794 38th Avenue
In July of 2003 the single-family home at 794 38th Avenue sold for $450,000. In July of 2005 it sold for $676,000. And in November of 2006 it changed hands for $760,000. Not a bad run for the previous owners or neighborhood comps. On Friday, however, it returned to the market with a “pre-foreclosure” list price of $575,000.
Prepare yourselves for the “multiple offers and over asking” stories that will likely follow (and the “obviously they overpaid” comments should when it sells for under $760,000).
UPDATE: And while we missed it, a couple of plugged-in readers didn’t: listed without selling for $828,000 this past October; $699,000 this past November; and $649,000 this past December.
∙ Listing: 794 38th Avenue (2/1) – $575,000 [MLS]

35 thoughts on “Up, Up And Into Pre-Foreclosure In The Avenues (794 38th Avenue)”
  1. Unless this has major issues not discernable from the MLS (roof, foundation), I highly doubt it will go for $575K– that seems remarkably undervalued. I’m curious to see what others think, though.

  2. and no parking. I believe that they were trying to unload this thing over the summer for about $800k? Wishful thinking….

  3. I feel very sorry for the family who must have paid that ungodly price of 760k and are now losing it to foreclosure. Living in the netherlands of Fresno, this 575k still looks high, but it is SF.

  4. It does seem to be priced fairly reasonably (I’ll add the obligatory “you can still rent for far less”). There are some bigger, nicer places on the other side of the park in the Sunset in the 700s — I’ve always preferred the Sunset to the Richmond because the train (even the N) is a much nicer commute than the bus.
    The sales history of this place does paint a good picture in a microcosm of the insanity of the last few years.

  5. This seems like a good, honest house. Solid working-class neighborhood. It deserves an honest price. I bid $300K, and I bet within a few years, that sort of number will not seem out too far out of place. (Maybe $350K if you want to live there – that would put it at about 4x SF median household income – about right for this type of property IMO).
    About whether this seems “remarkably undervalued”. Obviously a sea change is occurring, and people are going to have to start recalibrating their ideas about “value”. This property has been on the market for a while, and so the market is not only speaking, it’s SCREAMING for bubble-deniers to start listening.
    This property started out being listed for $829K!! Apparently advertised a realtor named “Vanessa Justice” (google the listing and check the google cached pages – you’ll see it was remodeled as well at some point).
    According to SF House Prices Blog, it started out on 10/12/07 at $829K (I guess some realtor really had no idea the market had turned….)
    On 11/15/07, reduced to $699K. At this point, it must have become clear that the ponzi scheme had stopped, and for this working class house at least, its race had been run.
    12/19/07, reduced to $649K. This should have been the “oh $hit” moment for neighbors who purchased recently, and who are not wealthy enough to laugh about the situation.
    2/08/08, reduced to its current $575K.
    It may or may not sell here – who can really guess? In a city of 775K people, with only 100-200 SFHs selling per month, it should be possible to find a knifecatcher. But, given its long listing history and multiple step reductions, we can probably say that no bidding war is going to erupt. If anything, a collapse in listing prices like this (-31%) in about 4 months (that’s a -67% fall on an annualized basis) should scare any potential buyer!
    BTW, this one is tax-defaulted as well. We’re starting to see a pattern of course. Distressed properties are showing the “true” state of the market, while the many participants whose livelihoods depend on this bubble continuing will spin furious denials and distinction as to why nothing has really changed.

  6. Actually, come to think of it, the parking may be in the back of the house. Some of the homes in the Outer Richmond have carports or detached garages in the back of the house.
    Satchel – The Outer Richmond has always been a working class neighborhood, but there has been a lot of blue portopotties in this neck of the woods too. Consequently, we are seeing lots of 2nd additions, remodeling, and ultimately homes priced in the $1M+ range.

  7. Prices in the Bay Area have averaged 6-7X income, not 4.
    Still overpriced though. Unless that attic really is usable space or you can throw in a couple dormers.

