Friday, December 21, 2007

Where the hell am I?

Sorry folks, was traveling for a couple weeks, and now hunkering down for the holidays. Light posting until 2008, but I'm definitely here, and definitely keeping up with the comments. I have some great properties I'm going to be highlighting soon, so don't forget about me.

Monday, December 3, 2007

Doom & Gloom... or is it?

A recurring meme I see among SF housing bloggers and commenters is to label the concept that prices may be susceptible to declines or stagnation in the near future as "doom & gloom".
I think this label is funny, and perhaps gives away something about the people using it. Because what they are calling doom & gloom looks a lot like a beautiful sunshining day to me.
One comment I was reading today was from a homeowner who was quite secure in that whatever the future brought, their home had already appreciated 35% since they purchased it a couple years ago. They too were using the "doom & gloom" label to generalize those that thought prices were coming down. While I was stewing on that, I started thinking about what it would really feel like to a homeowner if housing prices started to move in a negative direction.
It occurred to me that while housing market pricing typically moves very slowly, that doesn't mean you can pull out on a moments notice if things take a turn for the worse, because the reality is that selling a house takes a while, even if done quickly. And therein lies the problem: history is full of people who hung to real estate a little too long, and couldn't get rid of it in time when the tide turned. The event that sets all of this off could be an external force, such as an economic downturn, or even a recession, which leads to a significant amount of job loss, which in turn leads to a number of people needing to cut the fat and reduce those $10k monthly housing costs.
Once critical mass is reached among sellers, an interesting effect occurs: buyers stop buying because they see the writing on the wall. They know all they have to do is wait and prices will come down further. Meanwhile desperate sellers find themselves increasingly cornered. Eventually they start to capitulate, only to find the first couple of rounds of price reductions aren't enough and only exacerbate the situation. This leads to more price reductions, and unless they wise up and price their home very competitively, they chase the market all the way to the ground. And in short order you start to see some very sudden price changes across the board.
As an example, Miami has a number of sellers who were confident in the gains they had already achieved and their ability to extract those gains in an emergency. Sadly, many did not realize these gains, holding out for the market to turn upwards again, only to be buried under even larger losses, until finally they lost their equity completely and their house was foreclosed.
Yes, that was doom and gloom for the seller, but when it has all shaken out, there will be some very happy buyers for whom this was a very sunny event.

Saturday, December 1, 2007

An interesting proposition, and a mystery...

624 10th Ave. presents itself as both an interesting set of options as well as a mystery.
The flat is a Richmond 3 bedroom 1.25 bath TIC in a 2 unit building. It is currently asking for $699,000. There are no pictures of the interior, so we don't know much about the size of the bedrooms, but judging by the bay windows it looks likely to have a nice sized living room.
The notes state that building has separate water and PG&E meters, which make it "perfect for fast track condo conversion". Another option is to keep it as a rental unit, as it is currently occupied under section 8 for $2500 a month. Supposedly the tenant is fine with vacating for the new owners (given 60 days notice) but the buyer can renew the contract with section 8 if they so choose. The question is why would they want to? And it is that question that brings us to the mystery: the notes claim the building has "no rent control!". Perhaps someone can explain to me how a two unit building built in 1919 escaped rent control? A quick check with the SF Tenants Union reveals that
"2-4 unit, landlord occupied buildings used to be exempt from rent control.
Pursuant to 1994's Proposition I, these buildings have had full rent control protection since May 1, 1994. "
but I can't find out if there is any special rule exluding a building from rent control if the building is not occupied by the owner.
At any rate, the last listed sale (with a price) on Property Shark was $324k in 1991. Clearly at that price, between the sale, and what they made in rent, those owners did very well. But what does it look like for the new buyers? Plugging the numbers into our spreadsheet reveals that if we change the sale price to reflect the same appreciation the previous owners enjoyed over the past 16 years of 8.3% (which seems to me to be an exceedingly unlikely event), we will wind up with a sale price of $2 million in 2023. Assuming the same tenant lives in the house for 16 years from 2007 paying $2500 a month with 1.5% annual increases, the owner will be poorer to the tune of $138,000 (or $656 a month). He would have better off if he had just rented the place himself! And if property appreciation actually slows down a bit (as opposed to going into reverse, as some fear) to a more typical 2.5%, the owner will be out $867903, or $4113.29/month!