If the California Association of Realtors’ 2009 forecast is accurate, the median sales price of a home in California will decline by 6 percent in 2009 while sales volume will rise 12.5%.
Regardless, there’s the quote with which we absolutely don’t agree (once again, cue the foreshadowing): “”The worst is over, but we’re still not out of the woods,” said Leslie Appleton-Young, the association’s chief economist.” And the one with which we do: “This forecast is not baking in a recession with huge job losses.”
Or as JPMorgan Chase CEO Jamie Dimon said today, “We have to be prepared that [the economic slump] gets a lot worse and we are.” Unfortunately CAR doesn’t appear to be part of that latter “we.”
∙ Forecast: Calif. home prices to dip further in ’09 [SFGate]
∙ JPMorgan’s Dimon Plans for More Loan Losses as Economy Weakens [SocketSite]
Editor,
I have to respectfully disagree:
Mortgage industry is one wave behind the RE market. There is a difference there.
Plus, the associating is predicting the whole state in general, not just SF market.
Personally, I agree SF is one wave behind the national market. Worst is NOT over for areas like Dist 9, or possibly Noe. 7&8 may see more sluggishness, but not the type of disaster that some on SS are predicting, or hoping for.
Nobody knows where this market is going.
All we can say is:
1 – There are long-term fundamentals. Buy vs. Rent. You know, the premium one is ready to pay for the pride of ownership vs. rent is 100-150% which is unheard of.
2 – This is a major correction. What corrections do is revert the previous trend towards the median, and to do that, all things being equal, they have to overshoot.
If wishful thinking makes us all sleep better at night (as a former landlord – new renter with only little skin in the game I am sleeping like a baby), it does not make fundamentals go away. SF is overpriced and is coming lower.
Whatever sustained prices from mid-2006 to mid-2008 is going going gone. VC money dries up, Big Tech are soon to trim further on payrolls, rich foreigners are less and less rich by the day, banks now distrust even their most reliable customers. Game Over.
The wit and wisdom of L A-Y:
http://www.signonsandiego.com/news/business/20051215-9999-1b15outlook.html
Everyone I know in Silicon Valley is getting laid off: I met with an engineering manager today and tomorrow I’m having lunch with a former VP of biz dev at a large tech company.
Another client called today and said “stop everything” (we’re getting one call per day like that).
One of my former employees, now at Google (having started pre-IPO) emailed me and said she was quitting and going to business school.
And the Dow is down another 700 points (evaporating how many more billions of wealth?) and making it clear that Monday’s rally was a sucker’s rally.
“Sluggishness”, ester? Sounds like Alan Greenspan’s “a little froth”.
leslie appleton young…obviously nothing more than a mouthpiece. she dont know shit from shinola, now does she?
From a 2005 CAR “forecast” re: Sacramento (the median has dropped there more than 50% since this was published):
“With housing prices rising strongly throughout most of the country, there has been widespread media coverage of the possibility of a housing market bust. A thorough analysis of the Sacramento-Arden-Roseville metro market, as detailed below reveals little danger of this. In fact, the local housing market is in excellent shape with a potential for significant housing equity gains, particularly for buyers who plan to reside in their homes for a long time. ”
http://web.archive.org/web/20051231064046/http://www.realtor.org/Research.nsf/files/Sacramento.pdf/$FILE/Sacramento.pdf
I don’t even know why they bother.
With these predictions, I think that Leslie Appleton-Young is trying to get her own watch site just like Lawrence Yun and his esteemed predecessor David Lereah at NAR. She is already on the Housing Bubble Hall of Shame – but it must be pretty cool for any “economist” to have his or her own watch site.
I will always be grateful to the davidlereahwatch for its link to socketsite. I first ventured here from there a couple years ago.
…speaking of tech, ebay just warned on revenue, and shares are down another 7% after hours (on top of the 14% they fell during the regular session).
count on massive layoffs throughout tech starting right about now, and continuing for at least two years as the world economy falls towards inevitable depression.
I think the stock market and the housing market are doing awesome. It seems like everyone is making up the numbers on the declining stock market, plus they are not siting any references. Down 700 points…link please? I can’t find that anywhere.
Not everyone in tech is being laid off.
I am not, still working.
And I currently have 2 FA positions to fill, each at $90K, can’t fine the right people, and I don’t even think that I am picky at all.
Worst is over my foot. These people have no idea how bad things are out there, and how much worse they’re going to get. This is not your average recession people.
Jamie Dimon also said this today, “If you are not fearful, you are crazy.”
@ester : “And I currently have 2 FA positions to fill, each at $90K, can’t fine the right people, and I don’t even think that I am picky at all.”
who can afford to live in SF earning 90k?
