What happens when well over 1,200 buyers enter into contract on pre-construction condominiums in San Francisco (in new developments ranging from The Potrero, The Hayes and Arterra; to One Rincon Hill, Infinity, and the Ritz-Carlton) and from the time deposits (non-refundable) are placed, to the time loans must be funded, the mortgage market shifts?
To be honest, we don’t know (at least not yet). But we do know that it’s worth watching (for insight into both the new development market as well as the local market in general). And that we will find out.
Will rising rates impact buyers’ ability to afford their intended purchase? Perhaps. Will a tighter credit market affect a move-up buyer’s ability to sell a starter home (in terms of ease of sale or expected value) in order to fund their move-up purchase? Perhaps a bit more.
And will stricter underwriting standards have any significant impact on those who have been banking on closing with 5% down (owner occupiers and “investors” alike)? Perhaps the most. It’s one thing to free up a couple hundred dollars a month (to cover a higher mortgage payment), while it’s quite another to free up an extra hundred thousand (to avoid an onerous second mortgage or even qualify for a first).
Of course only time will tell (and we’ll keep you plugged-in).
One Rincon Hill: An Unofficial Update On The Timing Of The Two Towers [SocketSite]
The Infinity: The “Official” Dates And Update (8/24/07) [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by Dave

    Probably the wrong place to post this, but Ed Leamer (and others) was on KQED today talking about the housing market. Leamer’s a very (nationally) well respected economist (and a California housing bear). He talked a lot about the bust and overpriced homes in places like Solano County. But Ed also lives in Palo Alto and talked about the “two markets” we have in the Bay Area. He’s seen no price correction in his ‘hood but lower volume. Great discussion. Worth a listen:
    http://www.kqed.org/programs/program-landing.jsp?progID=RD19

  2. Posted by Jeffrey W. Baker

    Why do people “reserve” these things anyway? Do these homeborrowers really think they are savvy enough to enter into an option contract on a REIT, an investment strategy which would give grizzled Wall Street traders pause? Or were they just overcome by all the “build equity now” noise?

  3. Posted by James

    I’ve heard of two investors that are looking to back out of their One Rincon purchase because they were counting on borrowing with 0% down. I think as long as the number of buyers backing out is less than 10%, the inventory should have no problems being absorbed by new qualified buyers. There are plenty of qualified buyers out there waiting on the sidelines. What’s more important is the psychology and sentiment.

  4. Posted by Dude

    “There are plenty of qualified buyers out there waiting on the sidelines.”
    Yes, but what are those buyers waiting for? I don’t think a plasma and 6 months of HOAs are going to do it at this point. They want discounts, and big ones.

  5. Posted by Amen Corner

    It also depends on what percentage of buyers will need to sell an existing property in order to close their purchase at one of these buildings. If this percentage is non-trivial, it’s certainly going to make things ‘interesting’ in the current environment.

  6. Posted by Melinda

    Count me in as one of the “waiters.”
    NO way will I pay the developer directly, I don’t support their methods, and in addition, I’ve seen too many people burned south of market (yes, this means YOU, the Beacon!). Some developers won’t even let you have a real estate agent when you buy. Seems fishy to me.
    But, Thanks to Socket Site, I can see all of the inventory about to come on the market in the condo arena, and I think if I wait awhile I will have more choices for my money, or at the very least, not have to engage in a bidding war for a house, even if the “list price” doesn’t change.
    Right now for example, if I see a house priced at $799k, I have no idea if it will actually go for $900k. I’m not interested in wasting my time in a bidding war.
    In the end the house may still sell for $799, but at least that’s a price I *know* about in advance.
    With Single Family Homes, though, it still seems like a seller’s market. I’ve seen many good homes get snatched up in days.
    Just my two cents as your average buyer, not a speculator or Real Estate guru. Right now it seems better to just save and wait.