  8. Nope – no parking – that’s a bit of a deal killer for a lot of home buyers out there as there usually isn’t a ton of nearby street parking in the Sunset/Richmond and so many of the other homes have it. The Sunset/Richmond has so many similar and relatively affordable homes that I think it bears watching as to the health of the overall market. And yes, if this sells below $650K, it’s a pretty strong data point that the market has significantly softened in the past few months.

  9. David,
    I don’t have the actual data (it’s sort of hard to find easily without paying DQ or someone like that and then crossing it the census income data, for example). 6-7X sounds high.
    Do you have the data for, say, 1993-1998? And, for 1983-88? Average would be ok. It would be really useful to think in those terms. Lots of people dismiss historical data. Moreover, they do not even think about how to adjust them for things like the secular decline in interest rates post-1980, or the continuous increase in debt/GDP post-1980. It’s pretty easy to change prices, especially when they are set at the margin. It’s also pretty easy to upgrade the physical housing stock, especially when HELOC money freely flows.
    Under ANY conceivable set of economic circumstances, though, it is MUCH harder to improve the HUMAN capital stock. That is what ultimately drives the value of nonproductive assets like houses IMO, because their debt service requirements are ultimately tied to the value of their human inabitants, ie, their wages.
    If you do have that historic data, I’d really appreciate it. I’ll throw in my one data point from a tour I took in Oakland once: in 1910, the average NICE Craftsman house in a NICE neighborhood cost 2X median wage.

  10. Wells Fargo has excellent data, but only back to 1991 (go down to row 1746):
    The NAHB/Wells Fargo Housing Opportunity Index: Complete History by Metropolitan Area (1991-Current)
    At least that far back, it looks like 4-5X income for home prices was fairly standard until 2000 when the ratio went through the roof (at about 9X in 2007 — looks to be dropping now but need to wait for more data). 6-7X sounds like bubble numbers, not norms, but we’d need 30%-plus price drops just to get back to that!

  11. Thanks for that data source, Trip. Very interesting. I stand by my initial estimate of fair value: $350K if you like and want to live in THIS house. $300K if you are buying to rent out and looking for a reasonable risk-adjusted return.
    About 3.5 – 4.0x median household income for this house. That makes sense, in light of the historic data (going back to 1991) that seem to coalesce around 4.5 to 5.5 times median income. This is a starter home. It is in a nice area, but not one of the nicest in SF of course. Positives include the facts that the population demographics are probably relatively stable for this neighborhood and that supply is likely to be increasing at a very slow pace for the foreseeable future (this isn’t SOMA or 1RH or anything – man, are those SOMA buildings going to get smashed as the supply comes out right into the teeth of the credit deflation monster!). IMO, it should trade slightly below the median 4.5-5.5 average multiple, reflecting the fact that (all things considered) it falls slightly below the median of desirability for SF generally (which is pretty closely correlated with the MSA obviously).
    It probably also makes sense to discount slightly the historic ratios in light of the coming credit crash that is only starting. When we come out the other side of it (which we will), people will look back at the foolish lending practices the way we now look back at dotcom valuation metrics!

  12. I think that 5X income was more the norm for the period of relatively flat housing prices from the mid 80’s up to about 1997 (as measured by median SFH/condo sales price / median household income). Here is a table of median and average sale prices for San Francisco for combined SFH and condo sales (table shows year, median price, average price with $ in 000s):
    1993 $260 $310
    1994 $264 $321
    1995 $262 $331
    1996 $270 $346
    1997 $295 $372
    1998 $347 $451
    1999 $407 $528
    2000 $525 $688
    2001 $535 $691
    2002 $560 $681
    2003 $591 $711
    2004 $685 $819
    2005 $770 $934
    2006 $775 $934
    2007 $800 $996
    2008 $789 $1,027 (YTD)
    This data is similar to the Case-Shiller and other historical graphs with the big % gains in 1999-00 and 2004-05. I have separate data for SFH and condo. Interestingly, the median SFH price was only a few % higher than the condo median during the 1993-1998 period – but, since 2004, that difference has grown to about 20%+.

