“Californian homes are overvalued by as much as 40 percent and stricter lending standards will probably contribute to “material” price declines, according to analysts at Goldman Sachs.
Prices in the state “have proven surprisingly resilient, given the severe curtailment of credit availability and rising unemployment,” the analysts said in a note to investors. “However, we believe that a downturn is imminent.”
California Homes Are Overvalued by as Much as 40%, Goldman Says [Bloomberg]

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Comments from “Plugged-In” Readers

  1. Posted by mktwatcher

    In related news, Goldman takes huge short position in etf that tracks california real estate values.

  2. Posted by SFhighrise

    I wih that these projections would discuss San Francisco itself. A decline in the city is likely to be much different than in somewhere like Tracy.

  3. Posted by Trip

    SFhighrise — Tracy, Modesto, etc. saw much larger price run-ups than SF from 2001-05, so I agree that those places will also likely take (and are taking) a much larger hit now that we’re in correction mode. But SF price trends generally track those in Tracy, the rest of the state, and the rest of the nation. As much as Jimbob’s realtor wants us all to think otherwise, SF is not particularly special with respect to real estate ups and downs.

  4. Posted by Michael L

    When you think about it what else can Goldman sachs say?

  5. Posted by james

    i love the last paragraph. our prices will PROBABLY drop by 4% next year. after grabbing your attention with the 40% over valuation headline. these guys are such a bunch of bs artists it’s not funny. nobody knows what’s really going to happen.
    great article in the times yesterday about the auctions in minneapolis. i think that and possibly the fires in socal are the only way to eat up the supply and find a bottom in this market.

  6. Posted by arlo

    The Goldman comments capture the essence of the debate that has been raging here. No surprise – prices should fall in SF, but they have been “surprisingly resilient”. What is amazing though is the now daily flow of bad news regarding CA housing. It wasn’t too long ago that the local media (the Chron and particularly the Marin IJ) were being accused of shilling for the RE industry. For the past few months though there has been a constant drumbeat of negative news – and now the drumbeat sounds like Ginger Baker’s Toad. The sheer weight of this media coverage must be tamping down demand. Why would anyone buy a today’s prices?

  7. Posted by Kimberly Wright

    the 40% number is Goldman’s estimate of overvaluation … the 4% number is not Goldman’s — it is per the California Association of Realtors

  8. Posted by knowitall

    SF is protected due to a variety of reasons (higher incomes, geography, convenience, hub, etc). But it’s not immune. What happens is SF will be the last to be hit by the downturn and the first to recover. SF has just now been hit (ask your Realtor friends how long their listings are sitting)….but it will be the first to recover. I’m guessing spring/summer of ’08 SF will stabilize.

  9. Posted by gh

    They’re the same Wall Street geniuses that are always smarter than everyone else…and loaded everyone up on their packaged subprime garbage loans. They probably had a big hand in causing all of this. I say a 6-7% SF decline through 2008. 40% in Tracy maybe…but that market has nothing to do with SF.

  10. Posted by Anon2

    james – good job of highlighting a sale for $421K over asking but not linking to the next story down: sale in the Marina for $967K UNDER asking.

  11. Posted by RinconHill_Res

    “I wih that these projections would discuss San Francisco itself. A decline in the city is likely to be much different than in somewhere like Tracy.”
    Exactly, that statement by GS is sort of like a Bay Area meteorologist saying, “Well, it’s going to be a scorcher here in the Bay Area today”, but it’s only 75 degrees in SF.
    All things being relative, real estate in SF is truly in somewhat of a bubble, a protective bubble that is.

  12. Posted by james

    the sale in the marina was 3.9mm. hardly the typical 2mm single family home in the city. kind of like chatting up the rare transactions in seacliff and presidio heights. they really have no connection, imo, to the rest of world.

  13. Posted by movingback

    Great for Goldman Sach’s to throw in their 2 cents worth regarding what we already know about the California housing market – many of the overbuilt areas have and will continue to see a tremendous decline in home values – no argument there. However, 40% is just not going to happen in San Francisco – most of us know that already.

  14. Posted by John

    Those “predictions” are more like “postdictions” to me. Where were they when the price went through the roof in 2005?

