August 27, 2007

QuickLinks: U.S. Home Sales/Median Sales Price Down, Inventories Up

U.S. Economy: Home Sales Drop, Inventories Increase [Bloomberg]
Glut of homes hits 16-year high [CNNMoney]

First Published: August 27, 2007 10:09 AM

Comments from "Plugged In" Readers

The last I checked they're still not making any more land, the population of the US been increasing at a rate of 2-3M people a year and everybody wants to live here. So how can prices be dropping?

Posted by: SteveO at August 27, 2007 11:49 AM

SteveO - .....are you being serious, or sarcastic? So tough to tell anymore...

Posted by: Dude at August 27, 2007 11:54 AM

SteveO's sarcasm was pretty obvious to me. Replace "San Francisco" for "US" in his statement with an adjustment in the population numbers and you'll hear the local real estate mantra. No more valid for SF than for the US as a whole.

Posted by: anon at August 27, 2007 12:07 PM

When it comes to SF real estate, I wouldn't worry about the national credit situation, any slight hiccups in supply or sales rates, or any short-term negative price data. According to my Realtor(TM), the price of real estate in SF only goes up at 15%+ per year, and never goes down. The average house in San Francisco will cost $12.9 million in 2025. People who do not buy real estate TODAY, including people who are too young, and people born in future generations, will be priced out FOREVER. They will live in tent cities, Honda Civics or on lunar colonies. I would advise everyone considering real estate to submit multiple offers on multiple properties immediately before prices take their historical 15% Christmas leap (what better gift for the wife for Christmas than a new house?).

And don't forget: they're not making anymore land. No one has ever factored that into a the price equation, so you can use this information to your advantage. "You heard it here first!" And as others have pointed out before, EVERYONE wants to live in San Francisco, and they will buy ANYTHING, regardless of condition, location or price.

Posted by: Jimbo at August 27, 2007 12:41 PM

I agree with you SteveO.
Prices in San Francisco will always be expensive. There are just too many reasons why an individual, a family, or a retiree would want to live here.

The drop in house prices will be steepest where it's less attractive to live, and will be less severe the more attractive a place is. Just go outside and ask all the tourists in the city right now...do they find San Francisco attractive? Would they want to live here if they could? I'm willing to bet that 90% of them will say yes (they are tourists visiting for that very reason, after all).

Do the same thing in a new sub-division in Topeka, Kansas and I think you'll find a different answer, if you can find any tourists at all...

So the US real-estate market isn't apples to apples with SF's real estate market...the direction of prices is relative to the city, neighborhood, street you're talking about.

Posted by: alex at August 27, 2007 12:43 PM

And yet, if you look at any historical data, you'll see that SF real estate trends correlate extremely closely with US trends. Maybe asking a bunch of tourists "wouldn't you like to live here?" doesn't really say much, or anything, about real estate markets.

[Editor's Note: One such correlation.]

Posted by: anon at August 27, 2007 12:54 PM

The marketplace asks those tourists that question each and every day, and yet in spite of the fact that we all believe everyone wants to live here, SF loses population or stays relatively flat.

I guess we have their answer!

Posted by: tipster at August 27, 2007 1:21 PM

I hear the same thing down in Laguna Beach and Palm Desert. "Everyone wants to live here". Bill Gates has a home in Indian Wells-Palm Desert (The Vintage Country Club) and Warren Buffet has one in Laguna and yet prices in both cities are dropping. (I realize these are not primary residences) California is loosing native born population at an alarming rate also btw.

Posted by: anonlurder at August 27, 2007 1:39 PM

It's kind of interesting about SF's population. None of these condominiums in SoMa or south beach existed 20 years ago. It totals to many, many thousands of units and they're all full now. I think SF's population is just changing demographics basically. 50 years ago, my old neighbors grew up in SF. Now their kids or grandkids would never ever raise a family in SF. So now the residents of the buildings I've lived in are affluent couples without kids, empty nesters moving back from the suburbs, and people with multiple homes who want a SF pied-a-terre.

A lot of neighborhoods in SF will do their best to never ever change. But Mission Bay, SoMa, and SoBe are getting better by the minute. In 5...10...20 years these areas are going to be even much better places to live than they are now. Of course the market will have ups and downs but with 15 million more people living in CA in the next 25 years, prices are going up, up, up. I can't imaging what traffic will be like in 20 years from now but it is sure nice to walk to work in 10 minutes than be in a car (or worse, public transport) for 2-3 hours a day.

I only own one property here but would by as many as I could afford (such as in Infinity tower II), if I had the means to do so.

Posted by: AC at August 27, 2007 1:50 PM

AC, I agree with you that in 20 years just about any property in SF will likely be worth more than it is today. But you would get a much, much better return on your investment if you wait 3-5 years to buy all these properties, after the correction that is now well underway, than if you bought them today.

Posted by: anon at August 27, 2007 1:59 PM

Dude - I was being sarcastic.
alex - I agree that price drops will be less severe in better areas but they will drop none the less. I love living here but the tightening credit market doesn't much care.

Posted by: SteveO at August 27, 2007 2:55 PM

Same old bubble, same old excuses.

Anybody remember the real estate boom in Hawaii? Not a lot of land there, and considered reasonably desirable. Yet the top-shelf properties-the most desirable addresses-fell 50% over 10 years. Bottom-shelf fell about the same just took longer to sell.

