And let me follow suit and correct you, young man: I think you are referring to a one-dollar bill and not a piece of paper. Dollar bills are valuable because they are accepted as payment. But real estate is not a currency. The car I bought dropped in value as soon as I left the car shop but the price I paid stayed the same.
I'm a very successful investor and here are some advice:
1) Never chase bottoms or tops - go for the meat of the run
-- I sold the asset I bought in '95 in '99 (not the SF market) with a 300% return (FANTASTIC!)
2) Take profits and wait for next opportunity to reinvest
3) Never listen to the so called professionals (brokers, analysts et cetera - info to biased... ;)
Time will tell but I'm on the sidelines, waiting to get in when I either see a market capitulation (increased volume and much lower prices selling on ask) or that there is a confirmed bottom. As I've said, I'm not afraid of paying more, I just don't want to buy on the way down... Until then I'm making a great risk free return while everyone that bought over the past 24 months are either under water or in foreclosure with a very high burn-rate.
Let's revisit this discussion in 12-24 months and see if S&P/Case-Schiller is either up, flat or down... Since I don't have a mortgage I can afford to treat to a coffee. lol
Housing price will NOT stop going DOWN UNTIL 50%+ of these so-called "pros" stop cheerleading, and San Francisco is NO EXCEPTION. This is called sentiment index, and it simply works!!!
The past real estate bull market started in 1997 and ended 2005. It will take more than a few years to unwind and de-leverage this bubble. The S&P/Case-Schiller Index is now down 36.15% in San Francisco since May 2006 when it topped out at 218.37. It's down 26% so far this year alone (Dec '07 - Oct '08).
I think real estate can be a great long-term investment if you time it well and you can (investments are all about timing). The folks that bought into the bubble market in 1989 didn't get their money back until 1995-1997. Investment takes a lot of discipline and patience.
I think we are still about 12-18 months away from a confirmed bottom (3 consecutive month of S&P/Case-Schiller increase, decline in inventory, prices starting to stabilize, rent versus buy multiple around 15 et cetera). But it could take much longer. Until then my monthly housing expenses are about 50% of a owner plus I'm making money on my future down payment. My overall cost of living has actually become much cheaper thanks to the financial crisis. I love the free market!
The point I've proven here is that a) there is enough data available for the individual consumer to make their own educated decisions, b) real estate agents are biased towards sales to cover *their* bloated mortgage (i.e. glorified car salesmen) and c) it's possible to time the market by analyzing different data points and not listening to the cheerleaders.
Happy New Year! :D
If he's really done as much analysis as he claims and fully understands the rent vs. own equation, then he's smart enough to figure out if he'll ever buy. He probably won't because he thinks that there's some magical point where ownership will cost half as much as renting here in SF. That, we all know, will never happen.
He also claims that "several" foreclosures are happening "on his street" in Pac Heights. Total and complete bull sh*t. Please point the rest of us to this magical street where we can all buy Pac Heights homes for half price. I'd like the exact address, please...
The reality is that things are flat here in the city. If "per" wants to buy in bayview/hunterspoint, then he will find all kinds of great bargains. If he wants to buy on his street in Pac Heights, I think he will find no bargains (except for the imaginary foreclosures).
I love the fact that you keep telling me that I'm not capable of digesting and analyzing data or interpret economic patterns. Maybe I should listen to NARs Lawrence Yun? He's probably the most honest and unbiased guy on the planet since Nixon. lol
The real problem for you might be decreasing commissions but the real problems for real people are the unethical and fraudulent activities in the real estate and mortgage industry that got us here. This reprising process will take time, it's a natural part of a business cycle. Especially a cycle that has been artificially supported by loose lending standards, historically low interest rates and heavy marketing to own at any cost.
Prices *always* reverse to the mean and so will real estate. Sellers in San Francisco are still holding onto the idea that their home is *worth* as much as a year ago or at least what they bought it for. They confuse price and value. And if we are looking at historic patterns: the last real estate crisis lasted for almost 5 years (1989-94). I know since I bought in March 1995 after a few months of stabilization and paid 10% above the lowest price and was therefore never under water.