Well, I consider $90K average salary, not everyone has 2 comma on his/her W2.
If it is a two income family, $180K is not that bad.
“If it is a two income family, $180K is not that bad.”
or maybe they have some investment properties that
bring in a bunch of cash.
I feel one huge factor is missing from this thread and that’s the return of the 20% down payment. Let’s just say we wake up tomorrow and the economy is fine, that still means every home buyer in San Francisco is looking at a $150-$200K down payment for the standard $1MM 1 BR condo.
How many people have that kind of coin laying around? Not many…
http://www.payscale.com/research/US/City=San_Francisco/Salary
An even if they do, they’ll also have to adhere to more traditional debt service ratios which will mean high HHI levels.
Architect and Project manager (construction) are both wrong on that chart.
I continue to be astonished at the real estate industry’s self-defeating attitude, parroted by many (not all) in the industry who chime in on this board. The RE industry NEEDS prices to correct (ie fall dramatically) as quickly as possible. That is what will get volume moving again — they are paid on commission only when sales close, after all. Notice that volume has actually picked up in some inland areas that were hit hardest and probably do not have that far left to fall. The slow decline is a volume killer as far fewer are willing to make such a significant purchase in a declining market.
I know that it would be nice for those in the industry to have 2005 return where you could sell anything to anybody because everyone got financing and “real estate only goes up” so you had lots of willing buyers. But those days are gone forever. However, there is still money to be made in the industry when things bottom out and people start buying again. But until that time, this will be a rough way to make a living. I’m betting those looking to buy or sell can negotiate a very favorable fixed hourly rate (rather than a commission) as realtors will be glad to take the guaranteed income without the contingent risk, even though the overall transaction cost will be far lower than the normal 5%.
Ester, thanks for your comments. It’s good to know there is some sunshine among the clouds. Can you tell us what an “FA” is?
bobTrouser: lots of people living here making under 90k. According to the latest (2006) ACS published by the Census, the median family income for the City of San Francico is about $79,000 (median household is only $65,000). By tenure, it’s about $78,000 for owner occupied households and $45,000 for renter (of course for home-owning households this is skewed by folks who bought long ago).
@trip
i would love to see this happen. paying 5% to have a ‘real estate professional’ (whose formal training is $500 worth of books and a test) to take some pictures, spam listing services and babysit the house when the neighbors roll through is ridiculous, especially in over priced markets like SF. i’ve never seen a profession that requires so little education and creates so little enterprise value earn (relatively) so much for doing so little, lying and scheming (err, sorry, “selling”) an asset they have no stake in. craziness.
this is just classice econospeak. She really said nothing, just made lots of qualified statements that negate one another.
all she really said was
“things look to have bottomed unless they didn’t”
“If the California Association of Realtors’ 2009 forecast is accurate, the median sales price of a home in California will decline by 6 percent in 2009 while sales volume will rise 12.5%.”
For argument’s sake, lets say 6% decline in 2009 will apply to SF. That’s a $50,0000 right out of your downpayment on a $800K house. I am amazed that anyone will buy in that environment. Long term buyers? The recent highs will not be breached for 10-15 years. And “real SF” is still close to or at the highwater mark.
FA = Financial analyst.
It is amazing so many people here think that they can out-smart the market and time the marekt.
I am just a averge person, making not so much money. Try to make the best use of my money. Got into RE, bought over time and over different area (pretty picky when I bought – to the extend that people here like to say that I lied about those purchases). Incuring small cash flow loss TODAY, don’t know what is going to happen tomorrow, and don’t care that much either.
Have very good sense of security with my job, and that is it.
Good luck, all your smart cookies here.
@ bobTrouser……I recently bought a 1bdr condo (new construction) in SF and roughly make $90k per year. I would question a persons spending habits who can’t survive on $90k in SF. I don’t live an extravagent lifestyle but I am certainly am not a hermit or frugal when it comes to disposable income and enjoying city life.
Layoffs will be the nail in the coffin for bay area real estate. I know plenty of people laid off from high end finance jobs in the city (200K+) and they are having trouble finding anything new.
I myself was looking around for some cheaper digs (rent of course). I found a really nice renovated house in Brisbane on Craigslist for $2,200 a month – 3 beds / 2 baths. There was a link showing pictures which led to a real estate listing. Guess how much they are asking?
980K.
HAHAHAHAHAHA.
(2200*12/980,000 = 2.7% return on asset, not including taxes, insurance, and maintenance)
Assuming 9% return (reasonable %5 over 10 year treasuries) the house should cost:
$2200*12/0.09 = $293K !