  13. The 2003 sale for $450k was probably overpriced. That means that with inflation the price should be less than $500k. Exactly what wage data is and where it is going is complex to measure. Not all income gets recorded and households taking in over $100k/year are not so rare in San Francisco. I bet the $350k figure is essentially right, but will rise with inflation as the bubble continues to deflate which means the bottom for this structure might come closer to $400k when it moves. That is also close to half of the extreme bubble price which seems about right.

  14. What happens when the sale price is less than the loan? So the previous owner bought this home at $760K and still owes $760K as of February 2008, and sold it on March 2008 for $575K. Does the seller still owe $185K to the mortgage lender? Does the mortgage take the loss of $185K?

  15. I agree with Satchel that $300K would represent a decent price to an investor (say a GRM of about 10). I also agree with Mole Man that $400K is probably the floor – but we’re clearly not there yet. What would be so bad about a property like this going for about $300 per square foot?

  16. Moku6 — the seller cannot convey clear title unless something is worked out with the lender (either agree to a short sale or the seller just pays off the balance). No buyer would ever buy this place unless one of these occurs. (This is one of the reasons you have people walking away from places — too much down the drain for either scenario to happen).

  17. Thanks Trip. How easy is it to get the mortgage lender to do a short sale? How easy is it to get a lender to do a short sale when loan to market value is 30% to the downside? How will it affect the borrowers FICO score? Will the borrower owe taxes on the difference?

  18. Sorry, you’re beyond the scope of my knowledge on most of these. Re taxes, the new law eliminates federal income tax on the forgiven debt from a short sale, but as far as I know, there has been no state law change yet, so Cal. income taxes would still be owed.

  19. Satchel, my numbers are from a Goldman Sachs research report published October 21, 2007.
    In it, it states that
    1) California is overpriced by 35-40%
    2) Home prices depend on income and interest rates (what do they pay these guys?;)
    3) This relationship broke down in 2004
    In a January 2006 research report published by HSBC, it states that:
    1) The 30 year average rental yield for SF is 3.8% (2.9% for the East Bay)
    2) The 30 year average rental yield less the real risk free interest rate is 0.2% for SF, -0.7% for the East Bay.
    3) The 30 year average price/income ratio for SF is 6.4 (East Bay is 5.9)
    4) Th 30 year average price/rent ratio for SF is 19.7, for East Bay is 23.8.
    So for 30 years the price/income ratio for SF has averaged over 6, hence my 6-7X comment. If you go ex the recent bubble, (1/6 of the time, or 5 years, at 11.3) you end up with about a 5X average.
    Prices in the Bay Area diverged from the national norm in the ’70’s, when building restrictions really came into effect.
    Anyway, if the average household income around there is $100K, then the house is close to “fairly priced” or if you could rent it for, say, $30,000/year ($2500/month), plus or minus.
    If that’s not the case (I don’t think it is in that neighborhood), then yes, it’s overpriced.

  20. David,
    Thanks for that data. Makes sense, and I think around 5 is probably right too if you ex out the bubble. That’s basically consistent with the data from WFc that Trip linked to. So, like I said, about 4x for THIS house, because it is a little below the median on the scale of desirability in SF IMO. I thought that household income for SF generally was around $90K, but no big difference. No way the average household income in the Outer Richmond is $100K, though! (Although I bet there are a lot of $100K+ households there.) The 2000 Census data reports household income in that zip (94121) as $62K, and more recent IRS data (2004) shows “average” AGI of about $73K, of which $60K was wages (although these of course are not directly comparable with median household income). Obviously, these numbers are a little higher today, but I bet not by too much!
    Your idea about building restrictions driving valuation makes some sense, especially in the Bay Area, but I bet the major distinction is Prop 13, which came into play around 1980. If you think about Prop 13, it acts as an “insurance policy” or “put” against the government taking too large a share of the value of your house. That insurance policy has some value, and I bet that that fact has a lot to do with higher valuation of California homes versus neighboring states, for instance. This would drive the California “p-e” ratio higher, but I would bet that the effects of the Prop 13 insurance policy will start to fade now that CA has broken through the limits of affordability even using the most insane and toxic loans known to world history! It is MUCH tougher to raise income levels in the aggregate.
    I would think Prop 13 also lowers the carrying costs (on average) for rental properties, especially when inflation was high in the 1980s, leaving a lot of legacy owners with low carrying costs, which allowed low rental cap rates, especially today as the properties have appreciated, but the taxes have not (well, a little – 2% per year – but off low base numbers 15 to 20 years ago!). In NYC suburbs, for instance, where my brother has rental properties, rents are MUCH higher relative to purchase price of the property, the properties themselves cost LESS, and the household income is comparable if not HIGHER (in many of the NYC near suburbs). I suspect the tax burden is the major distinction (in fact, I’ve been told by landlords of SFH’s here that there would be no way they could run their landlording businesses without Prop 13 – the income of the population is not sufficientto allow the raising of rents to levels that would be economical for the owners if they had to pay “fully-valued” property taxes).

