CFAH


Click to enlarge. And once again, a bit of foreshadowing. Yes, with regard to local housing.

Comments from Plugged-In Readers

  1. Posted by anon

    And? After the last troubles in the stock market (dot com), real estate had one of the biggest booms ever. People wanted to put their money into something tangible rather than just numbers on a screen. Fact is, no nice property in a good neighborhood is going down 60%!

  2. Posted by scurvy

    Convenient that they’re all tech stocks with bloated PE’s (on a trailing and forward basis).

  3. Posted by PostDoc

    W00t! Go DNA!
    Cash-flow positive pharma and biotech are great places to be in unsteady times*. Go Gilead, go PDL (wait maybe not them).
    People may cut back on new cars, fancy gadgets, and new computers, but they’ll keep paying for life-improving and -saving drugs no matter what.
    Build biotech. Feed the monster.
    *Oh wait, you mean there are like a thousand other bio/pharma companies that have been pummeled? Forget about them, focus on the winners!

  4. Posted by eddy

    you forgot CRM, Ebaym YHOO

  5. Posted by Badlydrawnbear

    anon is correct, after the last stock market implosion investors where looking for a safe harbor and and with interest rates dropping to historic lows they moved into RE big time and helped feed the bubble.
    The difference this time is that the bubble bursting is real estate and not tech stocks. Normally a recession burst real estate and adjust prices, in this case it’s real estate dragging the world into a recession.
    So the idea that suddenly, after watching major financial institutions become insolvent due to bad RE deals, the idea that real estate is poised for a sudden turn around is just delusional.

  6. Posted by badlydrawnbear

    sorry for the exceptionally bad grammar above, I was multi tasking 😉

  7. Posted by FSBO

    Good points bdb, but delusion has always been a key component of our prosperity.
    And don’t forget VMW.

  8. Posted by dub dub

    The whole tech “bubble” of the last 15 or so years (lack of business models, crazy valuations, lottery exits) may have been (indirectly) fueled by loose credit.
    After all, tech was alive and well before the craziness began in 93 or so (as many know, apple, microsoft, and genentech were started in the 70’s).
    There’s an interview with Tom Perkins somewhere that discusses the early days of Genentech, and tricks they used to fund this first biotech business in an era where the money did not flow so freely as it does/did recently.
    If we return “permanently” to that type of environment, it probably does not bode well for much of the SF startup scene, much of which is as useless as the financial engineering complex which is being so thoroughly destroyed.
    Impossible to predict anything right now, of course!

  9. Posted by chippers

    Anon,
    You are giving such an over generalization!
    Badly Drawn Bear is right on the money!
    On its own, tech is doing well. The bursting of the housing/credit bubble is pulling tech and much more down. Good companies are announcing windfall quarterly results BUT they are hesitant about future guidance because of the overall state of the economy based on this housing implosion.
    Housing prices WILL catch up with GOOGLE’s downward trend, mark my words!
    As unemployment picks up, more people will be on the Internet. Tech is far from dead. Tech will just be tooting along, not soaring, not completely crashing (like in the dot.com crash)…tech will just get by.
    And, as unemployment picks up and stocks drag low, you will see major changes in the housing market here, in all districts. Even the poor Trust Fund Babes will be feeling the pain if they are not feeling it already.

  10. Posted by anon

    You don’t get it. Options affect housing only to a certain extent. What it affects more is discretionary spending in the form of nice cars, vacations etc. etc. What this post, and chart, should be about it JOBS. LAYOFFS affect housing much more than options pricing. HP has had layoffs, Ebay has had layoffs, people loosing their primary form of income- this is what affects the housing market locally. Give me a graph of the bay area unemployment rate coupled with anecdotes of the top bay area employers conducting layoffs over this useless(in terms of association with housing) one anyday.

  11. Posted by anon 10:27

    This also is kind of moot because pretty much a chart of any stock’s performance from July ’08 to present is going to look like this…

  12. Posted by San FronziScheme

    I have the feeling that Tech now is a full part of the economic cycle. Not the leader as was hoped in the late 90s, but A leader in the pack.
    Therefore it is affected by general economical factors. It didn’t suffer too much in the feedback loop coming from the first wave in the current RE crash but it will be affected by the current and future waves. Which is why they’re cutting down jobs.
    Some will shine in this environment. I am surprised eBay is not doing better as more people are looking for bargains and refusing more and more to pay full retail for high-margin products.