This is a great discussion! :)
I live in Pac Heights and we have several foreclosures on my street and several of the multi-million mansions up for sale. That is telling me that the stupid money is getting screwed and the smart money is getting out. It's never wrong to take a profit and there are always several opportunities to get back in the market.
I agree that we are seeing relative strength in San Francisco due to the unique micro markets. But I'm not sure if the relative strength is going to turn into strength or weakness, that all depends on the general market conditions. I'm not short-term *bargain hunting* so I don't mind if I miss the bottom and have to pay *more*. Staying on the sideline at this time is perfect: no risk, growing savings and lots of choice.
Few people succeed in buying low and selling high since hardly anyone can predict tops or bottoms. The key is to get the meat of the run, i.e. enter the market when there are clear indications that the market has bottomed and exit when it's getting to frothy and real estate becomes first page news.
A re-pricing process takes time - both on the way up and the way down - and in my mind I think we'll have more downside before we can see the light in the tunnel. Once the S&P/Case-Schiller has shown 3 consecutive months of positive growth I'd consider buying again. That could be in 3 months or 3 years - lots of time to find a great place to live in without overpaying or gamble.
Are there any serious professionals in this forum that can give an honest answer? I'm interested in understanding if there are any market signs (and what those are) pointing to a possible bottoming process? What general market metrics / indicators should I look at to determine if the prospects are shifting from negative to positive?
You have to understand the formula used in any data. Case Schiller uses the greater bay area and calls it San Francisco. It looks at sale information on previously sold single family homes. Tracking the difference between the price in the past with the price today on each individual property and then averages the difference.
What will prevent San Francisco real estate from dropping is the classic law of supply and demand. If Case Shiller looked at San Francisco single family homes they would not be able to report wildly huge numbers that.
I just ran a comparison for March 2007 and March 2008 for single family homes sold in SF. In 2007 205 homes sold with the average price $1,239,278. In 2008 151 homes sold with the average price $1,202,134. The average price is down 3%.
Now let me point out that even within that stat is a story. Average can be swayed by individual sales. Was there a 25 million property reported on month that affects the average. Median is also moved by the same factors.
My point is that when you or any person just looking wants to know what is going on talk to the professionals. The focus of our time is spent on understanding what is going on in the market and being able to decipher the numbers so that you can make decisions based on knowledge.
I believe too that we are in a deflationary environment and will likely be for some time to come. I'd give it 1-2 years. If inflation will be a force beyond that time frame, and if you've managed to lock-in a low rate, you will be in effect, repaying your borrowed money with the future's inflated money. This is an important consideration, perhaps even more of a consideration, than the year-over-year value of your home.
San Francisco is not an investor friendly city. At least not from the perspective of being a landlord. I know, I've been one for the last 10 years. Rent control, automatic 2% property tax increases, restrictive building and zoning conditions, a populist Board of "Supervisors" and SF Tenants union make this a bad candidate city to own property as an investor. You're better off in the East Bay for investments that make $ense!
Lastly, while I have quite a few friends out there that are real estate agents, I think it best to reiterate advice that will never fail you: Buyer (and seller) beware!
There is a conflict of interest that is inherent to your relationship with real estate agents and you will not get the "advice" you might come to expect from their role as your agent. Sorry agent friends! Whether it is the liability of giving candid advice or the fact they might get it wrong (perfectly understandable), agents are only there to complete a transaction.
Do you due diligence and take a little bit from both the skeptics and the real estate agents; 60-40%, respectively. In my opinion Jed, Ilse and Per have all had some good things to say. Get educated, don't over-extend yourself and follow the same advice that you might give to a good friend.
My two cents...
In the San Francisco market the median price is affected by the lending policies more than any other factor. By far the majority of homes are selling in the price range where government loans are available since the banks are not lending thier own money.
I'm changing my plan of entering the residential real estate market from 2010-2011 to 2013-2014 as I believe we'll have another 15-20% drop on a national level due to deflationary pressures, high unemployment (demand), declining population, declining eligible buyers and rising dollar ( i.e. Foreigners that have been propping up the costal metropolitan cities will decrease).