  15. Posted by anono

    40% declines have already happened in parts of California. Go to Fresno, Modesto, Stockton and parts in between and you can get newly built stucco mcmansions for 40% less than 2 years ago. Probably ditto for Valejo, Tracy etc… if not already then soon. I don’t much about SoCal but I’ve heard similar declines have already happened in the inland empire.
    A smallish central valley real estate developer told me that their total cost basis on many of the stucco mcmansions was about 175K and they were selling for 475K in ’05. So now even when the same houses are selling for $275K at auction the developer is still making money.

  16. Posted by Peter

    Every other city believes they are special as well. Spend some time looking over http://www.seattlebubble.com which is also predicting a downturn. The Seattle community also believes Seattle is special and that they will not suffer the fate of the rest of the country.
    There was an interesting post awhile back about someone from Indiana who said that everyone their thinks they are immune as well. I mean Indiana is the best place in the world to raise a family, and the parks, and lakes, and safety, and standard of living. Sheesh.. EVERYONE wants to live in Portland OR, err I mean Seattle, err I mean Indiana. Anyways, we are all immune from the down turn. It will happen somewhere else but not HERE.. whereever HERE is.

  17. Posted by RinconHill_Res

    “Every other city believes they are special as well. Spend some time looking over http://www.seattlebubble.com which is also predicting a downturn. The Seattle community also believes Seattle is special and that they will not suffer the fate of the rest of the country.”
    First of all, sorry, but Seattle is not SF, even though I think Seattle is a great city. And second, if you read more carefully, I believe the very key word, “relative”, was used to describe SF’s immunity. Again, it’s not absolute immunity, it’s relative immunity, nothing more.

  18. Posted by Peter

    Your are absolutely right that Seattle in not San Francisco but that is why they say they won’t have the same fate as San Francisco.
    The standard of living in Seattle is much higher for an upper middle class family.
    The argument is that people will move to a place like Seattle that is still a great city when they want to move out of a roommate situation or renting a small closet.
    My point is that every other city that I follow believes their city is NOT some other city and is thus ‘relatively’ immune..
    I think everyone can agree that Indiana is not San Francisco but the whole point is that Indiana believes they will be immune for exactly that reason.
    The only difference between cities is the demographic that they attract. It is not that people would rather live in this place or that place. Only that the place that is right for one person is not right for another person.
    San Francisco is great but I know many many people who would not live there.

  19. Posted by Dan

    According to SPUR’s comparison of SF and Seattle, Seattle builds about twice as many housing units per year as SF, despite the fact that both the city of Seattle and its metropolitan area are much smaller.
    SF’s constraints on building, with the concomitant fewer number of units owned by speculators rather than residents, is the prime reason SF real estate may not suffer the degree of decline of other areas.

  20. Posted by jw

    “San Francisco is great but I know many many people who would not live there”
    “My point is that every other city that I follow believes their city is NOT some other city and is thus ‘relatively’ immune.”
    I could not agree with the above statements more. If you own vacation property you hear the same things in those areas. We own a cottage on Balboa Island (where they are REALLY not building any more land) and talk about a group of people who think they are immune. Laguna Beach, Newport Beach, Santa Barbara are all areas with VERY high incomes and look at what is happening down there now. The other point that rings home for me is how many of my friends want to visit me here but have no desire to want to live here. They have children and a lifestyle (homes, safe clean streets, etc.) that they are not willing to sacrifice so that they can be San Franciscans. The same is true for most of my co-workers on the Peninsula who have no desire to want to live in the city or even come up here to shop anymore.

  21. Posted by fluj

    Seattle has over twice the square miles as SF and half the population.

  22. Posted by EBGuy

    I really don’t get some of the posters here. No man is an island (or for that matter, a penninsula). Every single household in the greater Bay Area has to make the decision whether they will rent or buy in their current town, or look one city over. As the outer edges crumble (and become more attractive financially) this exerts a subtle downward pressure on the core. Here in East Bay “prime”, some of the crime challanged areas are starting to see multiple foreclosures/REOs. I could bury my head in the sand and say “I don’t live in THAT area”. But really, you can’t hide from the inevitable.

  23. Posted by RinconHill_Res

    “SF’s constraints on building, with the concomitant fewer number of units owned by speculators rather than residents, is the prime reason SF real estate may not suffer the degree of decline of other areas.”
    Not to mention 49 square miles of land that is bordered by water on three sides.
    Why are diamonds generally expensive? They are objects that are extremely scarce in nature…
    SF residential real estate will always be “relatively” immune to falling values nationwide, statewide and even Bay Area-wide.