  7. Posted by MQ

    Here is my story, Toll Brothers sold me an apartment and it’s a requirement on the purchase agreement that I qualify with their mortgage arm TBI. The “news” is that when trying to lock a rate for my anticipated closure late September, they basically said that due to market shit, they did no longer have a product to offer me! So here I am with a non-refundable deposit of 10%, qualified borrower and a builder that required using their lender without a product to offer on a 20% down / 80% percent financed purchase. What am I doing?! Nothing at this stage, but will wait to see what the market does and last resource will try to see how many are in the some “boat” to see if we can survive the stormy weather!!!

  8. Posted by anon

    I suspect that most developers will hang on to units that are backed out of and put them in the rental pool until prices rebound. That’s what happened in the 2001-2004 timeframe. If developers significantly lowered prices of units that were backed out of, then everyone would back out.
    Why do people reserve units? Uh, mostly because the good units (high-floor 2+br with unobstructed water view) get sold the first day the sales office opens. For less-good units it is usually because they are priced below market rate.

  9. Posted by 49Giants

    Strange timing for this post. The other day, I got a letter from One Rincon telling me how excited they were that I’ll be moving in soon. They also “suggested” that I check in with my lender to make sure that I’m still approved for my loan. They mentioned something about some mortgage meltdown? Some credit crunch? Some downturn in the housing market? =)
    It was a funny letter. Well, not that funny, and slightly scary, actually. But still, it was sorta funny.

  10. Posted by missionbay res

    I think it’s good that all this bad news is coming out now instead of early next year when folks need to close on OneRincon/Infinity/Alterra etc…
    At the very least, it’ll give extra time for ‘borderline’ buyers to try find the extra funds or start communicating their concerns to the developers.
    If I were a buyer I’d certainly rather hear this news 6-8 months out rather than hearing about it 1-2 months before I close…
    Also, I think the degree of fallout will vary on the development. Places with more first-time buyers (Symphony Towers, 170 Off Third, Alterra, etc) may get hit more severely than say Infinity/Ritz, which has a large % of cash buyers and/or affluent buyers.

  11. Posted by Rich

    This will be an interesting watch, and one that I have been waiting for.
    Don’t forget, for those looking for uber-luxury and thought the Infinity or One Rincon Hill was it … do they bail and hold out for 45 Lansing?
    I also wonder how many put deposits down back when flipping was fashionable.
    It will be a fun ride.

  12. Posted by james

    please scan and share that letter from orh. it sounds priceless. did everyone see the journal article last week about the same topic? developers are failing like flies in the southeast.

  13. Posted by james

    here’s that article i just mentioned:
    http://online.wsj.com/article/SB118799900508008451.html
    Condo Troubles Further Squeeze Property Lenders

  14. Posted by tipster

    These units were all “sold” at the peak of a mania, when flippers were out in force, and they offered a relatively low risk way to get into that game.
    By the time they will need to have their loans funded, we should be firmly into the start of a downturn. At least 20% were flippers who will turn and run. Another 20% won’t qualify at all. Ten percent will decide it isn’t worth the extra money to fund their loans in a declining market and will bail.
    The real fun will be in watching the developers squirm as they try to insist that almost no one didn’t fund their loans while they quietly rent out one unit after the other, knowing they won’t be able to sell all 50% in one year. Any flippers who foolishly think they can rent out their units to make most of their payments will have a pile of units from the developer to compete with, only to turn around and sell them in competition with the devloper.
    And then the developer will quietly offer all sorts of incentives before they finally start dropping prices.
    How can they not drop their prices? They’re building SECOND towers. Maybe they’ll hold out for some period of time, but in the end, they’ll cave. And that will put too much pressure on the reseller market.

  15. Posted by missionbay res

    Tipster, just wondering which development you’re referring to that will experience a 50% drop out rate?
    Since you mentioned ‘second tower’, I guess you mean OneRincon or Infinity.
    OneRincon I can see that since they sold out so fast during those crazy pre-release parties. But at Infinity, they quietly and steadily sold their units over a period of a year before selling out their tower (or close to selling out). Since Infinity sold at a much slower rate, the buyers there seem to have taken their time in making their decision, did their due-diligence, and thus don’t have the same number of ‘flippers’ as OneRincon??