  13. Posted by Chippers

    PS-What will the Internet offer the unemployed?
    For the price of a connection, one receives:
    1. Cheap communication-Besides, email, people will have phone and video service to speak to friends and family.
    2. News.
    3. Entertainment.
    4. Cheap porn.
    Now, this is all paid by advertisement. Who will be advertising? The Wall St is in another tailspin today. So, revenue for these Internet companies will probably drop off a bit for a short while before actually generating more jobs, ect…

  14. Posted by Chippers

    Anon…
    We are dot.commers. It effects us in BIG ways. We have been following this website for awhile because we were on the sidelines of purchasing a home. We are not on the sidelines anymore, thanks to this grand implosion. The company is tooting along. Jobs, for now, are safe. But, the overall economy impacts us all!
    Silicon Valley’s revenue (bright companies) are built on:
    1. Advertisement of other companies, who are mostly outside the tech industry (Google, Yahoo and such)
    2. Consumer purchasing power (Apple and such)
    3. Company purchasing power for corporate networking needs (Cisco, Oracle, Sun and such).
    4. Overall consumer use for building the infrastructure that we are using right this very moment (lots of companies).

  15. Posted by G-man

    Um, Scurvy… are those really bloated P/Es still? (HPQ 8x, GPS 8x, ORCL 9x…these are historical lows for all of these stocks). But, you are right…they *did* have bloated P/Es in many cases.
    But as of right now, the biggest “inflated P/E” around is still housing. Average home price in SF is $735k. Average household income is $70k. That’s a 10x multiple. Historically, the house price/household income multiple has been about 3.4x (that is a national multiple from 1968-2007). I don’t know about you guys, but I can’t believe that this real estate bubble still hasn’t really popped. It will.
    Anon: you are probably right that it might be a stretch to think that a nice house in a nice neighborhood probably won’t go down 60% (but maybe not). However, given that most people put 20% down, the house only has to go down 12% for that person to lose 60% of their equity (actually really only 7% when you consider they will need to pay 5% fee to sell the house). Leverage sucks on the downside!
    I think the point of the graphs was to show that many bay area companies are now hurting. When that happens, they lay people off. When people have no job, they can’t afford their mortgage and they sell their house. And when there are no buyers, they drop their price, and still there are no buyers, so they drop their price…and so on.
    All you SF real estate bulls, I hope you enjoying all the crack you are smoking. But, crack addictions never end well.

  16. Posted by mrbogue

    USO going down, USD going up against other currencies, the deflation monster is hungrily digging in the housing and stock asset cookie jar.

  17. Posted by TechDefender

    Its pretty clear when you extrapolate the yellow line out to where it meets the Nasdaq 50 day average that biotech will be the next bubble. I think the resulting biotech rally will fuel innovation in tech companies for years to come.
    Off topic, socketsite- I saw you guys had some problems earlier in the week good to see you guys back up; don’t forget to be a good net citizen and push up the ttl on your name record.

  18. Posted by jessep

    I’m only buying Berkshire Hathaway.
    No other business in America deserves my money.
    I’ll keep my house even if it goes down 80%. I bought it because I love it and I love living here.

  19. Posted by jessep

    @techdefender
    “Its pretty clear when you extrapolate the yellow line out to where it meets the Nasdaq 50 day average that biotech will be the next bubble. I think the resulting biotech rally will fuel innovation in tech companies for years to come.”
    Technicals mean absolutely nothing. Charts do show trends but they are not predictive in nature.
    Focuses on businesses that build value for their shareholders over time, are honest, and have long-term competitive advantage (high entry costs, simple but NOT easy businesses)
    I learned that when I flipped the chart upside down and I got the same answer..

  20. Posted by tipster

    A good chunk of silicon valley doesn’t build anything that anyone will pay for (facebook, etc.). Another chunk of companies like zillow in seattle, don’t have a business model that profitably supports as many people as they have.
    What happens to all those people when investors start demanding profits?

  21. Posted by Michael L.

    Clayton Homes – fantastic job with very little fall out.

  22. Posted by denise

    So, with tech folks losing option value and jobs and biotech job growth slowing, who is going to be buying all those expensive places at the Infinity and Millennium? With 10%+ unemployment in California and the Asian/Russian buyers now out of the market too, when do these two buildings start loweing prices? Or, would they prefer to sit on them empty until demand starts to catch up with supply (2011?)

  23. Posted by waiting2nest

    Denise, I agree with you 100%. With median salaries at “only” $70K, I’ve always been astonished at the proliferation of luxurious or high-end, overpriced new developments (Millenium, Inifity, etc.) over the past few years. Now that cheap and easy credit is no longer available and “rich foreigners” have also recently lost a lot of paper wealth, who’s going to buy up all these units?

