggy back allowed. no gifts from parents.
    4. they were RIGOROUS with documenting all of this.
    imagine that. Using these guidelines, even if you made $200,000/year, you could purchase a $600,000 house MAX. (today in SF, I would guess that the household income of most people who live in $600k homes is far less than $200,000)
    these guidelines were common until the 1990’s when they started changing (much looser, much higher debt to income allowed, much less income verification, etc). we MAY return to the old lending guidelines again. I’m not saying we will, but it COULD happen.
    The fed cannot control this. Look at what happened when the Fed raised the Fed Funds Rate from 1% in June 2003 to 5.25% in June 2006 (a 4.25% raise). Mortgage rates on a 30 yr fixed ONLY went from 5.25% to 6.6% (only 1.35% change). This is because mortgages are set by LIBOR and by the 10 yr treasury rate and by what’s happening in the MBS/CDO/CDS market, not the Fed (who controls Short term lending rates)
    in the same way, if/when the fed “drops rates” it MAY not lower the mortgage rates, since mortgage rates aren’t set by the fed.
    **link to Fed funds rate historical data and Freddie mac weekly mortgage rate data:
    DISCLAIMER/DISCLOSURES: I am not trying to talk any of you out of buying a home. There are many NON-financial tangible benefits to owning a home. How much is it worth for example to be able to tear down a wall in your OWN home? Or paint the walls Fuscia? Or to put in a home theatre? Or to put pop-art on your roof??? or to rip out carpeting, change the appliances?
    Also, nobody knows the future. The financial markets OFTEN react contrary to the way that rational analysis would indicate. NOBODY foresaw housing doing what it did from 2001-2006, certainly not me. perhaps there will be a prolongation of the boom? My money is bet on the opposite, but I’ve lost big money before and I’ll lose big money again.
    and lastly: I own my own home. That said, I expect it to lose 30% of it’s peak value (it’s alreay lost 10% or so from peak I’d guesstimate). I am fortunate that I can withstand a 100% loss on my home, and I love my home so I choose to accept the loss in value.
    (My original mortgage was 1x annual earnings, my mortgage payment is less than 5% of my take home pay, I have enough cash in the bank to pay off my mortgage right now, and renting would cost me MORE than my mortgage payment).
    In order to achieve this, I had to move away from SF (hence, “ex SF-er”). And although I’d love to go back to my hometown, it doesn’t make economic sense for me since I’d have to take a huge pay cut to go back to SF and the cost of living is so outrageous, which gets in the way of my other life goals.

  33. @jeccat: Your story reminds me of a question I had for a previous SF rental.
    I used to think it a “waste” to upgrade a rental (e.g., paint, better flooring, lighting, minor appliances, etc), but if it’s rent-controlled, the rent is cheap and you are sure you can stay for a few years, is it really such a waste of money to do that, if the landlord okays (and you can perhaps share the cost)?
    I realize there are risks, and you have to be reasonable, but If I had to do it over again, I would have sunk more money into my rental, as it had very drab flooring, lighting, etc. I’d have enjoyed my stay more.
    Anyone else have an opinion on this?

  34. Dan,
    I think you are the one who is getting it wrong. If you are a stat person, then you can use your “percentage of change” to make the claims you are making and feel nice and cozy with your calculator.
    However if you are a person living in the real world, those percentages have a corresponding real amount of money attached to them, and that money needs to be paid with a real debt.
    The real number that matters in the real world is the actual amount of increase.
    In other words, if you could hypothetically buy a home for $1,000 and there’s a 10% increase, then you only have to come up with an extra $100. No biggie.
    But if that home cost $1,000,000 and there’s a tiny 1% increase than you need to come up with another $10,000… so a 9% decrease in “percent of change” still result in nearly a 10,000% increase in what you have to pay. Dig?
    So let’s revisit your numbers (and this is just for SFH because I don’t have time to do your whole post line by line):
    87-89: prices increased about $60k
    98-00: prices increased $237k
    02-05: prices increased by $336k
    The 02-05 period was the highest 3 year “Actual Increase” period in the 20 year SFH records you show. Therefore, the original poster was correct, and you are using stats (i.e. damn lies) to bury the real underlying facts.