  16. Posted by pablo

    Given that so many early units were sold to ‘investors’ – mainly real estate agents and mortgage brokers i think they aren’t in a position to close. Almost 1/3 of defaults are on ‘investor owned/flipper’ properties. I for one am tired of hearing of sob stories and then reading that the ‘victim’ is a real estate agent or mortgage broker.

  17. Posted by tipster

    I agree that Infinity will probably have a below average rate of cancellation, One Rincon, an above average rate.
    But remember that people had all the time in the world to consider their dot com stocks and they still bailed out of them when the downturn started. And the quality companies like Cisco got crushed to the tune of 80% drops: buying quality saved you some, but not all, of the losses.
    And I suspect a large number of these places that weren’t purchased by investors were purchased as second homes. Having more real estate than you need in a downturn is just plain stupid. And I doubt many of the second home buyers are that dumb.

  18. Posted by Trip

    Given the current downturn in prices, which is already more than the 3% deposit one would lose by walking away, and the near certain acceleration in the downward trend with the mortgage blow-up, I have to believe there are going to be huge percentages walking away from their contracts at each of these new places. Those very few with top, top places in these developments who really couldn’t care less about the cost will close. But for everyone else, it would simply be a smart financial move to cancel. 100% of the would-be flippers will cancel. But even if you plan to live there, you’ll be able to either buy the same place for less or rent it for far less. There is little reason not to cancel unless against-all-odds the market has completely turned back up by decision time.

  19. Posted by ex SF-er

    We are still in inning 2 of a 9 inning game.
    The mortgage turmoil is just beginning, and I personally expect it to get worse before it gets better.
    The essential problem is that the secondary mortgage market is way too opaque, and nobody can be confident about what is in those securities.
    The ratings agencies (moody’s, s&p, fitch) clearly had conflicts of interest for years and rated garbage as AAA, so their ratings cannot be trusted.
    thus, investor demand for them stays low, and will stay low until we have some way to make them more transparent. this will take some time. Nobody knows how long, because it’s never needed to be done before.
    the good (e.g. Thornburg mortgage) are being destroyed with the bad (e.g. countrywide).
    I’ve said this before, but the developers will NEED to finish their towers ASAP before their bridge loans and construction loans run out. Right now, the lenders aren’t fond of putting up more towers. anywhere. thus, ORH and Infinity need to CLOSE on their first towers to raise cash for operations so that they can finish their second towers. There is a not-unreal risk that the second towers could end up half-completed. (I’m sure the city or perhaps another developer would eventually buy the site and finish the tower… but it’s not a pleasant thing to have half completed towers sitting around)
    Rumor alert:
    Countrywide may be laying off 6,000 to 10,000 employees
    (link: Businessweek.com “Countrywide Feels the Heat”)

  20. Posted by ex SF-er

    that said:
    PRACTICAL ADVICE ALERT:
    if some of you out there are planning on buying a home, or will soon buy a home, there are still ways to get financing.
    the secondary mortgage market WAS the primary way of getting a home loan.
    However, regional banks, credit unions, and even some national banks lend home loans, and KEEP THE HOME LOANS on their own books!
    Those lenders are NOT dependent on the secondary market, and thus are still able to originate loans. (they get financing from their own deposits)
    thus, find a lender that keeps loans on its own books, and you will likely have a better more secure way to get a loan during this period of turmoil. You will likely pay a bit more for doing this, but you will be less exposed to international capital finance risks (and less exposed to them yanking or changing loan terms before closing)
    good luck!