  24. Posted by Dan

    G-man wrote: “Average home price in SF is $735k. Average household income is $70k. That’s a 10x multiple. Historically, the house price/household income multiple has been about 3.4x (that is a national multiple from 1968-2007).”
    First of all, the average household in San Francisco is a renter, not an owner. (Unlike most of the USA, San Francisco housing is predominately rental.) So the average household income does not predict average home prices.
    Second, the national income multiple for homes does not predict San Francisco home prices. Homes have always been more expensive here than nationally, and that will not change.
    A prediction of an average San Francisco home price of $70k X 3.4= $238,000 is without logical basis.

  25. Posted by Gavin

    Dan, if median incomes are 70k and the income multiple falls to 7x is a price of 70k x 7 or approx 500k a reasonable price for San Francisco? This was the price in 2003.
    If other areas in California can fall to 2001 prices why can’t San Francisco fall to 2003 levels?

  26. Posted by sparky-the-bear

    Gavin,
    What did you get for $500K in 2003? Nice Mission and Glen park houses could get $900K+ in 2003.

  27. Posted by jessep

    @Michael L.
    Clayton Homes = Berkshire Hathaway subsidiary. Yay for Berkshire

  28. Posted by Dan

    I’m not predicting where prices will go– and no one knows– but median income is not a useful measure. For many years, the median priced home has been affordable to those in the top 10-20% in income. If only the top 30% in income are potentially in the market for market-rate homes of any price, then the median home might only need to be affordable to someone in the top 15% of income. It is more complicated than that, of course. But the change in income of the highest earners might be a better predictor of affordability than the change in median income.

  29. Posted by unearthly

    The lack of availability of exotic mortgages will cause the buying pool to shrink dramatically; affecting new buyers and move up buyers. Combine that with rising down payment requirements and mortgage rates as risk premiums rise. Unless the USG decides to destroy the dollar, I’m not sure how anyone can bet against deflation.

  30. Posted by BernalDweller

    Dan, you’re right to point out that the SF multiple is not directly tied to median income, since the majority rent in the city. However, there is a correlation to be sure, which I have tracked over the last 25 years or so, and my belief is that a reasonable multiple here is roughly 6-8 times median income. It may be more than that since income disparity has increased dramatically over the same time period. I’m not saying this will be where we return to, but it is one measure to compare against, since the loan terms we are returning to were in effect prior to the exotic loan craze. Of course if unemployment reaches beyond the 8% level here, all bets are off and the price decline will be even larger as rents fall.

  31. Posted by G-man

    Dan, I totally agree that SF should command a higher multiple than the national average (I pointed out that 3.4x income was a national figure). However, it is now at 10x.
    BernalDweller, I would love to see your data…would you be willing to share or point me in the direction of your source (thank you!)? Bernal Dweller says 6-8 times is the right multiple for the last 25 years. Given that all asset classes outside of real estate are at more than 25 year low valuations, I think 6x might be a safe bet.
    That means the SF real estate market is going to fall 40%.

  32. Posted by f.i.e.a.

    whatever, g-man. How long have you lived here? “That means” more than anything you have said, as you seem to lack a fundamental understanding of historic values.

  33. Posted by paco

    yo g-man,
    looking at median income is not a good gauge. in high value places (like sf) we have much more of a ‘barbell’ shaped spread of incomes; lots on the lower end, fewer in the middle and lots on the high end. so you take the fact that most people rent (the lower end) and the resulting pool of buyers is much more capable of affording sf prices.
    pretty simple analysis really.

  34. Posted by G-man

    Paco…I totally agree about the barbell in incomes and the shortfall in using median. I don’t have handy any historical median HH income for the high-end markets (Marina, Pac Heights, whatever) or historical house prices for those areas. If anyone does, please share with us. My guess is we are still well above historical norms even in those high-end areas. I ask…why would we not go back to historical norms? Why? Because SF is different? Because of all the credit that is available out there?
    f.i.e.a., I’ve lived here almost 8 years. My first place I rented in 2001 was $3200. The prior tenant paid $5200, pre-crash (about a 40% drop). If you have such a great “understanding of fundamental values”, please share it with us. “Fundamental values” are what I’m trying to get at. Not values that are pegged at the price of the greater (or perhaps, greatest) fool that made the last purchase.
    I believe that, over the long-term, there is a fundamental link between how much people make and how much they spend on a property and/or on rent. Seems pretty elementary, right? (BernalDweller says he has observed a 25 year correlation in SF.) I also believe that this relationship will tend to hold over time (aside from temporary shocks like a dramatic increase in credit availability).
    So, how do you get to a fundamental basis for today’s real estate prices in SF?