  24. Posted by "Dave"

    There’s no debate about the state of speculative markets. They are toast, and getting toastier by the minute. Stockton, Inland Empire, Florida condos, etc… Not enough bag-holders to go around in hyper speculator towns.
    So let’s look at SF, which has slowed down but is still ridiculously expensive. Will it tank? That’s what everyone around here seems to already-know, claim-to-know, or want-to-know. Truth is that we simply don’t know. The lack of building here is due to land constraint is unique (a la Manhattan). But two other factors should have the single largest impact going forward: availability of capital and the local employment/economic situation. Neither of these can be predicted with much accuracy.
    Good news for fence-sitters: if the local economy tanks and/or liquidy dries up, then prices will fall even in the “good” areas where you want to be. Bad news? You are probably not immune to said conditions and may not (a) have a job and/or (b) access to capital when time comes.
    The other major unknown: how many people currently own homes that they can’t really afford? In other words, does a huge % of the population sit on exploding ARM time bombs that will all get dumped on the market simultaneously? I don’t know. You don’t either, unfortunately.
    My best guess is that SF will get gradually more affordable over the coming years but will always be incredibly (relatively) expensive. Rome has probably had high real estate prices for 2000 years… except perhaps during WWII.
    Good luck to you all.

  25. Posted by Dude

    Maybe you guys could be more specific about which parts of SF will be “relatively immune,” or the degree of immunity?
    While I agree what’s happening in Stockton will never happen here, I’m also cognizant of the fact that many areas of the city have already fallen from their peaks set just a year or so ago. Some have fallen materially.
    So does “relative immunity” mean that if central valley real estate loses 40% of its value, San Francisco loses only 20%?
    I’m not trying to stir things up, just looking for some detail.

  26. Posted by fluj

    What parts of the city have fallen materially? No snideness here, OK? I just would like to know where the perceived hits have occurred. Because it has not happened in areas 1, most of 2,5,6,7,8 or most of 9.

  27. Posted by Dude

    No snideness interpreted. But as you know, fluj, most of the outer areas (Bayview, Visitacion Valley, Sunnyside/Excelsior, and parts of Sunset and Parkside) aren’t doing so well. I’ve seen tons of properties there listed for below last sale. In fact, even you once admitted these areas had a “bubble” and are losing value.
    In places like Glen Park and Richmond, I’ve seen some listed at last sale, or close to it. In Soma, I’ve seen condos listed for $ psf below the peak prices hit in 2006. Buildings that fetched $900-1,000 psf in ’06 have units on the market for $800 psf or so, sometimes less.
    So my question is (also no snideness intended): what does “relative immunity” mean?

  28. Posted by RinconHill_Res

    “So does “relative immunity” mean that if central valley real estate loses 40% of its value, San Francisco loses only 20%?”
    Yes, (except more like 10-15% on average). Why is it so difficult to comprehend this?
    The point was merely that the 40% number used by GS is wholly irrelevant to SF’s market, for a number of reasons.

  29. Posted by Dude

    “Yes, (except more like 10-15% on average). Why is it so difficult to comprehend this?”
    Got it. And I agree with that.

  30. Posted by fluj

    I don’t know what relative immunity means. I do know that we are desirable, bounded by water and mountains (or large hills), and our city councilpeople are either in effect, or intentionally, anti-building.
    I’m not a subscriber in “superstar city” either. But I am seeing people with vast amounts of capital buying real estate right now. How long that can continue, I cannot say. There are tons of folks with money around here. That’s indisputable. Where it comes from, I don’t know.
    Glen Park hasn’t taken a hit. In fact, the north side of Glen Park is more expensive than ever. Anything bigger than 1000 feet still costs 700K+ in the Sunset, it seems. The Richmond? I haven’t seen it decrease. For older lofts and condos in SOMA, yes, I agree. There’s too much competition. People want the newer stuff. The older condos are where the good deals are to be found.
    Southern reaches, yes, have taken a hit. However, we’re still seeing occasional 800K purchases in those areas. 800K for Portola? 950K for St. Mary’s Park? Those locations should have taken big hits by now. You can’t touch Merced Manor for under $1.5M, and it is trending up. It’s weird. That used to be where people could get giant homes for under $1M.

  31. Posted by Mole Man

    People said the City was too whatever to fall last time when values fell from 1988 to 1995, and in the end everything fell the same third or so it just took longer in the nicer areas.