  35. ex SF-er:
    I just had to say that your posts are excellent – I share your thinking but you are much more articulate and to the point than I am! I think that anyone (in SF or elsewhere) would do well to read your posts when considering the buy/rent decision.
    Regarding the mention about the underwriting requirements for your parents. You really don’t even need to go back a generation for similar standards. We bought our first house in 1997, a mere ten years ago. We had very similar requirements, except that we put 10% down instead of 20%, and used a second mortgage (at a higher rate). This was quite aggressive at the time, but because our debt/income ratio was even more conservative than required, all parties were ok with this. I remember provoking much discussion at the dinner table with my grandfather when I was pressed for our terms!
    Will those “old” underwriting requirements all come back? I can’t presume to know. But the current easy credit situation seems the historical anomaly….

  36. @ dub dub: I think for some people it could make both emotional and financial sense to sink some cash into into a long-term rental (the NYT had an article about people doing just that two months ago). It the case of my friend who has been in her large, rent-controlled one-bedroom in the sunset since the 80s and pays $900/month, it would ABSOLUTELY make sense to put in some new kitchen cabinets if she wanted to.
    However, it really depends on the situation. In the case of our last apt, I certainly didn’t have the appetite to do a full kitchen and bath remodel, as well as the pest control work, required to make that place anything other than a dump (and to see my slumlord reap the benefits). Also, keep in mind that evictions DO happen. I have a friend who’s been evicted TWICE in the past year (one OMI and one landlord who kicked her out on a technicality so he could sell without doing an Ellis), both times after doing work on the apartments– just painting and carpet shampoo, but still worth a few hundred bucks. Something to keep in mind…
    On an emotive, non-logical note, I have to say that making changes in an apartment you own feels really different than making changes in a rental. We’ve been in our place for 2 months and we’ve painted AND changed light fixtures, something I’ve never done before. There really is something different about owning. I’m not claiming that that feeling of ownership is worth X number of dollars for everybody, but it certainly is worth something to me. I’ve been surprised at how happy owning my own little piece of SF has made me.

  37. missionite, do you think the value of $1 in 1987 is worth the same amount as it is in 2007? a little something called inflation exists. percentage change is a much better comparison gauge than your math logic.

  38. Missionite:
    Percentage increase is the standard way that price increases are measured. If median prices go up 3%, from $1,000,000 to $1,030,000, it would be false to say that prices have skyrocketed, just because a $30,000 is a lot of money. It is still only 3%. In any event, I posted data and a source, which the original poster did not for his claim that the current price run-up is unprecedented. The data I posted included both the percentage and the actual dollar amounts, which made it clear that while by the standard measure, % increase, the price run up in recent years is not unprecedented, that still the dollar increase has been substantial.

  39. Rut,
    Dan and I are operating from the same data set, so inflation is essentially a non factor (the point is how do we express the same data in an understandable way, not whether inflation is measured or not).
    But to answer your question, growth in housing prices have obviously and clearly far exceeded the rate of inflation, and the $60k increase from 1987-1990 is a much smaller number then the $336k increase in 2002-2005 even when adjusted for inflation. To be specific, $60k in 1987 dollars is worth about $103k in 2005 dollars, leaving a $233,000 increase in real dollars. So trying to say that the increase in 87-90 is analagous to the increase in 2002-2005 is ridiculous.
    A YOY percentage increase, such as you have here, is one among many ways YOY price increases are measured.
    You are incorrect to suggest it is the standard way for comparing wildly different housing prices that are decades apart like we have here. The standard way to handle this particular data set is (as rut is driving at with his post) to measure inflation adjusted housing prices.
    To talk about the data in the manner you are doing is very misleading.
    For example the increase from 1988 to 1989 was 15.7% representing roughly a $50k increase. The increase from 2004 to 2005 was 14.7%, a full percentage point less in terms of YOY increase, but that 14.7% increase works out to $140k, which believe it or not works out to an increase of $150,000 in real inflation adjusted 2007 dollars.
    The poster you took issue with did not frame his remark as narrowly as you construed it: he said “the run-up over the past several years is unprecedented”. He did not use “YOY percentage increase” which you leapt to simply because you found a table that helpfully described the data in that fashion.
    Seen through the prism of inflation adjusted real dollars, which is the only criteria that matters to someone about to sign a mortgage loan, it is perfectly clear that the run up from 2002-2005 was indeed unprecedented.