Percent decline to fair value of 293K: 70% (yikes!)
It’s a long way down from here…
bobtrouser
loads of people in san francisco live great lives on less than $90,000. i’m making the most money ever this year, will end up around $55,000. i have no debt. paid cash for my used truck. rent in noe valley at $1000/month. i go on a small vacation every 2-3 months. i have saved $70,000 for a downpayment, not including 401k or stock investments. i live a great life here in san francisco and most of my friends of the same means do also. oh, and i only work 26-30 hours a week so i have plenty of time to enjoy my life my friends and hobbies. i do think it gets hard below $40,000 a year but not impossible.
and more on topic. it seems the system that has been holding RE prices up in san francisco is gone and prices will eventually fall. i feel many people in san francisco with lots of money have chose to buy above their means and we will see the fallout. i do not however think housing in the city will ever be cheap but i do think and hope it will be more affordable.
Links to house mentioned above:
Craigslist ad for rent:
http://sfbay.craigslist.org/pen/apa/879720532.html
House for sale:
http://www.movoto.com/real-estate/homes-for-sale/CA/Brisbane/834-Humboldt-Rd-110_342618.htm
Oops, $2500 a month – new numbers are still atrocious:
ROA: 3.06%
fair value of house at 9% ROA: $333K
i think the snark didnt come across in my post about the 90k. sorry about that. i shouldnt be snarky.
90k should be plenty to have a full and comfortable lifestyle. including buying a place to live. that the real estate bubble in the bay area has made that difficult to achieve is sad.
ester thinks it is a reasonable amount too, as long as you double it.
Looking for a new place:
How did you come up with this fair value of $333K? is it close to 10 yr rent??
Historically, up to 2000, SF has been 18 yrs.
My parents bought a SFH on Rossmoor street in 1993/1994 for $460K. by (maybe) 1997,it was valued at $380K. By 2000/01 when they sold, it went for $900K. Today, it is probably over $1M.
So, do I get worried over a 20% drop?
@ester
It’s basic finance. I am simply assuming that housing stock should return 9% (discount rate). This is around 500 basis points (5%) above the 10 year treasury. Of course, housing is more risky than government securities so it should be somewhat hire. If you think housing is only slightly more risky, you could use 6 or 7%.
annual rental amount / asset value = return
With a 9% return assumed, and the annual rental amount equal to $2500 x 12 months you get a $333K asset value.
Re. layoffs:
legal gossip site abovethelaw.com constantly talks about law firms’ quiet layoffs — can reasonably assume some of those high earners are getting dumped in SF
“hire”?
As a spelling nut, I’m giving “Homophones are your Enemy” a virtual hug.
But I also think “looking for a new place” is right. Except for his/her spelling…
Ester,
If you think everything is fine, you might want to hurry up and hire those $90K financial analysts. You may need them worse than you realize.
“Well, I consider $90K average salary, not everyone has 2 comma on his/her W2….If it is a two income family, $180K is not that bad.”
Just a quick reality check: $180K would put a household in the top 10 percent of household income. If such a family cannot afford the top 10 percent of SF housing stock, then things are definitely overvalued.
I should probably be more precise: $180k puts a household in the top 10 percent of the SF household income distribution. It would of course be well above the 90th percentile of US income distribution.
I think migh speling is fighn.
Actually, just misfired on the keyboard.
hire = higher
I was reading a jobs report at the same time.
gmh-
you’re asking a question to a person who claims to have 4 or 5 rental properties, but doesn’t understand that the rent she theoretically receives (I say theoretically because she’s a troll who doesn’t actually own this many properties) is taxable income. Somehow, she miraculously receives interest rates on the rental properties at rates only available to non-investment related real-estate. And when pinned down on the number she throws out there, she waves her hand and uses phrases like – “or thereabouts” as if she can’t remember how much she actually has paid for a piece of property.
Just a general grounding comment. The SF market is not in a vacuum. Any analysis needs to take into account not just SF prices, but prices in at least a 4 county area, if not the entire 9 county area. So, gmh, remember that many households with lower household incomes will gladly commute from safer price climes. Also, SF has always been priced at a premium to everything except Marin and some parts of the Peninsula. I don’t see that going away anytime soon. I’m a bear (and owner, yikes!) but am in for a long long haul, so I think we need to not only ground our discussions geographically, but also over a 10 year timeline. I will never understand the analyses that have tried to measure “return” over the last two to three years in SF proper…obviously, that’s a loser. Anyone who says otherwise is out to lunch. Don’t buy a house for the “return.” Buy a house to live in for a reasonable time frame. Would you amortize any asset over less than three to five years? I think not.