  32. Posted by RinconHill_Res

    “But I am seeing people with vast amounts of capital buying real estate right now. How long that can continue, I cannot say. There are tons of folks with money around here. That’s indisputable. Where it comes from, I don’t know.”
    This is precisely the reason why certain types of properties in SF (the $1.5MM and up properties) are more immune and will continue to be immune relative to others. These people generally don’t worry about a tightening mortgage market because they’re either paying cash or can easily put down 20%.
    Also, a lot of the people that buy these properties in SF, even if they’re doing so as a second or third home, are not speculators, they just have too much money on their hands.

  33. Posted by "Dave"

    People said the City was too whatever to fall last time when values fell from 1988 to 1995, and in the end everything fell the same third or so it just took longer in the nicer areas.
    Exactly. What happened during that time frame? National and local recessions? Defense/aerospace industry implosion? Look at Detroit. It’s housing market is collapsing today not because it was a bubble. Its economy is imploding and its economic problems are exacerbated by the subprime mess.
    Can that also happen here? Yes. Tech can fall apart (again) and Google can come crashing back to earth. But if loads of people lose their jobs, housing only gets cheaper for those who don’t. There will be winners and losers. But, IMO, waiting for magical drops of 30 to 40% in Pac Heights is not a great strategy.

  34. Posted by james

    here’s that article from the times i mentioned earlier:
    http://www.nytimes.com/2007/10/22/us/22auction.html
    who’se ready to move to minneapolis? ;)

  35. Posted by SFAnalyst

    Schadenfreud is great in the abstract but renters need to be careful (and I am one). In the event of “loads of people losing their jobs” or “magical 30% declines” there will be no place to hide. Very few would be unaffected and it would hurt. Let’s hope it doesn’t happen that way.

  36. Posted by emmett_brown

    Here is an article by Jim Jubak on the global boom/bust cycle. His thesis is that (1) the modern era of global cheap money supply that (2) leads to massive amounts of investment that inevitably inflates asset values and subsequent panics and (3) the central banks pump out more money to limit the fallout which in turn causes (1). Risk, Bailout, Repeat.
    I’m sure I didn’t explain that very well, but it is an interesting answer to the question “where is all this money coming from?” It’s not real estate specific, though it calls out the current subprime market as the most recent panic this decade.
    http://articles.moneycentral.msn.com/Investing/JubaksJournal/HowToRideTheBoomPanicCycle.aspx
    2,220,000 for a 70′s condo on steroids? Granted, 5 bedrooms in 94131, but still…
    http://www.1809diamond.com

  37. Posted by redy

    Anon2 – 745 Marina Blvd was sold for $3.1 mil in 2005. Selling for $3.95 million 2.5 years later is still a $800,000 gain, and +25%. Yes, it is under their sky high asking, but $800K is still decent. Place is about 2,300sqft.

  38. Posted by Neverland

    I really question the sanity of some buyers’ actions, and who is their buyer’s agent, advising their buyers to pay $400K over asking for a decidedly uninspired house on Diamond St – in this market ?!

  39. Posted by kel

    While its true that we do not know what is going to happen here, we can draw parallels to the past, i.e. Japan in the early 90s.
    This is from a NYT article in 2005:
    “Mr. Nakajima said he had barely missed being stuck out there himself. In 1991, he was looking at a 100-square-meter apartment (1,080 square feet) for about $600,000 about two hours outside Tokyo. He said his wife stopped him. Six years later, he spent the same amount to buy a more spacious house in a downtown neighborhood. “Maybe my wife should be the economist,” he said.”

  40. Posted by fluj

    Wasn’t the Japanese real estate collapse preceded several years by a nearly complete general economic collapse? What you are talking about here, in the States in 2007, is the opposite. Drawing parallels is a big stretch. TULIPS! DOT COM! BEANIE BABIES !

  41. Posted by EH

    Has anybody ever been able to predict a downturn?

  42. Posted by Trip

    Goldman Sachs (the subject of this thread) made billions recently predicting the housing downturn and resulting mortgage mess.

  43. Posted by diemos

    “Goldman Sachs (the subject of this thread) made billions recently predicting the housing downturn and resulting mortgage mess.”
    Which reminds me of an old chestnut. “The easist way to predict the future is to create it.”
    Isn’t it great that they can reap windfall profits off of the collapse of the very securities that they created even while they are begging for a bailout of said securites from the government. Ain’t capitalism grand?

  44. Posted by diemos

    “Has anybody ever been able to predict a downturn?”
    Famous trader Jesse Livermore massively shorted the market in 1929 and went into the great depression with 100M in cash.

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