SF Business Times articles for June 26th
Since there are so many articles in today's San Francisco Business Times related to housing in San Francisco, I'll just link to them...
The politics of planning - The Mayor and supervisors square off over development
Transbay Terminal, neighborhood on the rise - Plan in place for big transit hub, offices and housing
Stuck in the pipeline: The case of 2660 Harrison
Third Street rail brings housing along tracks - But developers complain process is slow
A 'perfect storm'? Costs could kill condo mania - Prices may not be high enough to offset soaring costs
City hunting for treasure in middle of bay - Treasure Island ready for a transformation
Port turns to state legislation to open up land
Buyer checks into Canterbury for timeshares - Cendant swoops on S.F. hotel
posted by Matt Lanning @ 1:42 PM
9 comments
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9 Comments:
Matt -
I really like the last line from the article titled (#5 in your list):
"A 'perfect storm'? Costs could kill condo mania"
It says:
"We're interested in picking up entitled condo projects and doing apartments. The fundamentals over the next five years are there for apartments."
Translated:
"The homebuying/condo market is going to suck wind over the next five years, so instead we're going to build apartments."
Further translation:
"These crazy ass prices people have paid in this city over the last few years... are coming to an end. We can't continue to build projects after price growth stops."
Or the editor could have just saved everyone from having to read between the lines and titled the article:
"A 'perfect storm'? Flattening condo prices to kill projects"
I don't believe I've ever said that developers could build unlimited high-rise condos and there would always be buyers to pay top dollar. In fact, I think it's just the opposite. But it does reinforce my continued argument that by increasing suppply, you'll actually see a shift in the market. There is at least one reader who gets his panties in a wad every time I use that argument, but here's a perfect example.
Not everyone wants to live in a high-rise, and not everyone wants to live in South Beach. But unfortunately, there's no way to build another 1000 single family homes in Noe Valley, so San Francisco has to build the additional supply in places where it is possible. That being Rincon/SoBe/SoMa/Mission Bay.
Lofts have ebbed and flowed in their popularity and pricing based on the market and on demand. Right now we're seeing a lower demand for high-rise condos and lofts, but there is still strong demand for condos and homes in neighborhoods that do not have any significant issues (next to freeways, etc).
It's nothing new to see developers gain entitlements only to sell them to other developers. Some people are better at putting those deals together, while others will have different ideas about market timing. It doesn't mean that the buildings won't get built. It just means that they might wait a year or two.
Besides, just because the market is softer in that part of town today, doesn't mean it won't be strong again in 3-5 years when these projects are completed.
Do you think that the One Rincon developers started their quest to build last year during the hottest market in history? No. They probably started back in 2001 or 2002 when things were flat. When the doomsday prophets were out in force, just like they are now.
And what came of that? Nothing more than new record prices due to limited supply of housing.
Perhaps this additional supply in SoBe/Rincon will give some opportunistic folks a chance to get into the market... Because this is not the beginning of some long, protracted downturn. This is a short-lived market fluctuation that will end up on the chart as just another ebb, followed by another flow.
The only question is, will it happen later this summer or early next year?
I think it's clear that the cost for developers of navigating San Francisco's inane planning process and the conditions for low income subsides add greatly to the cost of these projects. Sadly (for the middle class) it only makes sense to build in SF in a very up market.
Quote
"The only question is, will it happen later this summer or early next year?"
The upflow of the down trend?
It is easy to see following past Bay Area housing booms housing can go into a 6-8 year malaise.
Yes, but if you do your homework, you'll also see broad economic downturns associated with those housing downturns. We only have a minor housing downturn now due to a couple of different factors and a lot of media hype, but we also have lowering vacancy rates for both residential and commercial leasing, we have a rising job market, and we have a stable economy in general.
And although we have (finally!) some over-supply in lofts and high-rise condos, and in TICs in some parts of the city, this is not the case with single family homes in most parts of town, especially the properly marketed places that have inherent value in popular neighborhoods.
So you might be able to look back and say in 6-8 years that things didn't rise as far or as fast as they did between 2002 and 2005, but I doubt that anyone will feel like anything became more affordable or that we had any sort of a housing downturn.
Unless you paid top dollar for a high-rise condo in August of 2005. Then you might have something to complain about.
But I'm saying that we'll see a different market as soon as August of 2006, and although inventory will rise again after Labor Day, the spring of 2007 will be strong again, just like the spring of 2006.
Of course, this is just my opinion, but is certainly carries as much or more weight than someone's opinion who doesn't work in this industry and who hasn't followed housing trends in the city of San Francisco (not across CA or the USA) as closely as I have.
And you're only going to believe in the opinions that match your own anyhow, so if you want doom and gloom, read the newspapers. I think I have a little bit closer read on reality (and have for the past 4 years) than the over-hyped media in SF and elsewhere.
