November 18, 2008

We'll Connect The Comments, You Connect The Dots (And History)

From a comment this afternoon:

I remember Palo Alto holding up well (in nominal terms) [from 1990 to 1992] and I trust the best parts of SF did too.

But from a plugged-in reader last week:

A friend of my Dad was just reminding us that he bought a couple Palo Alto REOs in 1994 for about half of what they sold for in 1989…

We'll connect the comments. You connect the dots (and history).

Once Again, It's Just Getting Starting (And It's Going To Last Longer) [SocketSite]
A Plugged-In Reader Picks An Apple For Himself (1968 Greenwich) [SocketSite]

First Published: November 18, 2008 12:30 PM

Comments from "Plugged In" Readers

Um ... anybody remember the 1989 earthquake?

That helped depress property prices for several years afterwards: property damage, people fleeing earthquake country, insurance companies refusing to write new earthquake policies on homes.

Posted by: DataDude at November 18, 2008 1:02 PM

The Real Estate Industry has been in a 14 year run-up 'prosperity' cycle. Prior to this recent ,cycle correction cycles were fairly regular ... about every 7-8 years apart. Perhaps the affluence today drove market past the correction cycle; thus the 14 year run up. Who knows?

During this time both Buyer and seller expectations changed... we have become accustom to the upswing in the market and have developed 'patterned behavior', which, behavior will need to be rethought: new rules of engagement will emerge and buyers and sellers will develop new behaviors appropriate to the circumstances. Seller will emotionally adjust their 'expectations' to lower prices... buyer will have a 'place at the negotiation table' for the first time in many years. Negotiation and Leverage will equalize between buyer and seller.

This cycle will take its course.. Companies, people and industry will adjust and 'this too will end'.

Posted by: e.room at November 18, 2008 1:13 PM

SF was a dump in the sixties and seventies, a great dump to live in. A teacher could afford a sunset stucco box.

Posted by: irreverent at November 18, 2008 2:06 PM

Article out today on the luxury segment, specifically referencing SF as well as Palo Alto. It's that First Republic Prestige Index that SocketSite has referenced before.

http://www.marketwatch.com/news/story/California-Luxury-Home-Values-Decrease/story.aspx?guid=%7BD649A3AC-B536-4DE8-9B22-6423E57A48D7%7D

Posted by: Dude at November 18, 2008 2:13 PM

From the article above "The average luxury home in San Francisco is now $2.99 million."

Wow, what a price correction.

Posted by: anon at November 18, 2008 2:20 PM

The quake was nothing compared to the economic mess. Things started going sour in tech around 1987. By 1991 the situation was extremely stark, and the Valley was lean and mean. Things kept getting worse, not really even starting to turn aorund until 1993. This time is probably going to be more harsh. Much of corrections, especially with homes, is accomplished with the period of stagnation that follows the sharp downward plunge. It took around a decade to shake out all the crud after the last boom which was smaller.

Posted by: Mole Man at November 18, 2008 2:24 PM

The point is it's lower than it was a year ago, and predicted to keep falling. It could be 2.99 gazillion for all I care...but the current trend and future outlook are both negative.

Posted by: Dude at November 18, 2008 2:25 PM

The two corporate authors of that "study" are hardly objective. They use those "studies" to curry favor with the real estate salespeople so that the salespeople will hand out the studies to their clients who will then consider the authors for their funding needs.

If the "study" doesn't slant very favorably towards buying real estate, the salespeople won't hand it out. Therefore, it states that things are down a hair.

Anyone who has spent time writing press releases knows that newspaper editors will quickly incorporate whatever you write into an article. You could write that your "study" says the moon is made of green cheese and it would appear in half the morning papers.

Relying on that bunch is about as smart as relying on "analysts" during the dot com boom. Watch out for the bias, it will cost you a lot of money.

Posted by: tipster at November 18, 2008 2:36 PM

My father-in-law tells me that he had a hard time getting rid of his Presidio Heights mansion (Clay between Spruce & Maple)in the early 90's. It was eventually "sold back to the bank", then some Russians bought it and it burned down.

It is now a vacant lot used by the Fisher's for their back yard.


