A plugged-in reader reports (and posits):

I was on a conference call today with the National Association of Home Builders (NAHB) CEO Jerry Howard and Chief Economist David Seiders where they were presenting the June Housing Market Index (HMI).

It was pretty bad. They were basically pleading with all news organizations and others to put pressure on the federal government to bail out the housing meltdown.

Jerry even went so far as to say that it is effecting senior citizens and it is just not right that they are losing their equity.

The NAHB reported that the index is at an all time record low of 18. Down from 19 in May. (a rating of 50 is neutral, greater than 50 means a majority of positive responses. less than 50 means a majority of negative)

David did say that he expects further declines since the current index does not reflect the recent rise in interest rates.

I really wish I could describe in words the sense of desperation that came from the call.

It seems easy to look at particular neighborhoods and say that a major downturn is not coming but I would have to agree with those whom have studied bubble and mass movement mentality. The drastic movement starts at the fringes and moves in over time.

Stockton -> Contra Costa -> Specific Districts in SF -> Top of Russian Hill

If we look back in 5 years I will be very surprised if those prime districts have not followed suit.

Homebuilder Confidence Index Unexpectedly Fell to 18 [Bloomberg]
SocketSite’s San Francisco Listed Housing Inventory Update: 6/16/08 [SocketSite]

34 thoughts on “Homebuilder Confidence Falls: From The Fringes To San Francisco?”
  1. I’m a Republican. And for years my Democratic leaning friends have been lamenting that the rich get richer and the poor are getting poorer. And I’m beginning to think that they are right. It might explain how property values are holding steady (and even increasing) in expensive nabes while they crash in middle and lower class ones…

  2. That may be true. But my recollection of the early 90’s real estate correction is that the high-end properties took the biggest hit, whereas less expensive homes tended to retain more of their value. Is that correct?

  3. It’s still not over and jumping in the waters now as a first time buyer is still a very risky prop.

  4. nowonderitcostssomuchhere, remember the Bush tax cuts?
    At the time, the Bush supporters were praising the “trickle down economics”. The rich would spray their wealth around.
    Ever since W got to the WH, salaries have stayed pretty flat, squeezing the middle class into a new kind of lower class. School becomes unaffordable to more and more, housing costs have exploded, healthcare costs too with less coverage from the HMOs.
    The housing boom managed to level the field temporarily as the middle class could fund big life expenses thanks to rising equity. Now that the bubble has popped, reality takes over. It’s back to “what can I afford with my salary”.
    And all this while the top layer juggles with more and more millions.
    I guess it’s the “Trickle UP economy”.

  5. In spite of the economic downturn, SF’s wealthiest residents are spending more than ever before on their homes. I’ve never seen higher prices in certain areas. There are thousands of families here with enough money to make prime Pac Heights, etc. increasingly unobtainable.

  6. Wait. What was that sound? Oh yes, the sweet ring of rising rents! Keep wringing your hands while rents continue to rise!

  7. Funny you mention how much money there is in the Bay Area, Sleepiguy. Because BusinessWeek recently put out a list of best and worst cities for careers, evaluating local salaries vs. the cost of living. No surprise that San Francisco was rated among the worst three places to live in virtually every category – even for CEOs:
    I guess the best way to assure oneself of a good lifestyle here is to inherit well. I won’t argue that 94123 prices will correct dramatically – this is a neighborhood that’s roughly 1 square mile in a metropolitan area of roughly 9 million people. Pretty well insulated, I agree.
    But I will say, as I’ve said before, that we don’t make enough to justify the prices we have across the city and bay area, as a whole.

  8. Dude,
    When SF is always with NY (and LA) in the bottom 3, somehow I don’t think people will think it is a bad thing…..
    Actually, if you want the best place for (cost-of-living adjusted) career, I can give you stories and stories why you should move to some small town in the middle of nowhere.

  9. Dude — your article considers only salary, not stock options, a significant omission for the folks competing for the best houses.

  10. In spite of the economic downturn, SF’s wealthiest residents are spending more than ever before on their homes. I’ve never seen higher prices in certain areas. There are thousands of families here with enough money to make prime Pac Heights, etc. increasingly unobtainable.
    Posted by: Sleepiguy at June 16, 2008 2:50 PM
    I don’t know what data your considering…

  11. Homebuilder (and commercial construction) confidence is pretty much at an all-time high in San Francisco. The amount of projects online right now is just stunning. And there will be a mammoth increase in construction pipeline once the Planning Department’s Eastern Neighborhoods plan is finalized in June or Aug (the biggest change to the city zoning in the last 50 years). Developers are chomping at the bit to get a piece of the 6.500 units to be built under this plan. San Francisco will change even more in the next 10 years than it has in the last 20.

  12. There are three basic principles in Wall Street:
    1. Bulls can make money
    2. Bears can make money
    3. Pigs get slaughtered.
    The same rules apply to real estate.
    Does the NAHB think that real estate needs more subsidies from the Federal Government. We already have the mortgage interest deduction. We already have tax-free capital gains (up to $500,000) for the sale of a primary residence after two years’ of reisdency (out of five). We even have depreciation, for some. We have the FHA. We have Fannie Mae and Freddie Mac. And that’s still not enough? Ha-ha!