Top-shelf stuff sells at huge premiums at the top of a bubble. The concept it is somehow "immune" to a downturn is silly. Yes it may take longer to affect nicer properties but nothing with a huge premium is immune.

On Hawaii - yes the Japanese were mostly behind it. What was driving them? Crazy banks lending money to anything with a pulse. Oh right.. that's totally different.

Posted by: anon at August 27, 2007 3:33 PM

I agree with the comments regarding "same old bubble, same old excuses". I have friends in Miami who would go on and on about how everyone wanted to live there, and how all of the "foreign investors" were driving prices there sky high. Well, if you have been reading the news you now know some of the biggest price declines in real estate in the country are in Miami right now. People in San Francisco need to get out every now and then, people like it here, but the whole world does not want to move here and buy a condo.

Posted by: anonandon at August 27, 2007 3:53 PM

I hear you anon, prices may be lower for sure, and if I were in the market I would consider waiting until spring to see what happens. I'm in for the long term so current pricing doesn't interest me terribly. I am just counting the years until I am totally mortgage-free.

Regarding Hawaii, I believe they had a 10-year downturn but prices are higher than ever right now. Last time I was in Maui prices were getting astronimical, and it has moved even higher since then. Bottom line, anyone who bought at even the hight of the bubble and held their property could make an absolute killing right now. Of course they could have made more if they timed it perfectly, but 20 or 30 years down the road the purchase price matters a lot less than if you sell in five years.

Posted by: AC at August 27, 2007 4:02 PM

"Of course they could have made more if they timed it perfectly, but 20 or 30 years down the road the purchase price matters a lot less than if you sell in five years."

How many buyers of studios, one bedrooms or even two bedrooms do you think are going to hold for 30, 20 or even 10 years in San Francisco? The national average is something like one move every seven years and I'd be willing to bet it's getting even more frequent in San Francisco as families flee the city.

Posted by: Michael at August 27, 2007 4:40 PM

Nobody is arguing that prices won't be higher in 20 years than they are now. But if you don't already own, why would you buy today given the evidence of a pending correction is mounting every day? Especially given that the recent run-up is unprecedented in its size and drivers. A run-up this large is not just another up-cycle, so the correction may be much larger than a typical down-cycle.

Apropos down cycles, here's a link to a CNN article called "Real Estate Horror Stories." Look at the date - December 2002, the start of the boom that's now fizzling. More sobering, corrections can be as large as 20% and last 7-13 years. And Hawaii is probably a good analogy for our current market.

http://money.cnn.com/2002/12/02/pf/yourhome/q_housingbusts/

Posted by: Dude at August 27, 2007 4:47 PM

Regarding Maui, I actually think it is more of a "bargain" than San Francisco. We were able to buy a 2bd oceanfront townhouse (with garage) in Kapalua for less than 1.2m and a similar sized condo (1,450 sq. ft) in a similar area of our city would be much more. Tiger Woods owns a home on the same beach and the Ritz Carlton is right up the hill so where in S.F. could you buy a similar sized unit and neighborhood for that price?

Posted by: anon94123 at August 27, 2007 5:44 PM

"Bottom line, anyone who bought at even the hight of the bubble and held their property could make an absolute killing right now."

Wrong. I was born and raised in Hawaii; much of my family still lives there. Even last year prices didn't reach the levels of 1987. That means people who bought twenty years ago are still under water.

We bought a condo there in 2000.

Posted by: anon at August 27, 2007 7:47 PM

"The marketplace asks those tourists that question each and every day, and yet in spite of the fact that we all believe everyone wants to live here, SF loses population or stays relatively flat. "

If the city is not building new housing, and younger population demand better living conditions (more sqft/person), how would the population change?

Keep in mind, when there is a buyer, there is a seller. So, if someone buy a property and move in, someone's leaving the city at the same time. So, population change (or lack of) has nothing to do with property value.

Instead, we need to look at comparative desirability of the city. If the city was only marginally better than an average US city 10 years ago, but much more desirable now (I am not saying that's the case, it is just an example), it would do better than the national as a whole. Otherwise, it will do worse than national average.

Posted by: John at August 27, 2007 8:29 PM

The "SF is losing population so prices should go down" argument is really old and stale. Everyone knows that changing demographics are the biggest causes (besides the cheap credit of the past few years) of price increases AND population decreases. I'm not saying that prices won't go down here over the next few years - they likely will. BUT - most places that show large population increases don't show large price increases - because one of the reasons for the population gain is almost ALWAYS lots of cheap new development.

Posted by: Brutus at August 27, 2007 9:18 PM

my earlier comment didn't mean to say that I think the prices won't go down...I think they will. And I think they will stay flat for a few years after that.

I'm just saying that people's emotions play a big role in real estate purchases, so while all the graphs and market analysis might suggest that there is the potential for a big correction, there are places where emotions weigh more heavily than others. And in those places (nice cities, safe neighborhoods, good schools, etc), I would argue that the correction would be less severe.

the reason we got ourselves into this mess is because we taught ourselves to look at real estate primarily as source of profit (by looking at those graphs go up and up), instead of as a roof over one's head or place to start a family. i think as the market flattens out making a profit will become less important, and those other reasons (a lot of them emotional) will grow in importance.

Posted by: alex at August 27, 2007 9:49 PM

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