CFAH

While the number of homes listed for sale in San Francisco ticked down over the past week heading into the holiday weekend, the number of active listings (729) remains at a five-year seasonal high and is now 73 percent higher versus the same time last year.

The number of condos actively listed for sale in San Francisco (473) remains twice as high versus the same time last year, not including the vast majority of unlisted new construction units available for purchase in individual sales offices around town (the unsold inventory of which currently totals around 1,200).

And the percentage of all active listings in San Francisco for which the asking price has been reduced at least once has ticked up to 21 percent versus 15 percent at the same time last year, or 150 percent more in the absolute having hit a four-year high last week.

Comments from Plugged-In Readers

  1. Posted by mr miyagi

    These data points, if accurate, are indisputable evidence that the housing market will be undergoing a massive price correction. All of the uber bull lemmings will likely eat their cockiness by 2016.

    • Posted by R

      Massive?

    • Posted by JR "Bob" Dobbs

      The beauty of time is that in the coming months we’ll know if the early July 2016 evidence indisputably indicated a coming massive price correction or not!* Stay tuned and see if you can claim bragging rights. You can short Case-Shiller if you wish to profit from your insight.

      * Well, actually, one can dispute right now whether the evidence foretells this. But I quibble.

      • Posted by Sabbie

        The Case Shiller ETFs are no longer around, they lasted less than a year. Probably the best short plays if you are ultra bearish on residential real estate are regional banks and homebuilders. Also big box home improvement store stocks. Or just short the broad market, because it will all fall together like a house of cards!

        • Posted by San Fronzischeme

          I wish I could back to 2010 and buy again at that price. I think we’ll go back to 2014 prices but not much less. The US economy is still fairly strong and not overheating or overblown by asset inflation like 2006.

      • Posted by anon

        I think the most likely situation is a change from a strong uptrend to a flatness. Once in the flatness I think it would be wise to then look for evidence of a decline.

      • Posted by Dave

        I’d agree. The signs are pointing to a leveling and, IMO, a small/modest decline. 10% – 15%. A massive decline? Not at all likely. IMO.

        • Posted by Sabbie

          You have to remember that after the last two busts, the Fed was able to step in and lower interest rates to backstop the economy. Today that is not really an option. Japan and Europe have not seen results by going negative. I’m not saying they won’t come up with some outlandish hail mary plans, but will they be effective…

          • Posted by Dave

            Its a trough call. Your points have merit – I just don’t see a “massive” decline per the OP in SF home prices.

            Plenty of good markets are actually undervalued. One can purchase a 2400 square foot home on an acre and a half, on a river and within a 25 minute commute of a booming business center. For 450K.

            The point? Real estate is local and tea leaves apply more to specific localities than to the overall market. RE is, IMO, a good investment now. Depending of course on the locality one invests in. I would personally not invest in Bay Area SFH RE at this point.

          • Posted by Sabbie

            I agree, I don’t see the decline being as severe as 2009, however I could see the downturn going on for much longer for the reasons above. Which is not a bad thing, we need to move away from the boom and bust FIRE economy and into something more sustainable.

          • Posted by SFrentier

            Sabbie, don’t you own RE right here in Frisco? Why you want a long drawn out flat economy and no appreciation? RU guilt ridden landlord that didn’t expect to profit from it all? Ex hippy morals clashing with material wealth getting in the way? If you ain’t evictin’, you ain’t cheatin’. Why not just enjoy the passive fruits of prosperity? Just curious.

          • Posted by Sabbie

            I bought property for the long haul, not to get rich quick. I am happy if it appreciates at the typical rate of inflation and wages. Anything else is unsustainable and actually dangerous.

            This Fed driven, boom and bust, credit based, FIRE economy is going to lead the country down the road to ruin, and much faster than you think.

            A slower economy would allow real productive business and savings to build up a solid economic foundation. But that would be bad for the large corporations that have purchased our government. Instead we have these speculative asset bubbles that are guaranteed to go bust again. Of course they front run all of the bubbles and then leave the sucker public and their pension funds holding the bag.

          • Posted by SFrentier

            I dunno, I kinda like the excitement of it all. Ride the wave, ride the tiger. It’ll be alright. Otherwise life = b-o-r-i-n-g!