  35. Posted by paco

    the same way you suggested except you need to focus on the incomes of the pool of buyers-not the pool of renters/buyers.
    easy example as bernal dweller noted; two earners with hh income of $250k can spend 6x (thats $1.5m).

  36. Posted by sparky-the-bear

    G-man, why a 25yr indicator? why not 15yrs? Why not 10 yrs? Ten years ago I bought a Mission 3 unit for $350K, I don’t think I will be able to again. For one thing if the same place goes down to $600K I’ll buy it in cash. That is well above your 7X multiple, and if the mission is the “median” (which it may be) then lots of other hoods will price well above the median.
    Is the SF “different”, yes. It is different than 1990’s SF, because there are good jobs now!

  37. Posted by gman checker

    G-man,
    You grasp the barbell, but you’re not grasping that that while median income has not increased that much over the past ten years, the median income of homeowners likely has – meaning you need to determine the size of that part of the barbell. It’s pretty common knowledge that the rich have benefitted more over the past ten years than have the middle and lower classes, so you need to add that to your equation. The multiple may not be as “out-of-whack” as you assume.

  38. Posted by G-man

    Paco…that is a good point about the income of buyers not renters. I’m pretty sure it would be difficult to get that data. I would still bet that the multiple is very, very high versus historical levels. Maybe I’m wrong…if anyone has any data, please share. (Also, with all the layoffs hitting, options becoming worthless, and bonuses being paid down, it would make sense that incomes of SF homeowners in 08 will be lower than in 07).
    Sparky, I don’t care what time frame you use (25 years was Bernal’s), all I’m saying is that house prices should be fairly closely related to incomes over the long-term. Do people really disagree with this?
    gman checker. All those rich people just saw their porfolios cut by a third over the last 4 weeks.

  39. Posted by gman checker

    G-man – two thirds of 3 million is still 2 million.

  40. Posted by waiting2nest

    Interesting discussion, and good points made by all.
    What I’m wondering is: were banks really lending 6-8x income BEFORE the availability of exotic loans? Was that really the norm? And if banks are retreating back to pre-bubble lending standards, does that mean banks TODAY are still willing to lend 6-8x income to buy homes in San Francisco (assuming you meet all other qualifications – i.e. min. 20% down, high FICO, low debt, etc.) – – just because banks accept the fact that it simply costs more to live here?
    Paco, you mentioned that HHI of $250K could buy a $1.2MM house (6x income). Personally, I can’t imagine being that much in debt. I still plan to buy a house again, but only one that I can comfortably afford @ max 3x HHI. Am I the only one in SF who doesn’t want to be house poor by spending 6-8x HHI on a house????
    These are not criticims. I am really just curious – – and a bit astonished.

  41. Posted by BernalDweller

    Waiting2Nest: Remember that there are a nontrivial number of cash buyers in SF, so that skews things somewhat. I wouldn’t jump to the conclusion that because the multiple is 6-8 that banks are lending to that ratio.
    G-man: Here are some data points off my tracking, based on year’s average medain SF income and median house price:
    Year Wage Median Price Multiple
    1976 12,000 52,000 4.33
    1980 16,000 110,000 6.88
    1985 24,000 140,000 5.83
    1990 30,000 288,000 9.60
    1995 36,000 255,000 7.08
    1997 41,000 270,000 6.59
    2000 54,000 400,000 7.41
    2005 62,000 670,000 10.81
    These are pretty rough averages, so I’m sure someone could try to pick these apart, but I stand by the rough trend in multiples. I would argue that two-earner couples made a big impact on multiples and that it is unlikely we will ever see a multiple below 6 again unless things completely explode here.

  42. Posted by condoshopper

    using average income (mean, median, mode, whatever) to gauge fair value for home prices is only relevant to the degree of which only people who work in a particular live in that area. ie. say there’s a town in the middle of nowhere, with some prospects for jobs but no other real attraction. the home prices in that town will purely be determined by the wages offered by the jobs there. SF however, has buyers that never intend to work here, whether it’s because they are rich and don’t need to work, or a vacation home, etc.

  43. Posted by NoeValleyJim

    The times income statistic is mostly useless anyway, because what you should really care about is what percentage of your income goes to carry the mortgage. When interest rates are low, the “times income” number is going to go up.