BernalDweller wrote, “Don’t buy a house for the “return.” Buy a house to live in for a reasonable time frame.”
That’s exactly right. But if you happen to buy at the peak of a bubble, you’re going to be paying a high mortgage, taxes etc. for a long time compared to what you would have been paying in rent. A painful situation especially if prices don’t go up for 10 years or more, which looks to be the scenario unfolding more and more.
as an investor in SF RE, one needs patience in times like these (cashflow sure helps)….but don’t worry folks, appreciation will come back.
BernalDweller – I agree that the income distribution in, say, Alameda County is lower than that in SF. That’s been true for a long time. But I’m not clear on what you’re trying to argue. The SF income distribution is what it is. Either it can support the housing prices if it can’t. If it can’t, then either prices need to fall, or all of the rich people in the Bay Area have to suddenly decide to abandon their beautiful homes (and excellent school districts) in Piedmont, Rockridge, Palo Alto, Atherton, Lamorinda, etc. and move en masse into SF. Do you really see that happening? And if so, why hasn’t it already happened in the past, particularly since SF housing prices used to be lower, making such a move *more* attractive in the past rather than *less* attractive?
looking for new place, what if the house was bought for 400,000 10 years ago? The 26,400 in rent is 6.6% return on investment. If the houses in the area are valued at $900,000, there is potentially $500,000 gross gain or 125% over 10 years, for simplicities sake, 12.5% a year, plus the 6.6, not doing too bad. And what asset class has even shown positive returns above 5%? Check the market lately? One can almost afford to settle for even lower rent and still come out ahead. Yes, I know that there are costs assoicated with holding the asset, but still, without doing all the math, it is not a negative return and above 5%. This is just one possible scenario, there are way too many moving parts and in reality no two sitauations are ever the same. My main point is that the simple model you use to value real estate is way to basic for any real world application.
I live in SF very well for way way way way way way under 90K a year.
Where there is uncertainty there is opportunity.
@ viewlover
It is irrelevant what the original price paid for the house is for all concerned except the current owner. I hope for their sake they bought at a very low price many years ago, however it is more likely they are in the same boat as everyone else who rushed into overpriced assets in the last 5 years.
The analysis I demonstrated is a simple and standard way of evaluating real estate. Unfortunately, the house is indeed worth around 330K. This can be taken as an immutable fact (although we can argue about the appropriate cap rate – I would say you could make a case for anything from 6-12% depending on your long term view of SF real estate). What is horrifying is how different the intrinsic value is from the desired market value. It is just one example of millions of the Alt-A cohort of mortgages that are going to bring us even further down the rathole.
S&P is on the verge of making its largest single downgrade, this time for Alt A paper (think high income, good credit, limited down payment, massive 500K+ mortgage): http://mrmortgage.ml-implode.com/2008/10/15/sp-doing-the-nasty-on-280-billion-in-alt-alargest-ever/
They see the inevitable collapse of the “higher end” market and are downgrading accordingly. I wish it wasn’t so, but alas, it is!
No lay-off foreseen here….
But, talk about a shrinking nest egg!
NASDAQ (Ode to the Techies): http://finance.yahoo.com/echarts?s=^IXIC
You cannot ignore this chart. It impacts this whole area.
Forgot to add…
The last time the NASDAQ looked like the above, people searched around to decide what was a safe place to put their money. They found housing…
Do you really think they will do that, again?
Check out these charts too (since Apple and Google workers are often talked about on SS as being big buyers in the city). Their charts are inline with the NASDAQ.
http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chdet=1224187200000&chddm=98923&cmpto=NASDAQ:GOOG;INDEXNASDAQ:.IXIC;NASDAQ:CSCO;NASDAQ:ORCL&cmptzos=-18000;-18000;-18000;-18000&q=NASDAQ:AAPL&ntsp=0
chippers, i’m confused, do you mean no layoff for you, or no layoffs for the SF Bay Area. Because we are definitely in for a ride here.
http://video.marketwatch.com/m/21155593/slowdown_hits_silicon_valley.htm?pageid=1253
It is a simple way for YOU to evaluate real estate prices. Rents are a moving target, rates of return are a moving target and the asking price is a moving target, even the comps are a moving target. The property may be only worth $333K to you, but that does not mean that it is not worth $900K to the person who ends up buying it. And it cannot be said with certainty that it would be a bad investment in the long term.
As far as overvalued assets, based on the market, that would apply to all assets, including equity markets. Hard to isolate real-estate in light of the overall economy and state that it is overpriced when apparently we are headed if not already in a deep recession.