          • Posted by Sabbie

            Volatility is fun in equities, but I do have a problem with rampant speculation in essential items like housing, food, energy. It causes a lot of pain for people who don’t have the option to participate.

        • Posted by Dave

          @Sabbie – Agree. A modest decline in Bay Area home prices would be good for everyone. And if it is sustained for a while that would be good too. IMO. A re-balancing to a more sustainable home price growth in the Bay Area is long overdue. And would be good for business here. And business expansion here.

          I have shifted my RE investments to Portland/Vancouver as that region has population growth, job growth and, every bit as important – affordability. Prices are starting to take off, but still affordability is likely will remain good for the next decade.

          The median income in Vancouver is around 55K and the median home price is around 275K. The average commute is 20 minutes or so. To the growing Portland/Beaverton job center. This is what the Bay Area is competing with. Seattle is a bigger competitor, but its affordability and commute times, though much better than the Bay Area, are not near as good as Portland’s.

          A downturn, to the extent it happens, will IMO be good for the Bay Area – and especially so if regional business and government leaders take that opportunity to address the current housing crisis.

  2. Posted by David

    Anyway this can be broken down by type of condo unit? 1, 2, 3+ bedroom, etc.

  3. Posted by mr miyagi

    Dave, please show me this mythical undervalued market. I only see evidence of a global real estate bubble, it is not San Francentric. It will be a huge slide in prices. Massive, huge, substantial, major…use any adjective of your choice. The Fed is out of ammo. There will be nothing in the arsenal to counter it. I don’t need to short homebuilder stocks as suggested, why would I take on any risk? I just sit with cash during times like this and then poach deals from over-leveraged lemmings. Zero risk and all upside.

    • Posted by SFRealist

      Yeah, this is definitely different than the 2015 bubble. Or the 2014 bubble. Or the 2013 bubble. Huge crash is totally definitely about to happen this time.

      • Posted by Sabbie

        Like I’ve said before, people called the last housing bubble in 2005, just because it did not pop until 2008 does not mean they weren’t right all along. Maybe a permabear is like a broken clock, right once a day.. but a person who says “it’s different this time” has never been right, ever, not even once.

        • Posted by JR "Bob" Dobbs

          People called the last housing bubble because they (correctly) recognized that millions of mortgages were being written with essentially no underwriting to people that could not possibly pay them and, in fact, were not paying them. And they recognized the dot-com stock bubble because valuations were way, way out of line with earnings. It was not simply “prices are going up and they seem too high to me” in either case.

          What is the underlying cause of and evidence for the current bubble, in your opinion? Is it just “prices seem too high” or “companies seem to be issuing a lot of debt” or something else? I ask because I recognized both the dot-com stock bubble in real-time and the housing bubble in real-time (no, I did not become filthy rich on that foresight either time as I’m too conservative to short markets, although I did avoid big losses). But I just don’t see any housing bubble primed to pop this time around, locally or nationally, although I do recognize the risk of a pullback.

          • Posted by Sabbie

            This time we have more like a business cycle on steroids than a specific bubble. Driven by zero interest rates. There’s no price discovery when capital is basically free.

            Excesses are everywhere- corporate debt, equities, private company valuations, real estate, sub prime auto loans, bla bla. Made worse because what little growth there is, is going disproportionately to the upper income bracket, so you cannot compare these to GDP as in the past. And the Fed is in a corner now, they can’t raise rates and they can’t drop rates. The American consumer, the engine of our economy, is caught between runaway real inflation of essentials like rent and health care, and flat wage growth, so they won’t be spending anytime soon despite low unemployment figures.

            In this case, local real estate will drop simply because of the next recession. Probably not like 2008, but on the other hand, the Fed’s hand are tied this time around. The “Lehman Moment” catalyst for the recession remains to be seen.

          • Posted by Gus

            As pointed out earlier, there is nowhere for interest rates to go now to help prop the economy. That doesn’t signal anything, but it does mean there’s less play for a softer landing in the event of a catalyst for a bust.

            Personal savings rates are pretty historically low. But household debt payments are also pretty low.

            Seems like there’s still a fair amount of buffer for the economy to shoulder more unsustainable activity (growth far in excess of the mean rate) before a bust. I wouldn’t call a bubble popping this year or probably even the next, though. I imagine for now we’ll see a flattening.