  44. Posted by BernalDweller

    One other interesting (although now way outdated) data point…per the Bureau of Labor Statistics, San Francisco city/county had the fifth highest weekly average wage of all counties in the nation in Q1 2008 at $1,639/week. Now obviously this is probably lower now, but that equates to $85K annually. Of course I agree with condoshopper and NVJ…we’re just having fun with numbers here.
    http://www.bls.gov/news.release/cewqtr.nr0.htm

  45. Posted by G-man

    NVJim, good point–the times-income multiple really only works with constant interest rates–so we should adjust for that.
    That said, if your affordability metric is the right one (i.e., house prices are determined by the dollars that households have available to make mortgage payments at prevailing rates), then with $1mm+ jumbos at 8.5-9% now vs about 5% in 2005 , how much should real estate prices be down from 2005?
    If 10x was right in a 5% rate environment, it sounds way high now…

  46. Posted by waiting2nest

    G-Man: I was going to post a similar comment but you beat me to it 😉
    BernalDweller: I didn’t really believe that banks would lend to the 6-8x ratio, but wanted a sanity check. Also, thanks for sharing your data.
    For what it’s worth (and to NVJ’s point), here is a graph showing how much interest rates have fallen since 1985 (couldn’t find one that dates back to 1976) which correlates to rising home prices and P/I multiplier in BD’s data.
    http://www.shelter-rock.com/2002%20Rate%20Chart1.htm
    With interest rates rising, absence of loose lending practices, recent loss of wealth, and of course the economy, it will interesting to see how far SF RE prices fall.

  47. Posted by mktwatcher

    Just keep sitting on cash and see what happens. Although your basis will be safe – inflation will eventually eat you up. – The rest of the world is parking money in the US now. We continue to delever. The dollar is strengthening. Fear drives money to safety – and believe it or not – the US is considered safe. Rents are still high in SF. Interest rates are low. Paper non-hard asset investments are risky. Sounds like high quality dirt isn’t such a bad idea.

  48. Posted by mrktwatcher

    On top of my prior observations – the government is now moving toward consumer-based bailouts. Lending will be loosened by government fiat – otherwise property values will continue to decline – and that would be political suicide. Those who borrowed on the increasing values of their homes deserve a spanking. However – high quality real estate is still less volatile than equities.
    Remember – the people getting the most abuse now are speculators and the highly leveraged – neither of which deserve a bailout. However – people who will now buy homes to live in and raise a family will get interest rate and looser credit benefits.

  49. Posted by mktwatcher

    I’m pretty convinced the government moved away from taking on the toxic assets of banks because the banks were unwilling to mark those assets down to their true impaired value. Anyone read Michael Lewis’s article?

  50. Posted by FSBO

    mktwatcher – yes, the Michael Lewis article in Forbes was great. The analogy of fantasy football to the CDS market was really helpful and funny – and absolutely astounding.

  51. Posted by Laughing Millionaire Renter in Marin

    That Lewis article was fun.
    “the government is now moving toward consumer-based bailouts”
    IMO the Feds moving away from buying toxic mortgages is really nothing more than a tacit acknowledgement that the real estate fiasco is too big to bail. Housing will have a long grind downward, and I think 2009 will be very eye-opening for SF. I think SF will see 40%+ declines in prices, on average, over the next 5 years (with the bulk of the decline coming in 2009-10).
    About shifting the money towards consumer outfits (ABS for credit cards, auto loans, etc.), I wouldn’t read too much into it. They had the money ($700B) – might as well spend it. The banks’ bonuses are safe, now how to ensure that the ABS financial institutions stay “solvent” long enough for them to pick up their winter bonuses. It’s tough converting every Amex into a bank holding company just so they could borrow from the Fed to pay their execs, after all. Consumer spending is going to crash anyway, on par with what happened in the Great Depression, except that now consumer spending is 72% of the economy instad of roughly 50%.
    It’s been a cynical ploy right from the start IMO. I don’t think Bernanke for even a second thought he could avoid a deep recession (I’m still of the view that they wanted one because the credit edifice had no “end game” – a theme Lewis mentions if I remember the article.) It’s all going according to plan…
    The contrary view is even more scary, namely, that Bernanke really thought that by his liquidity injections and alphabet soup lending store he could avert the inevitable bust. If he really thought that, then we have total fools running the show and a crash landing is inevitable (it probably is anyway). They started with stimulus packages and rate cuts well over a year ago. The result is a full on global panic (after a short lived but very destructive mini-commodities bubble). After such “success”, it should be clear that they are not going to be the ones to get us out of it – only time and a destructive deleveraging can accomplish that.

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