  21. Posted by missonbay res

    “I’ve said this before, but the developers will NEED to finish their towers ASAP before their bridge loans and construction loans run out. Right now, the lenders aren’t fond of putting up more towers. anywhere. thus, ORH and Infinity need to CLOSE on their first towers to raise cash for operations so that they can finish their second towers. There is a not-unreal risk that the second towers could end up half-completed. (I’m sure the city or perhaps another developer would eventually buy the site and finish the tower… but it’s not a pleasant thing to have half completed towers sitting around)”
    Tishman didn’t need bridge loans to construct Infinity. They are large enough to finance their projects if need be (they own the Rockefeller Center and Chrysler building in NY, and several office towers in SF).
    Now OneRincon, that’s another story. They are using bridge loans and special construction loans to build. If they get too many cancellations, the whole project could be in jeopardy. That’s one development I would keep an eye on….

  22. Posted by J

    Isn’t “Alterra” in Boston and “Arterra” in SF???

  23. Posted by anon

    “Tishman didn’t need bridge loans to construct Infinity. They are large enough to finance their projects if need be (they own the Rockefeller Center and Chrysler building in NY, and several office towers in SF).
    Now OneRincon, that’s another story. They are using bridge loans and special construction loans to build. If they get too many cancellations, the whole project could be in jeopardy. That’s one development I would keep an eye on….”
    Where did you hear this?

  24. Posted by james

    the developer of orh seems like they might be cursed. they built my building and tried to sell it right at the height of the last bubble, 2000, then had to flip it to another developer whom took 4 years to sell it out. sounds like you guys at orh are in for the same story.

  25. Posted by anon

    I think both the Infinity and ORH will weather this storm just fine.
    I don’t buy all the doom and gloom posts here although there are many posts with great and interesting information.

  26. Posted by NativeSon

    Sometimes I wonder if prices at the Infinity and One Rincon will be lower in 5 years than they are today. Especially given construction costs and the still booming boomers who are sitting on obscene amounts of cash. It’s hard for me to imagine a $750,000 unit going for $700,000 in 5 years. I just can’t see it, even if I really wished it to happen. But then again, we’re only one good earthquake away from decent prices…
    And anyone who thinks that the Infinity and One Rincon are so totally different that one will tank while the other prospers or suffers less is smoking crack. Dudes, they’re 5 blocks away from each other. Do those 5 blocks make some difference? Maybe. Enough to make one weather a storm that will topple the other? Please.

  27. Posted by Trip

    Construction costs are sunk costs — they do not factor into the selling price. The projected selling price obviously had an effect on the builders’ decision to build in the first place, but once the dollars are spent, the law of supply and demand sets the price. If there are lots of buyers willing to spend lots of money, the price will be high. If there are few buyers (either because they won’t pay or cannot get financing) the prices will be lower. The builder might take into account the carrying costs and potential for future upward trends to keep places off the market altogether, but past costs are sunk and thus irrelevant.
    Five years out is pretty tough to predict. But given the extreme drying up of the pool of qualified buyers in the last month or two, it’s hard to imagine that prices across the board on all the places coming on-line will not take a big hit through the next couple of years.

  28. Posted by anon

    “Five years out is pretty tough to predict.”
    Pretty easy to predict this time: prices will be lower in real terms – and my guess is in the ballpark of 30-50%. In nominal terms, who knows how much money the Fed will pump into the system to avoid a depression.

  29. Posted by anon

    30%-50% in five years? Are you serious?
    You should short the DJUSRE index. If you’re correct about your prediction, you’ll be rich in five years.

  30. Posted by anon

    “You should short the DJUSRE index.”
    I have shorted homebuilders since 2006. And yes, I am rich 🙂

  31. Posted by anon

    “And yes, I am rich :-)”
    Don’t know that many people who are truly rich that would claim it on a blog but hey, that’s great for you!

  32. Posted by james

    speaking of construction costs. what do most folks think of construction quality these days? i’m hearing that it’s only gotten worse since 2000. what if anything should folks be factoring in when considering any of these newer condo’s?

  33. Posted by Karen Whatson

    I hear the potrero closed 40 homes in the first few weeks with no issues so this mortgage meltdown silliness is completely overblown………..

  34. Posted by Michael L.

    Its much less expensive to build your own home –

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