            A question is, how much speculation is going on in the market .. there’s lots of foreign money chasing RE at all prices .. lots of VC money chasing returns because nothing else yields a decent ROI .. how “spookable” is this market?

          • Posted by JR "Bob" Dobbs

            Thanks – we actually don’t see things too differently, although I don’t see a huge difference between reported inflation and what Sabbie calls “real inflation of essentials.” I’m aware of all the metrics both Sabbie and Gus note, and while I am concerned about the American consumer (at least those outside the top 10%), I don’t see that as a bubble-waiting-to-pop or a recession-in-waiting but the continuation of decades-long trends that will need to ultimately be corrected through political action, likely after I’m dead. Inequality is a bad thing for a lot of reasons, but the jury is still out as to whether it inevitably leads to recession.

          • Posted by anon

            Well, I’ve posted the Economist’s interactive chart a few times where you can look at housing price to income ratio’s and you can see that bay area valuations are getting stretched above historic norms. In the last bubble you could stretch and buy at 9x income due to lax underwriting, now you can buy at 9x income due to ultra low interest rates. History might not repeat, but it does rhyme as the saying goes.

            And we’re seeing some of the same bubble logic of lowering lending standards in the face of higher prices.

            “Q: Are 97% LTV loans at greater risk of default than loans with higher down payments?

            A: Borrower equity and LTV ratio are both important factors when determining the borrower’s ability to repay the mortgage in support of sustainable homeownership. Our analysis indicates that there is minimal difference in default risk for loans with LTV ratios greater than 90% up to 95% compared to those with LTV ratios greater than 95% up to 97%.”

            The reality is that few people default during periods of strongly rising prices. And just like in the last bubble people fall into the trap illustrated by SFRealist above, thinking that just because some risky behavior had no consequences last year that you can take it to the next level of risk this year. And for a while, the short term data supports that. Rising prices can paper over many foolish behaviors. But at some point you always run out of greater fools.

            The last bubble was national and across many income levels due to lax or non-existent borrower income verification. Now, I think if you look at valuations you’ll see more differences between regions and incomes. The bay area has the added risk factor that many of the incomes that are supporting these home purchases are being paid by companies that are unprofitable.

          • Posted by anon

            “As pointed out earlier, there is nowhere for interest rates to go now to help prop the economy.”

            While I’m not saying the Fed should or would go lower, there is precedent for interest rates going lower or even negative.

            “Europe already has a precedent: Banks in Denmark are paying thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates. Danish banks have increased some fees to compensate but never mounted serious legal objections.”

          • Posted by Sabbie

            Negative rates don’t work. They are trying to “force” people to take on debt then spend it, but the reality is that people want to save even more in this case, because it slows down appreciation of their retirement accounts, and it makes them even more uncertain about the future.

          • Posted by SFRealist

            We also have Apple and Google making a ton of money and paying very high salaries

          • Posted by Sabbie

            We also have this: the 100 largest U.S. pension plans face a combined $401B deficit, and have 77.5% of assets needed to meet future obligations. Makes you want to run right out and spend a bunch of money on your credit cards, right?

          • Posted by San Fronzischeme

            All very valid comments here. Yes the Fed is out of bullets. Yes local markets are unaffordable.

            But there is a macro-economic element that everyone seems to miss:

            The reactions to the GR were different between the US and the EU.

            – In the US, Obama tried the Keynesian solution and due to bad timing with the majority in Congress could only apply QEs. There were 4T pushed into the economy but through almost “free” money. BUT the country has postponed some major infrastructural upgrades and at some point these will be needed. If Trump manages to crush the GOP through his own stupidity we could see a Hillary presidency with the power to apply the policy she wants. This could mean Keynesian policy moves which in turn could jump start some healthy level of inflation through raises in wages.

            – In the EU the German-led austerian policy has been nothing short of a disaster. It has bred populism (the club of 4, BREXIT) and now voices against austerity are starting to be heard. The EU could be on the brink of accepting Keynesianism for the sake of putting back people to work to prevent a voter upset. This could also be inflationary.

            Inflation is the only way out of this.