  21. Satchel, you’re right about Prop 13 also. I just remember reading that the Bay Area was about 25% more expensive than the rest of the country on a P/I basis from post-WWII to about 1972, and then the P/I inflected higher, and was probably goosed by Prop 13 in 1978. (which of course has benefited the landed gentry more than anyone, in my opinion)
    This is supported by another thing I read, sorry I don’t have the pdf or link in front of me, where property taxes do have a clear negative effect on home prices (again, “duh” as it comprises your PITI payment).
    This idea is also corroborated anecdotally in my previous residence in Chicago–rents were much higher, taxes were higher and property values lower (although not by as much as you’d think, but you generally got a much higher quality, if not bigger house).
    Anyway, the P/I average is just that, an average, so some parts of SF (and East Bay) are going to run 10X “average income” (because it’s Nob Hill, and “average income” counts everyone from there to Bayview), whereas some places will probably be 4X (or should be as the bubble unwinds). The disparity is even greater in the East Bay, which must be why the P/I average is surprisingly high.
    So, yeah, it’s probably somewhat appropriate to go on average neighorhood income, although you’ll always get the few arbitrageurs who are willing to move from renting in the Marina to buying in the Richmond, etc. Anyway, I found the data to be useful to getting an anchor point to what the intrinsic value should be around town.

  22. PS. I think you also have two conflicting trends occurring in the Bay Area right now. Rents have been going up, but income hasn’t really been, so I’m seeing houses in Oakland that are selling for a “reasonable” P/R (say, 18X, which is actually lower than the national 20 year average of 20X, and significantly lower than Oakland’s 23-24X average), however, they’re not really that reasonable on a P/I basis (still above 7).
    So what trend is going to break first? Will rents stagnate or drop again, or will incomes go up (to keep up with increasing inflation)?

  23. David,
    Rents will stagnate. Count on it. It is always harder to raise aggregate income than to maintain proces. Rent controls distort this a bit in SF, though, so you might see rents rise on average (due to a large portion being below the market clearing rent already), but at the margins on SFHs and apartments that are not subject to rent controls, they should fall. Wait until the recession takes hold in earnest. The US economy is becoming very unstable when you look at the macro aggregates. While I can’t say with certainty that the big adjustment is coming this year or next, we are not going to dodge it, and at greater than 350% debt/gdp and no room to inflate real estate assets or equity asset values any further, it shouldn’t be too long.

  24. I’m suspicious that all the incentives are in place to inflate away the debt. Of course that’s not really a satisfactory outcome, but “helicopter Ben,” gov’t spending etc all point to inflation to me.
    What has happened the past nearly 10 years? Stock prices are flat, R.E. is heading to annihilating all gains made in a decade; all we’ve done is devalue the dollar as gas, food, etc are all more expensive.
    Locally I hear you–a recession that hits tech and biotech hard again will cause another couple hundred thousand people to skip town and relieve any upward pressure on rents. Nationally, I see more inflation. But again, if I could predict the future perfectly, I’d have retired long ago.

