The Front Steps breaks new ground

TheFrontSteps.com has started a new website at thefrontsteps.org (and count me as someone who thinks this new website should take over thefrontsteps.com pronto!). It's a social network for SF real estate. Alex (owner of thefrontsteps.com) clearly used some premade build-your-own social network software, but you know what? It kicks ass! No one has done this before, and I have no idea why.
SF is ripe for a social network devoted to SF real estate, and I think this is going to be a winning idea. I'm so fond of it, that I am moving my blog postings over there for the forseeable future. So if you are looking for musings from me on the submedian market, head over to thefrontsteps.org and join the party. Make your own page, start your own blog. With everybody playing in the same sandbox the open exchange of ideas is about to get a lot more fun.
I'll keep this blog here for a while, just in case the plug gets pulled for some reason, but new postings will be at thefrontsteps.org. See you there!

Holy Crap! It's getting rough out there!

DataQuick reports today that Bay Area sales ended 2007 at a more-than-20-year low, with last month being the slowest December since DataQuick started their stats in 1988!

Sales have decreased on a YOY basis for 35 consecutive months, and according to DataQuick the city of San Francisco saw a 24.4% drop in sales volume versus last year, and a 1.9% drop in the median sale price.

Intriguingly, there are still people out there who think RE is the path to wealth:

Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages or with multiple mortgages has dropped sharply. Down payment sizes and flipping rates are stable, non-owner occupied buying activity is edging up, DataQuick reported.

I'm calling this how I see it: clearly we still have some very foolish investors out there. There wil be some who will make money regardless, because even a broken watch is right two times a day, but many, if not most, of them will suffer a great deal for the mistake of buying at the start of a down cycle. We have a lot of room for downward momentum, and once it kicks in (I'm not even considering it an "if" at this point) a feedback loop will be established where buyers will grow increasingly reluctant to buy as prices drop further, which of course will only exert more downward pressure on pricing. As we are all seeing, real estate prices move slowly. So this can literally take years to play out, and in some cases, decades. You aren't going to see the bottom of the market until the volume starts going up significantly, and right now it's been 35 months (three years!!!) since we have seen any sign of that as compared to prior years. We have a large number of option resets headed our way, and a possible recession to deal with. There is a storm gathering here and a lot of people are going to get hurt. Be careful out there!!

Realtor Massacre - SFH sales volume down 27.9%

The buzz this morning via sanfranciscoschtuff.com is the new SFAR (San Francisco Association of Realtors) report which shows a stunning 27.9% drop in sales volume as compared to December of 2006.

This is catastrophic for realtors. As I pointed out in the comments in this post on The Front Steps, it is much better for realtors if prices decline then if sales volume declines. You can't collect a commission if the house isn't selling! In this case we have 61 less homes sold within a single month. If all these homes were all priced at the median price of $800k that's $48 million dollars of sales that dissapeared. Which of course translates to roughly 2.5 million dollars in realtor commissions that evaporated out of a total pool of roughly 8.6 million. That's a lot of missing money for a single month!

If realtors had sustained volume by being more successful at encouraging owners to drop their prices they would have fared much better. For example let's say prices had fallen citywide a jaw dropping and unheard of 10%, the realtors would be looking at a loss of only $860k for the month.

So if you are a realtor, and you want your properties to move, I would strongly urge your clients to start dropping prices.

What's The Diff?

We're going to start 2008 off with a bang here and start a new feature where we take a look at some of the pain in SF real estate. Looks like some folks have discovered that real estate doesn't always go up. Know some of the back stories? Share them with us!

Oops!
61 Ina Ct.
Last Sale: $730,000 (07/18/2007)
Asking: $650,000
What's the diff? $80k in about six months.

Even in Bernal Heights!
38A Elsie
Last Sale: $695,000 (08/25/2006)
Asking: $550,000
What's the diff? $145k in 17 months.

Another Bernal haircut...
277 Bradford St.
Last Sale: $775,000 (10/10/2006)
Asking: $675,000
What's the diff? $100k in 15 months.

Missing money in the Mission.
1800 Bryant #311
Last Sale: $739,000 (11/22/2005)
Asking: $625,000
What's the diff? $114k in 50 months.

Western Subtraction?
2529 Post
Last Sale: $756,000 (07/30/2007)
Asking: $669,900
What's the diff? $86k in six months.

Downside in Ingleside
230 Howth St.
Last Sale: $745,000 (08/31/2005)
Asking: $650,000
What's the diff? $95k in 52 months.

Keep in mind these are just the differences on buying and selling. Don't forget a true measure of loss would measure closing costs, sales commission, property taxes, carrying cost, etc. If you really want to measure the pain, use the infamous Submedian Spreadhseet and you'll see just how bad it really is.

BTW, Crocker Amazon, Excelsior, Bayview? Just too damn many to list. Seriously, there must be over a hundred properties in the city right now selling for less then what they paid for. Just a year ago that would be inconceivable.

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.

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.

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!