          • Posted by JR "Bob" Dobbs

            Exactly right about the salutary impact of some inflation. Ah, I dream of a demo presidency and congress to pass the infrastructure spending programs we should have started 7 years ago. With a new supreme court majority to uphold it all. That would be a huge step in the right direction toward solving many economic, social, and political ills. Sadly, a Democrat House seems to be a very, very long shot (but fingers crossed).

          • Posted by Sabbie

            I’m not advocating for one party or another, just bringing up some facts, Trump actually wants to spend more on infrastructure than Hillary.

          • Posted by San Fronzischeme

            Trumps wants what’s good for Trump. He will say he wants something then if there is resistance in his base say the exact opposite. He’s not an ideologue. He’s not an ideas man. He’s a salesman selling one and only one product: Donald Trump.

          • Posted by anon

            There’s undoubtedly some difference between fiscal and monetary stimulus, but the difference isn’t going to make an impact in the face of the the massive size of the monetary stimulus that has been going on. You claim that Europe is trying “austerity” , but euro rates have been pushed even lower than ours, even to negative levels in some places. And the ECB recently started QE’ing some junk rated debt.

          • Posted by San Fronzischeme

            What we need is wage growth in the medium and lower incomes. Plus it would be a good social stabilizer since populism is fueled by the frustration that no matter how hard you work, you’re not getting the just rewards because of reason x, y or z. Populists will exploit a real malaise by redirecting the pain.

        • Posted by SFBayview

          Wow, when will US banks start paying negative interest rate to homeowners? When mortgage rate becomes negative, you can expect a huge jump in home price

          • Posted by Sabbie

            The negative rate mortgage is just a loophole, they don’t actually offer those mortgages, it happened with certain variable rate mortgages when rates fell. In Denmark they honored it, but banks in other countries say they will mount legal challenges to avoid paying.

          • Posted by anon

            Not quite a loophole, but the Danish system is different than ours. In their system, mortgage rates paid by borrowers are essentially tied to the market rates of the underlying mortgage bonds. (And you can always pre-pay your mortgage by buying out the equivalent bonds at market rate.)

            But regardless of the specific mechanics, the main point is that rates could be driven down further, though this might cause all sorts of unintended problems.

          • Posted by San Fronzischeme

            In France you can already borrow at a rate way under 2%… Fixed

    • Posted by Dave

      @ Mr miyagi – there are markets in the US with job growth, population growth and high affordability. On top of which the US is growing overall in population. These people will need places to rent. New immigrants and millennials are more likely to rent hence a positive for the SFH rental market in many locations in the US. Portlan/Vancouver is undervalued for one example nd the recent growth in prices there – putting it at the top in recent price gains – is indicative of that. There are even more affordable markets in the US with good up-side potential. Do the research.

      One can get 8% plus ROI on SFH rentals. With the potential of good price gains in coming years. If things go bad for a while, the demand from a growing population for housing will remain. For rentals more so in a bad economy. I could lower my rents and still have a nice ROI. But I don’t foresee this bubble collapse across the board that would force me to do so. Certainly not in the areas I’ve done due diligence on before purchasing.

  4. Posted by mr miyagi

    @Dave, I will try not be a pr*ck here, but after speaking freely about many markets being undervalued you reference Portland/Vancouver as an example of that? Prices there, and everywhere else, are totally out of line with incomes and do not represent lucrative cash flow buying opps on any level if you are a sane investor.

    There are not 8% true cash on cash returns on SFR’s anywhere right now. Not even close my friend. You only see pro-forma numbers in that fluff range of 8% from overzealous brokers trying to pack value into a below average investment so they can rip a commission.

    THIS MARKET WILL BE CRATERING. I am no perma bear by any stretch, I call the market what it is at all times. Although in all fairness, all of the highly successful investors I know are generally pessimists like me when it comes to investing. That being said, I was brokering multi-million dollar apartment buildings and investing in them circa 2005 and knew the market was going to tank. I liquidated and went to cash. Even other broker friends I worked with were in total denial for 24 months after my attempts to slap sense into them. I am no longer a broker because I made fortunes during the downturn. This market feels exactly like 2005/6 to me.

    Obviously lending standards are different now. Who cares? Has every bear market in history been a result of loose lending? The answer is no. Do some research on the Savings and Loan crisis, or the tech bubble bursting, or any number of historical events that cause a bubble to collapse under its own weight…there are a myriad of factors.