Once we will enter the bottoming process, I think we'll have a buyi opportunity of a lifetime for longterm investors.
MASSIVE inflation. Inflation past what we saw in the 1970's and early 1980's. If that happens the devalued $$$ could drive prices up even as values drop. If the price stabilizes and goes up 15% but the $$$ drops in value 45% (or more) has it really helped anyone? I think not.
The only safe thing is to allow house prices to go where they will without government interference. When that happens prices should hit bottom and stay there awhile.
"Everyone that bought since I posted this question is under water and will be for the forceable future" not necessarily or in all cases, but don't look at that, it won't support your conclusion.
"median prices is a lagging indicator, not a forward" Any foward indicator is based on past numbers and assumptions. If assumptions are changed the prediction future is changed. Then we wait for history or lagging indicators to see who was right. (Emotions such as consumer confidence drive makets more than economic prognosticators. Something Alan Greenspan failed to realize till it slapped him).
"don't buy when the markets are crashing, wait until their is a confirmed bottom" The Rothschilds have made lots of money for centuries by buying in bad times and selling in good times. If you wait till there is a "confirmed bottom" you've missed it.
In writing as a professional, I'm not defending past "cheerleading" I'm putting truth to your past and present misconceptions and nattering negativity along with the spurious allusions to my professional inability to understand facts and perform and interpret market data analysis.
"I'm waiting for objective data to show that we have a confirmed bottom and we are back at fair market values". Fair market value is defined; The price that an interested but not desperate buyer would be willing to pay and an interested but not desperate seller would be willing to accept on the open market assuming a reasonable period of time for an agreement to arise. Fair market value exists in all markets, not at only specific times under specific conditions. It has to do with those pesky emotions of being not "desperate" but "willing". Desperation and being willing may have deal with numbers but they are feelings and speak to how a person feels about the numbers.
We all should feel sorry for those that are suffering the desperation that has been caused by the lack of confidence in the credit market. Last night it was reported on the Nightly Business Report that there are several trillion dollars sitting on the sidelines poised to come back into the markets.
Yes - San Francisco is weathering the storm much better than most micro-markets throughout the country. The city has been very strategic in restricting the number of housing units therefore we do not have the excessive inventory that must be absorbed into the market before the market turns around.
I definitely believe that we can and should make education decisions. With that in mind, no one has a crystal ball. The real estate market has proven to be much more volatile that many would have predicted therefore my advice is to think of real estate purchases as long term investments.
San Francisco continues to appreciate at a very steady rate over the long term and its a great place to live! In other words, I do not think it is prudent to compare the S&P to the Housing Index. Speculative real estate buying for the short term is probably not a good idea but buying for the long term is still a sound decision.
Paragon Real Estate Group
Jed, the estimated 50% monthly savings by renting is based on free market rents and not rent control. Furthermore, median prices is a lagging indicator, not a forward. My point is that if you are thinking about buying - wait until the markets have stabilized and turned around. The is plenty of time since we are entering the age of the buyer. Remember, to recover a 50% decline takes a 100% increase.
Ilse, please re-read my comment, think and then respond. Not the other way around. I'm not saying that folks that bought a long-time ago is under water or should sell. My message is that don't buy when the markets are crashing, wait until their is a confirmed bottom. That's your long-term entry point. There is no reason to gamble with real estate just cause you are holding over the longer term. And if you only buy real estate for the emotional connection (which is a pure marketing ploy) then why do you care what your home is worth?
If you love the profits a free market can generate in boom and bubble times you have to accept the losses in bad and bust times. We have had 7-8 historical bull market years, don't think they will come back anytime soon. The average historical appreciation for real estate since 1890s have been 2-3% per year in real terms, S&P has delivered 7%. It's the risky leverage and the tax deductions that creates the wealth over the long term, i.e. it's just like rent control - subsidized living.
So long, I'll be back in another 6 months when the S&P/Case-Schiller will have declined with another 5-10 points... feel free to keep buying on the way down. I'm waiting for objective data to show that we have a confirmed bottom and we are back at fair market values.