  40. Haven’t Bay Area salaries also climbed a lot in the past 20 years? I am making more money 3 years out of grad school than my mom was in Palo Alto in 1988-89, despite the fact that she had 15 years work experience in a technical field at the time. I’m not an economist, but I’d venture that 1988 and 2007 can’t be compared directly, even adjusted for inflation, because of salary increases.

  41. “I have to say that making changes in an apartment you own feels really different than making changes in a rental.”
    I agree jeccat. I once replaced the carpet in a condo I rented and never allowed myself to walk on it with shoes. When I moved out it looked new. The new tenants must not have taken very good care of it, because when I later bought this very same condo, the carpet had been replaced in fairly short order. The improvements I then made as an owner gave me a great deal of satisfaction. And I think part of that must have been knowing that someone else wasn’t going to benefit at my expense.

  42. Jeccat,
    The issue at hand is the best way to describe the upswing of prices over the past couple decades: percentage of YOY increase, or inflation adjusted pricing.
    Affordability is another discussion entirely.
    But since you asked…
    Median incomes have risen from about $45k in 1987 to roughly $65k in 2005. (source: – PAGE 9). That’s a $20k difference, or if you prefer it Dan’s way, a 42% increase.
    During the same period, a SFH has gone from $247k to $1.1 million dollars for a $841k difference, or a 347% increase.
    More importantly, during the biggest runup of prices, 2002-2005 when real prices climbed up an astonishing $336k, real wages remained essentially flat, hovering around $65k.
    Now there are those who will say it doesn’t matter what the median wage is, as housing is only for rich folks, which is why roughly 90% of San Francisco are renters. And perhaps that’s true. But in 1987 it wasn’t: a dual income family making the median salary could afford the median home with a 30 year fixed rate mortgage, and still have 2/3 of their take home salary left over for food, savings, etc.
    In 2007 that is no longer true. The a dual income family making the median income will just barely service the payments, and there will be no money left over at all, even for food.
    For better or worse, the SF middle class has been shut out of home ownership should they finance with a traditional loan. Enter the shady toxic loans. Now what you have is a recipe for some serious turmoil when these loans start resetting and “homeowners” find they can’t refinance as they were counting on.
    Add something unexpected like another tech crash, and things could get very bad indeed. But that’s another story…
    The bottom line: wages and inflation combined have not kept up with housing prices, particularly over the last several years.

  43. Re – home price to earnings ratio:
    Most people have noticed the changing demographics for SF that have certainly had an impact on prices, as well as the nationwide revival of urban living, but one thing that isn’t mentioned very often in these discussions – congestion is FAR worse than it was 15-20 years ago. For many people, the time factor involved in commuting has made paying a higher percentage of income for housing worth it.
    This certainly isn’t to say that I don’t see a price decrease/stagnation coming, even here in SF – but the days of a mortgage for a SFH or even condo in SF being 33% of income are long gone – forever, I would assume, unless supply can be significantly increased or thousands of jobs leave the city.

  44. The ’02 to ’05 run-up here was indeed unprecedented, as it was in most cities nationwide, driven largely by the same factors (cheap debt, loose lending standards, view of real estate as investment not dwelling, etc.).
    Rather than arguing about % change, you can just graph the data over time and visually see the run-up. A data series that had been somewhat linear historically goes exponential during that time period. SocketSite had posted a chart like this a while ago, but I can’t remember where or when.
    San Francisco has ALWAYS been expensive. San Francisco has ALWAYS been a desirable place to live. There have ALWAYS been good jobs here. And we’ve been “out of land” for quite some time. None of this is new and doesn’t explain the absurd ratio of prices to incomes we currently have here.

  45. Sure, it’s always been expensive here – but you have to admit that the demographic changes that caused a decrease in the population in the 60’s and 70’s and even for part of the 80’s(as people moved to the suburbs) are not coming back any time soon. That shift helped to keep prices down here and also helped to raise prices in the suburbs, no? As we reached the end of the 80’s, the easily accessible suburbs were built out. They’re still built out.
    This area isn’t geographically like many other metros – our fringe is now Manteca. No again, I’m not saying that we won’t see price drops here – I just think that expecting prices on SFH’s to drop back down to 33% of income is ridiculous – there are just over 100,000 SFH’s in the City, and we can’t build any more. Now, if we’re talking about condos, sure, the price could come down much closer to the historical data point.

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