    You are foolish to think this will be a flattening. The only flattening will be bulls being flattened by their awful levered real estate entanglements. HOUSING GETS SMASHED SOON.

    • Posted by SFRealist

      HOW SOON WILL HOUSING BE SMASHED? (and why are you shouting?)

      I’m perfectly willing to agree that there will be a large drop in housing prices at some point. But do you mean in two months? Two years? Before 2030? It’s not so impressive to proclaim THE SUN WILL GO DOWN without giving us a time, because everyone knows it will go down eventually.
      So, when?

    • Posted by Dave

      We’ll have to disagree. I’ve been getting 8% ROI on SFH rentals for a decade now. Cash on cash. Not in California. My best ROIs are in Ohio.

      Speaking of which and of affordability – the average sale price for homes in Cincinnati is 130K. The median income is 56K. Those numbers are from last year but the point is there are a number of metro areas in the US with historic affordability levels. RealtyTrac put it at 42% last year. I am not talking Detroit either. The places I am referring to have job and population growth and low unemployment.

  5. Posted by mr miyagi

    SFSurrealist, Yes I am indeed shouting, this is a shouting matter. The timeline for the home price pancake flattening of the 21st century is hard to nail down exactly because it all hinges on how our unhinged policy makers react to the approaching downturn in prices and the coming coming recession. To put it simply, my bet is that without QE4 you will see a REO market again inside of 12 months in many inland and secondary markets. Home values are conservatively 50% overvalued in most markets. I am not saying the market is turning already, I don’t think it has even peaked yet. There is still so much dumb money to be deployed.

    • Posted by SFRealist

      Well at least you have a time frame. I also have a prediction: a boring plateau. THIS WILL NOT BE DRAMATIC.

  6. Posted by MR MIYAGI

    @Dave Quite a shift to go from referencing Vancouver and Portland as undervalued market to the midwest. In fact just after you referenced Vancouver while I was still laughing, I randomly saw an article from their own government talking about how their real estate market bubble was going to pop soon. It was in the Vancouver Sun yesterday. 8% cash on cash surely must include your third party management fees since I am guessing you don’t live there? Don’t tell me you remote control manage those houses there yourself because then I will know you are lying. We all know you don’t fly out to fix toilets. It is standard practice for lease up fees to be 50% of contract rent so there is no way your actual cash on cash return is over 8%. I have too much experience as an investor and broker to believe that. @SFSurrealist, typically a steep mountain doesn’t have a mild plateauing downslope. THIS WILL BE DRAMATIC. SEE YOU ON THE OTHER SIDE.

    • Posted by Dave

      No I don’t fly to Ohio. But I travel to Portland often as I love the area. My 8% return includes the PM fees and I have a marvelous PM. In fact I do PLs with the PM and am getting an 8% short term return on those. Secured by RE.

      No shift. There are, as I said, a number of affordable markets. More East of the West Coast. I did not say undervalued. I said they are affordable.

      I don’t know what you gig is. I am doing fine with my RE investments and will continue to do so. Due diligence, due diligence and due diligence.

      BTW, down markets are an opportunity and, to be sure, having cash is always good as a play. Check out Riverscape in Portland. That is a success story out of the bottom of the last down turn. I participated in it. This stuff, these opportunities are real.

    • Posted by Dave

      To be specific, I purchased a new home last year for 155K (as part of a 1031 out of a California rental property). It rented in 1 week to a military couple. The home is near the largest military base in the US. Military folk make for great tenants.

      The monthly rent, after the PM fee is deducted, after insurance and property taxes, is $1335.

      The home is new and under warranty so upkeep/maintenance is not a factor now.

      That aside, do the numbers.

      • Posted by Jimmy The House Flipper

        Wow! That’s a great ROI … Are you talking Fayetville NC?

        • Posted by Dave

          No. Its Ohio. Butler County.

          There are several markets today with good rental SFH ROIs. Its a matter of research. I am not familiar with the North Carolina market.

  7. Posted by Gus

    Sometimes it’s helpful just to take a deep breath. While I’m not sure whether it’s wise investing in local RE markets, I can definitely recommend becoming less invested emotionally in this argument.

  8. Posted by David

    I love this debate. Keep it going guys.

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