  13. I agree with Anonymous.
    Add to these subsidies all the road building and freeway widening that was required to accomodate subdivisions built at the far periphery of urban areas, where land is cheaper, and profits were larger.

  14. “Jerry even went so far as to say that it is effecting senior citizens and it is just not right that they are losing their equity.”
    whaat? ok, call me ‘mean’ but wouldn’t you tend to agree that most senior citizens, unless they just finally purchased in the last 3 years (…which..if they’re senior…i’m guessing that’s probably not true) bought years and years ago and are still sitting on a LOT of equity??? Yeah, you could argue that maybe the upgraded to a home that they shouldn’t have, but I’m not feeling sorry for that situation. Maybe they took out all of their equity? Well, that was not smart and again, not feeling too sorry for that situation…
    doing a very (admit) non-factual straw-poll, i can’t count the number of friends’ who’s parents bought in the 60s, 70s, or 80s, and are doing very well with their appreciated real estate.

  15. It’s interesting to me when people argue talk about these wealthy people who are so price insensitive that they’ll pay whatever it takes to be where they want.
    The flip side of that is that people with that much wealth won’t blink about selling their place well below market when the time comes to just get rid of it because they’re bored with it. Friend of mine bought a place in 2002 for $100K off list, with very little haggling, because it was a wealthy foreigner who used it as a vacation home, and who was happy to unload it to the first qualified buyer who made an offer that could close quickly.
    Also, I can’t help but laugh when these homebuilder execs plead for government intervention. Did somebody FORCE them to overbuild?

  16. I have absolutely nothing against those that argue in a bullish fashion for SF real estate. It would be nice if it does turn out that SF pulls through these historic times with few scars.
    The problem I have right now with this view is described by Robert J. Shiller’s paper entitled Historic Turning Points in Real Estate. It was published in June of 2007 but reading it again now, with a year behind us, is very interesting.
    The paper can be viewed here: http://cowles.econ.yale.edu/P/cd/d16a/d1610.pdf
    Shiller explorers past housing crisis’ and identifies a number of factors in each, including the current, that have led to the major turning points in the boom and bust cycle.
    In short, Shiller explains that every boom throughout history must have a reason. His paper is an attempt to idenitfy, and hopefully learn from, past bubble events.
    In addition to supply and demand, he describes a psychological theory called ‘Uniqueness Bias’. In quoting the paper, “The uniqueness bias has its effect in the housing market when people imagine that the city they live in is unusually atractive, and increasingly so.”
    I travel extensively and view this uniqueness bias in nearly every major city in which I travel. Everyone thinks their city is the best. Right now the blogs I follow in Seattle are having the same debate. Historically Seattle proper was the BEST place in the region. Everyone wanted to live there. As the Eastside grew up and has become the BEST place to live, Seattle proper has diminished in terms of desirability. Ironically, even with this dramatic local ‘best’ shift, there are those in the region that feel the area will not be affected by the national housing crisis.
    I absolutely love San Francisco but am not so confident that it, or even parts of it, will be immune.

  17. @Peter:
    Thanks for the link. Uniqueness bias, I think, isn’t just something we see (saw?) in the housing bubble…it was the same during the dot com boom. Remember how standard valuation metrics like P/E ratios didn’t matter for the prices of tech 1.0 stocks because “things were different?”
    There’s a lot to learn from looking backwards, sometimes.

  18. Peter,
    One major thing that Shiller’s report does not factor in is the price of gas. The further you live from jobs, shopping, etc, the more it costs you to live there.
    MUNI may not be the best transit, but it is readily available and cheap. Millionaires may not care about MUNI (or ever use it), but a lot of “middle-class” people do use it. In my household, MUNI means we only own one small car that gets driven a few times a week (and filled up with gas about once a month). This makes the cost of SF much more “doable” for my family. And for us translates into a willingness to pay more for a home here.

  19. @TheRobin:
    The economic impact of increased gas prices would seem to be negligible when making a buying decision on something with such a large price tag.
    If it costs $50k less to live in comparable housing outside SF, that’s 10,000 gallons of gas, even assuming $5/gallon. If you can get 20 miles to the gallon, you’re talking about 200,000 miles, more than most families drive in 10 years.
    A budget conscious SF family might be better served trying to reduce or eliminate the approx. $500/month in HOA fees some of them pay than worrying about $5/gallon gas. Just cutting out that expense would be the equivalent of over 8 fill-ups every month (assuming a 12-gallon tank).

  20. The total cost of ownership of a car is a lot more than just the cost of the gasoline.
    True. but it pales in comparison to the cost of buying versus renting in SF, or buying in SF versus buying further out.
    SF real estate is just that expensive.