I feel really bad for everyone that were suckered into buying a house in the bubble years or sold ARMs but love the recessions which offers the best bargains and shows the true value of things. Remember Oscar Wilde, there is a big difference between price and value.
PS. I've attached NYTs excellent buy versus rent tool for you guys to play around with and to learn the dynamics. It accounts for all costs, such as maintenance, renovation costs, taxes, insurance, opportunity cost et cetera.
Now to the number. San Fancisco's median price (SFH and condo) in 2006 was $885,000 and 2008 YTD is down to $849,444. A drop of .0402%. In the past 15 years San Francisco median has gone from $261,250 to the aforementioned $849,444 an increase of 325% and there have been negative medians only once from 1995 to 1996 when the median dropped from $285,000 to $282,000 a decline of .0105%.
So if you were able to time the market and bought, as long as you were able to hold off on selling in 1996 when the market was "crashing" your San Francisco home would have been appreciating every year over and over again and again.
The data, that I'm not supposed to like since I'm a Realtor and therfore emotional, shows the fact that San Francisco county real estate is not crashing and probably won't crash.
Even looking at this "per"son's home neighborhood of Pacific Heights, the median price (SFH and condo) has gone UP from $1,125,000 in 2005 to $1,150,000 in 2006, up again in 2007 to $1,250,000 and AGAIN Up in 2008 to $1,350,000.
Since I'm "emotional" I'd like to reiterate that as a Realtor when I am working with an individual in the home buying, or selling, process emotions come into play. I understand this "per"son's dillema and have worked with other individuals that look at numbers and "facts" to base a decision on. If they are inclined to go forward they will, if they are inclined to not go forward, they won't. Numbers serve to reinforce emotional decisions or to put forward agendas. Facts are filtered through frames of reference and it becomes obvious as I work with each person where thier emotional frame centers. Will they reinforce a decision to move forward or will they find justification to stay where they are.
I participate in this discussion to share an informed perspective on the value of ownership in San Francisco.
Buying now would be counter to all the empirical data, now would it?
If we could all be so savvy and not swayed by emotion in buying consumption goods â€“ as housing is one.
Hey Dave: are you saying that there are never times when itâ€™s cheaper to buy than it is to rent? If so, please go ahead and provide data wherein it shows itâ€™s ALWAYS cheaper to rent â€“ and feel free to constrain your data to the market of your choice.
Renting in SF will always be cheaper than buying. Per is probably living in a rent controlled apartment. His rents are artificially low and subsidized by the newer renters in the building and the owner of the building. In fact his savings and his portfolio are being subsidized by all those other people too.
Just another "it's different here" point, huh John the Bruce. Poor â€œperâ€ wants to own again but the numbers are stacked against him and he isn't capable of making a decision that isn't based on empirical data.
Ain't that the truth! :)
Who brings the data to the homeowners who then become the ideal buyers for their own house?
There are very real differences in all of the "here's" that exist. So , whether it's trademaked or not, it's very valid to say "It's different here".
Another place where we need to look at the differences is in the conforming loan value settings. Go on Realtor.com and look at what you can buy in Tulsa or San Francisco for the confoming loan amount. Assume a 80/20 loan to value. Why should the Tulsa buyer be able to get a lower interest rate than a San Francisco buyer to buy a family home. The Tulsa buyer would get a mansion and the SF buyer would get a starter home. It is different there.
That is, unless you believe that the manic run-up in prices was fundamentally supported. If you do, then party-on and good luck!
But, if you are an intelligent man you know this: the mania was created by cheap and ready access to lots and lots of easy money. Cheap and easy money caused prices to skyrocket in a way that did not support the underlying fundamentals.
The gas that fueled the mania is long exhausted. No more cheap and easy money. Option ARMS â€“ gone. 100%+ LTV â€“ gone. No documentation loans â€“ gone. No income verification â€“ gone. Get the money out the door anyway you can â€“ gone.
Let me introduce you to 20% down and real underwriting. Whoâ€™s buying a house now that you have to show up with a sizable chunk of cash? Pick up the newspaper and you donâ€™t have to search too long for the answer: not many people.