And none of this opinion is because I have any concerns about my job. I'll do just fine no matter the market. This is about helping people become homeowners, and making sure that those who want to own in the city have the full story, from someone who actually works in this market. Not from someone who only reads press releases from guys in SoCal who base their careers on hoping their 'bubble' theories are correct.
I don't believe in a bubble or a housing crash being imminent but I as someone who looks for value in investments I can't see how
these prices can be sustained. Without big appreciation why would anyone want to own an asset that so horribly cash flow negative if they rent it out?
I think a long malaise will get fundamentals back in line so rent and income levels
can catch up
Matt -
Thought you'd appreciate this perspective someone posted over on Ben's blog:
"Carl Haefling is a portfolio manager in Bainbridge Island. He is a deep value player in small and micro cap stocks, biotech and medical devices; he and often takes a very long term view. Carl is often a contrarian — recently, he has been accumulating shares of Jet Blue (JBLU).
He also has a sharp eye for the Macro-environment, and I often find his take on events intriguing. Following the recent data releases on Housing, he recently observed:
'I believe the stock market is predictive — not reactive — except for relatively short periods of time.
Housing stocks topped out in Dec and are now down up to 50% in numerous cases from those highs. It will take a couple of years at least for this scenario to complete itself. A significant decline in the housing market over the next 2 to 6 years is being predicted by housing stocks.
It takes time for the housing market to fully unravel, we are in the early stages of stage 1. Stage 1 is where the market begins to recognize that prices have reached levels that reduce affordability and thus the number of possible buyers. Sellers, who have been holding back selling for fear of not selling at the top, begin posting signs advertising their home, usually at prices that reflect the highest paid for a similar home, and suddenly the inventory of homes foresale explodes. This has already happened in many parts of the country. This stage may take one to three years to fully unfold.
Stage 2 is price cuts by those who are becoming convinced that the market has softened if they want to sell their home they better cut prices. Once those “reduced” signs start appearing, buyers start reducing offers, even on properties that have been already reduced. Prices will drop far lower then anyone thinks possible in stage 2.
Stage 3 is the exhaustive phase. Buyers are afraid to buy, investors have no liquidity, mortgage requirements demand a high down payment and supporting cash flow, and the press is filled with articles claiming real estate is a terrible investment. (which happens to be true in the previous 5 years).
There are serious other problems that will contribute to this cycle, including a decline in the buying power of the middle class, tilting demographics which will reduce the number of possible buyers beginning about 2010 for real estate and possible shifts in values of owning vs. renting. There remain other problems that are related to real estate but not thought of as being directly connected. A decline in the value of the dollar may force foreign owners of commercial and residential real estate to try and liquefy. Higher interest rates because of inflation or stagflation also impact real estate prices.
And one of the unseen values will be the desire to downsize as the cost of insurance (in some high risk hurricane states you cannot get homeowners insurance except through the state at 3 times previous cost) explodes, the cost to heat and air-condition accelerates, and the cost of maintenance become detriments to ownership.
A house may go from being something that we take pride in, to becoming a burden.'"
Jack -
I have no reason to disagree that on a national level we'll see this kind of longer-term pain, but I still contend that San Francisco will not produce enough supply to meet the demand... Even if we are seeing a portion of what your article has stated, I think it will happen in a much more condensed form, and our market will stabilize (if not turn) much more quickly.
As I said above, I think we'll see a bit of a seller-favorable market in August 2006, and I predict that we'll see another strong market in the early to mid-spring of 2007. The SF market ebbs and flows pretty predictably (IMHO) during the calendar year, so I don't think we'll see much of a change overall.
The biggest change will be in the public perception of the market... But prices will be steady and demand will stay strong.
This is just my opinion, and I'm sure if I'm wrong I'll hear about it, but I've been consistent in my predictions and thus far I've been more or less on track for the past few years as well as this year.
Thanks for the article though!
Matt -
I agree that SF has particular characteristics that make it very different than other markets, especially the national one.
I think part of the reason I sent that article was to show that the national market's impact could cause a recession, which in turn would impact the Bay Area, to say nothing of the fact that mortgage payments in California are 22% higher now (adjusted for inflation) than they were during the last housing peak 16 years ago.
And, much to yours and others dismay, we could then have declining prices in SF over a protracted period (perhaps several years).... much like '90 to '95 around here (I know, that was before your time) following the '91 recession. A time when people who bought in '89-'90 and then sold a few years later had to bring checks to the closing (perhaps save for those who lived north of California Street in SF; do your clients or future clients all want to live north of California Street?).
Then again, maybe there will be no decline but instead a "long malaise", as mentioned by others. Such an event will be a lot longer than what you or anyone else will want, and be more damaging to the RE industry than a five years soft/downturn and then upturn scenario.
A "long malaise" or a downturn leading to an eventual upturn is what is needed to return the market to fundamentals.
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