  21. While I agree with Foolio the additional cost of living in SF can’t be rationalized by “being car-free” (you’d have to be an *extremely* profligate driver, j.a.’s comments notwithstanding), it’s moot.
    You might as well argue the “value” of the views at ORH. I’m surprised how often “the car-free” justification is trotted out, however. It sounds absurd, almost desperate. Have any of you gone house shopping outside of SF (foolio, your 50k savings is waylow)? And I’m not talking Tracy okay?
    In any case, the same ingenuity one applies to walking everywhere, waiting for trains/buses to show up can be applied to vehicle ownership!
    My experience with muni (not to fan the flame war) is it works only if your time has no value.

  22. My experience with muni (not to fan the flame war) is it works only if your time has no value.
    Perhaps true. But there aren’t many places in the rest of the Bay Area where you don’t need a car for EVERY other trip besides going to work. People don’t give up cars because they can take a train to work. They give up cars because they can walk to restaurants, cleaners, grocery stores, etc, etc, etc. I know several people who bought a place in SF because they wanted and valued a car-free lifestyle – yet they take Caltrain or an employer shuttle out of SF. These people don’t use Muni. They walk to places or take cabs.

  23. @anon — true enough, and I agree. But your argument is not about cost! My point is in SF you (generally) pay for the privilege of being car free!

  24. dub d,
    you said,
    “My point is in SF you (generally) pay for the privilege of being car free!”
    its a good deal. plus you get the value of the exercise.
    “My experience with muni (not to fan the flame war) is it works only if your time has no value.”
    not if you are a knowledge worker. you don’t need to watch the road when someone else is driving…you can be productively crackberrying away…

  25. You just don’t know how to calculate the cash flow:
    Two cars at $600/mo each is enough to carry about $200k in mortgage payments. Still not enough to balance out the cost, but to claim that a commute from anywhere in SF to downtown is worse than a commute from East Bay to downtown reeks of desperation.

  26. How can a city claim to be a “car free” location with such a limited subway system? Muni bus lines are as slow as anywhere except Cairo. We don’t even have a subway to the western neighborhoods, or up to the northern part of town. Growing up in Chicago, I had to bring a map with me as a child to help navigate the huge subway (and EL lines), as well as METRA rail lines. While Chicago had central terminals where dozens of rail and subway lines connected, San Francisco has a dangerous dirty bus station.
    You can be “car free” if you live near Market Street, but forget it if you live out in Cow Hollow. (To add insult to our lacking infrastructure, in Chicago I noticed they are refurbishing every subway and EL station, over 350 stations in total, with a completion date of 2013. Imagine San Francisco trying such a massive project?)

  27. “How can a city claim to be a “car free” location with such a limited subway system? ”
    its a small enough city to walk or bicycle in.

  28. anon,
    Your facts are not even close to true. Chicago’s El is woefully underfunded and crumbling at the moment. It is still a good system, but has around $5 billion in deferred maintenance that is currently unfunded. Overhaul the whole system by 2013? In your dreams maybe.
    And as paco said, SF is a car-free city because of its size. Muni may not be fast, but you can walk, bike, or take a less-than-$20 cab ride to ANYWHERE in the city.

  29. I am car-free, raising a family in Noe and working in SOMA. I probably use Zipcar or borrow the neighbors car once a week. I ride Muni or BART everyday.

  30. j.a — While it may be easy to commute Noe SOMA, this is not the case *in general* within SF.
    In fact, getting to parts of SOMA from Noe is a pain, unless your time has no value (I lived in Noe for 7 years, so let us agree to disagree).
    When I knew you (casually), you had a motorcycle, correct? It’s disingenuous to claim “carless” without disclosing that (while revealing use of muni and bart).
    More crucially, weren’t you a .com sysadmin during bubble 1, and for all I know, now? You allude to the money one saves going carless (presumably to afford more-expensive SF housing as a trade-off), but fail to disclose that too.
    Finally, you mention you are raising a family (to complete the carless, muni riding, family-raising perfect picture), but neglect to mention your age, which is older than many men wish to be when they start a family (my memory of your age may be wrong, and if so, strike this point).
    While you are justifiably proud (but frankly, a little self-righteous) of how you are living in SF, you are actually an example of the luck and deep sacrifices one needs *just to survive* as a homeowning adult in SF.
    Discuss 😉

  31. Sorry for the late reply here, dub dub, but this thread had long moved off the front page before I saw this.
    I used to own a motorcycle, yes, but got rid of it quite a few years ago. Another thing I forgot to add is that a house without parking costs at least $100k less than one with parking, more like $150k in Noe. So you can afford a house worth $350k more, overall.
    I am lucky? Raised on food stamps and free cheese and served a stint in The Army to afford college? Compared to your average Socketsiter, who was born on third base and thinks he hit a triple?
    I am smart, but that is about the only luck I have had. I have worked at two companies that have gone public and one that was sold (out of three start-ups worked at) so this might be luck, or it might be skill, or more likely a combination of both. System Administration is not a particularly lucrative profession.
    I guess you missed the thread where I posted how I scrimped and saved for a decade to be able to afford a down payment. Yes, buying a house in San Francisco requires hard work and sacrifice. Most things worth having are that way.

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