  25. David,
    It’s a good discussion – deflation/inflation – and reasonable, smart and well-informed people can come to different conclusions. Lots of arguments and nuances either way.
    For my part, after it’s all said and done, it comes down to this. The problem with the US is too much leverage and the inability to sevice this leverage at positive real interest rates. But this leverage is primarily located in the household sector, and by extension some of the fiancial corporate sector, which will be bailed out with taxpayer money. Government debt/GDP ratios are low, especially when contrasted with Japan or, say, Italy. The most important thing for a government is to retain its power and influence, and it does this through spending. And it answers to ints monied interests by bailing out its banking sector.
    However, as a population we do not save nearly enough, and consequently the USG needs to fund in the sovereign debt markets. It is doing that quite cheaply right now – at less than 3% on a blended basis in fact on a going forward basis. The primary reason for this remarkable fact is the reserve currency status that the US still enjoys, which allows and even attracts recycling of trade surpluses with our trading partners into US dollar instruments. Unlike what Schiff and others say, there are no real “dollars” offshore waiting to come back and bid up prices here – it’s all credit. If they sell it, they collapse the value of their credit instruments, and simultaneously drive up the value of the dollar as they convert credit instruments to actual currency. The USG can do a lot of things here, all the way to capital controls and forced conversions (all these have been tried by other countries in the 1990s BTW), but they would lose their ability to fund in the sovereign markets, perhaps permanently (Britain never really recovered from its loss of reserve currency status post-WWII, and the axis of finance passed to the US).
    The latest GAO data show that interest costs on the debt are less than 10% of government expenditure, while in the 1970s (a period of high inflation brought about by monetization and rapid base money growth) this figure was 19%, and the overall level of the debt was much lower (something like 50% of GDP versus 70% or so today).
    Bottom line, I do not see the USG abandoning reserve currency status to bail out a bunch of indebted households. They didn’t do it in the 1930s (total currency debasement), and they won’t do it again, is my bet. The USG wants its low interest rates (set by overseas lenders, NOT the Fed), and I am certain that there have been assurances made to our creditors, who will be accomodative (insert the old joke – if I owe you $1000, it’s my problem, but if I owe you $5 TRILLION, well, then I guess it’s YOUR problem!).
    I could be wrong about this, but I do not see government in the US as responsive to the people of the US in any way. They are responsive, however, to the banks and other wealthy interests (including the Fed) whose assets consist largely of paper ones (i.e., dollars and securities). In the end, a recession is no big deal if you are the USG, and especially no big deal if you can continue to borrow at low rates in order to wield power and influence with sectors of the population. Even a DEPRESSION (unlikely today, but possible) is no big deal if you are the USG or the FED. Look at the 1930s. Both those institutions same out of it stronger than ever!

  26. This house resides few blocks down from my friend’s. It’s not the greatest area, but definitely not a bad one either. It’s really funny how this old house is structured without any garage spaces on neither sides of the house. It also has no backyard, due to neighboring house. Is it well priced? If you can get a permit to retro fit and somehow build a 3 story house, maybe. You will always stay indoors due to immense fog that creeps in every noon, so backyard is not necessary in this part of the city.
    I side with David. He’s more realistic with the homes in SF. My banker friend’s been saying how he would buy my East Bay home at half the cost I purchased 3 years ago. I bet that in 10 years, rent yield ratio will drop, but not seeing more then 20% drop in the median home price. Listening to David, I may have lost this bet already. My friend got laid off couple weeks ago, and now, what I really want is for recession to re-adjust this economy, and that I will still have a job in 10 years.
    That aside, David. =) I am willing to jump into an investment property with you, even if this recession lasts 10 years.

  27. On the otherhand, I love that neighborhood. That house is 1 block from the GG Park, Walking distance to the beach, and the schools in the Richmond are some of the best in the city. I haven’t seen the inside of the house, but the curb in front of the house is cut out for some odd reason even though there is no garage.

  28. There does appear to be truly detached parking accessed via an alley off Cabrillo. And there has to be a small backyard.

  29. The Fed is obviously determined to inflate our way out of this problem. Remember all those amazingly cheap homes that your parents bought for $30,000 back before 70’s stagflation? This one will look the same in 30 years.
    What? You paid *only* *one* *million* for that? What a deal!
    Of course, gasoline will be $100/gallon and so will milk.

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