The real estate industry mortgaged its future for big sales in the 2000-2006 time period. People who should have SAVED and purchased with normally amortizing 30 year, 20 percent down loans were swept up in the fray to buy at any cost. It didnâ€™t matter that they didnâ€™t have the income to support the debt. It didnâ€™t matter that they had no savings and no down payment.
It didnâ€™t matter how stupid that was because the lending market did not discount for stupidity. If you had a pulse, you could get a $800,000 loan. It didnâ€™t matter that you only made $40,000 a year because real estate ALWAYS goes up in value! We can always re-finance later or use a HELOC to pay your 1st mortgage!
The thing that drove values up was the easy money. Thatâ€™s gone and thatâ€™s why markets that didnâ€™t experience bubble-style manias are still experiencing price declines.
The scope of this downturn is national because the scope of the credit bubble was national. Thinking that youâ€™re little utopia is going to be different could make for a very expensive economics lesson for you, friend.
Weâ€™re in the midst of the unwinding of the largest speculative bubble in the history of the world. Plan accordingly.
All through this thread I've been trying to enlighten per that his frame for making the decision to buy or not is false. He is looking at stats and not paying enough attention to his feelings. He wants to buy! He has an engiineer mindset and thinks that rational analysis will verify his decision, yet all it does is tear him away from what he wants. In the business we call it analysis paralysis. Poor per can't make a decision based on desire, need or the fact that he wants it.
Intelligence to beat the return of RE is not required. Investing the difference between rent and P&I in any financial vehicle with a positive return will outpace the negative equity return expected from RE over the next 1-2 years.
Per â€“ people who are data driven rarely make friends with RealtorsÂ® here as â€œthe prosâ€ are an â€œemotionâ€ driven lot. More recently, I think they are driven by hunger.
Additionally, I wouldnâ€™t worry about missing the bottom. If the last downturn is any evidence, weâ€™ll bounce along the bottom for a good number of years prior to any uptrend being established.
During the 13-year period from 1987 until 1999, real house prices stayed roughly within the range of $125,000 to $150,000 â€“ national average. This market will move horizontally after we reach bottom; it wonâ€™t spike.
The excesses in this market will take years to shake out; plan accordingly and keep your powder dry.
And you can't time the market. It is funny--when prices are high lots of buyers don't want to buy because there might be a bubble. But when they are coming down the same buyers want to know that prices have 'hit bottom'. Both are good reasons to keep you from buying because you will never know the answer!!!
If you are not selling and can afford the mortgage it does not matter if prices go up or down in the short run.
I'm looking to buy within the next 12-24 months but want some real data showing a confirmed bottom before I spend my hard earned money. Right now I'm saving 50% per month (net tax deductions) renting compared with owning at a 0% yearly appreciation (which is very conservative since we have negative growth). My monthly gross rental payment is 1/3 compared to owning. So while the market is declining I'm building equity fast at zero risk. Life is good!
Now about the misunderstanding with the Case-Shiller index and San Francisco. The index reports on the entire Bay Area. This includes places like Oakland, Fremont, Bentica, Walnut Creek, Vallejo and of course San Francisco.
These places have been hard hit by real estate slump. If you want to know about the general area, then it is a good index, however, comparing San Francisco with these places would be like comparing Manhattan to NJ. Really. Not only in proximity but also for the folks that live there. They are apples and oranges.
So, if you want to know about SF real estate, you're better off looking at a site that compares the performance of neighborhoods, year over year. Good luck!
Here's a site for condos: http://www.sfcondosales.com/condocount
That piece of paper in you wallet has value because we all agree it has value. It is losing value as we speak. I just wish I'd kept some of those 1972 dollars that everyone compares value/price to. Heck, even the 1968 dollar was a good dollar. Used to get three gallons of gas with that and a steak knife set if I filled the tank. So thanks "old man" and we will talk in a couple of years. But don't worry I can buy the coffee with some of the hundreds of thousands of dollars I've gained in leveraged equity.
Read the Chronicle today!
Paragraph 4 "San Francisco, for instance, eked out a median price increase in March . . .
To quote your original question and the one I answered â€œIs there anything that will prevent SF real estate prices from keep crashing? SF down another 5% in February '08 according to the S&P/Case-Schiller index. The prices have gone down about 20% since they topped out in May '06."
My response showed the correct interpretation of the data. My motivation in responding to your question was to make the point that San Francisco real estate is not crashing and I am correct.
To quote you in a subsequent post "Prices â€œalwaysâ€ reverse to the mean and so will real estate. Sellers in San Francisco are still holding onto the idea that their home is â€œworthâ€ as much as a year ago or at least what they bought it for. "
What is the mean that prices, I think you meant "revert to" not "reverse to", will always go to? Is it the average of a plot of land in Antioch and Pac Heights?
Also value and price are intrinsically related. The piece of paper in your wallet has a perceived value of 100 cents. The car you drive was chosen because of a perceived value that translated into the price you pay for it.
In the last housing downturn when you bought San Francisco as a whole saw a 3% drop in real estate median price from start to finish. The property you bought then is now worth three times what you paid for it. There are buyers out there that perceive the value and will pay the price.
Last point. At the end of the Chronicle article Case Shiller places the value of the San Francisco metropolitan area real estate at 175% of its value in 2000. Hopefully you didn't sell the house you bought in '94 in 2000 thinking that the value/price was as high as it was going to go.
You are not analyzing market data you are consuming market analysis done by others and I don't write promotional blurbs. Your question when I answered it was "chicken little" screaming â€œthe prices are falling the prices are fallingâ€. I missed the part about the "general market metrics" in the original post.
I did the research to find out what the Case Schiller criteria is so that I could interpret the data meaning for my market and my clients. In SF Case Schiller has no bearing on our market except to confuse consumers of their analysis.
No one has the ability to say when a market will turn and there are no metrics for it. Every system designed tracks history. Every analysis is done on data from the past. The economists make predictions based on past data and then see if they were right.
You or anyone of us can set up a benchmark to decide where we have a comfort level with a market and if you think 3 months of Case Schiller being up in the Bay Area is for you, then that's your risk tolerance level. The real problem now is that lenders have swung their risk tolerance level to an unsustainable level.
But again your original question was about SF prices and Case Schiller has nothing to do with SF prices!
I don't think there is anything such as "smart money". I know many who considered themselves "smart money" who lent to builders at 65% loan to value and are now reeling at the losses they are suffering. Much "private money" lenders, historically guys who are considered very "smart money" are feeling the same pain. Calling ANY market is oft times folley. I'm now trying to figure Warren Buffett's latest move to Wrigleys? I guess one chews through any market. But he predicted a recession of longer lenght and deeper than most.
In the southeastern quadrant of San Francisco, you can see some declining home values that might mirror some of what you have read in the press at large. In the outer Sunset and outer Richmond, some pockets and some blocks are experiencing this effect as well. But for the most part, the Sunset and Richmond are holding values because there are other blocks and pockets of homes that really shine in value.
I have the personal opinion that what we are seeing is a correction in the local market. Those who could barely afford the subprime loans, or those that could barely afford to move forward after purchasing their homes (not being able to improve, not being able to fix the fixer, etc) here in SF are those that are seeing they are in trouble. Not everyone is in this predicament. The correction we are seeing is that of those who made subprime loans, paying only on interest for short terms, not being able to increase their equity in the homes they bought, and now seeing the payment terms of those homes rise significantly. It is a minority of homes and situations like this that we find in SF propery.
Outside SF, in the surrounding areas like outer Contra Costa county, newly developed areas of Alameda and Santa Clara county, where a lot of developments were sold based on subprime mortgaging supporting (then) inflated home prices, YES, you will see declining values en masse. And that's what we have.
How will you know when the prices stabilize, Maybe when prices start to go back up again and by that time if you were considerig buying a property it would be too late to get the really best deals out there.
It is all based on Market value and market metrics will not give you a clear enough picture.
The past sales history, active properties, how the area is progressing, Schools, parks , etc. There are many ingredients that effect this.
Real estate is Cyclical, ups and downs, the basic rule of economics apply, buy low and sell high.
Hope this honest answer helps
First Team Real Estate