Posted by: HappyRenter at November 18, 2008 2:51 PM

AFFORDABILITY Hey Everyone, don't forget to adjust your studies of cycles for differences in mortgage rates, which can greatly influence affordability and changed dramatically from the late 80s onward. Cheap credit supports home prices and somewhat offsets negative effects such as falling employent or income. In 1988, the 30 yr treasury was 9% , and this was likely a benchmark off of which mortgage rates were based. It fell below 6% briefly in late 1993, only to rally quickly back to 8.5%in late 1994, before finally resuming the downtrend to below 5% today. If you can borrow cheaply, you can afford more.

Posted by: Affordability at November 18, 2008 3:16 PM

In the early 90s one of my professors had a home in Palo Alto that he couldn't sell. It mysteriously burned down one day and he collected the insurance and went merrily on his way.

In the late 90s I kept thinking how much he would have made if he had had a long investment horizon.

Posted by: danalotus at November 18, 2008 3:34 PM

"If you can borrow cheaply, you can afford more."

True, assuming a fixed home price. Or even home prices appreciating at historical norms of 3-4% annually.

But when a giant bubble inflates prices the way this one did, cheap debt isn't moving the needle.

Let's use the dates above: 1988, 1994, and today.

In 1988 the average price of a D7 property was $955K while a 30-year fixed was around 10.5%. Assuming 20% down, your monthly payment would have been $6,990 for P&I.

In 1994, average D7 price was $982K while a 30-year fixed was 8.8%, for a payment of $6,205. Homes had appreciated after the '89-'94 correction, just slightly, but rates were lower so payments were cheaper.

And today, average D7 SFR price of $3,854M with a rate of 6.5% for a payment of $19,488.

So mortgage rates may be 2-4% lower than they were historically, but the effect is meaningless because the prices have gone up so much. Plus mortgage payments have to be paid out of incomes, and incomes surely haven't increased as much as home prices during the last 5-7 years.

We can argue endlessly about how much of the run-up was attributable to bubble vs. gentrification vs. more good jobs or whatever. But regardless of the reasons, and despite low mortgage rates, SF homes today are more UNAFFORDABLE than they've ever been.

Posted by: Dude at November 18, 2008 4:01 PM

If you can borrow cheaply, you can afford more.

this is true.
however affordability is near all time lows in San Francisco if one uses the same criteria

(The NAR changed the way they calculated affordability a few years back when the affordability levels were rediculously low)

in the end, interest rates are lower now than in the early 1990's. but house price to salary ratios are much higher these days, negating that.

Posted by: ex SF-er at November 18, 2008 4:05 PM

oops I cross posted with Dude. but we're saying the same thing obviously.

Posted by: ex SF-er at November 18, 2008 4:18 PM

All that new construction is the achilles heel. If the building permits would have been thought through perhaps the values would hold up a little better.

Posted by: Michael L. at November 18, 2008 4:39 PM

I was living back east at this time. The Savings and Loan debacle did major damage to Wall St. There, real estate plunged quite a bit....even in Manhattan where everyone wants to live (even back then) and, where they are not building anymore land (even back then).

I have been told that this area was somewhat immune to what was happening back then because the tech industry was booming and wasn't really tied tightly to the mess.

But...man, it was bad back there...in a highly populated part of the country where land wasn't being built anymore and everyone wants to live, housing prices fell harder than hard and unemployment was pretty high.

Posted by: Pumpkin Patch at November 18, 2008 4:52 PM

Just to add: If you think real estate can't fall hard in a highly sought out city, here is a NY Times article that eventually talks about Manhattan real estate in the 1990 recession: http://query.nytimes.com/gst/fullpage.html?res=9A05E4D61539F930A25750C0A9649C8B63

Quote:
New York's last recession, in the early 1990's, hit real estate hard. Co-op and condo owners who bought at the peak of the market in the late 1980's saw their homes' values plummet. This trend took several years to turn around, partly because real estate takes a long time to sell, as opposed to stocks and other assets.

Why was this area so immune? Hum...tech was just starting to get going! Remember they started the wave that took us out of this recession in the 1990s.

Even if PA or SF saw minor drops in housing prices back then, it was nothing like the double digit loses back east!

Posted by: Pumpkin Patch at November 18, 2008 5:01 PM

@pumpkin patch, many tech jobs were lost in the valley from 89 to say 94. defense contractors were hit hard (lockheed, raytheon) and almost all tech manufacturing moved out of the bay area.

Posted by: steve at November 18, 2008 5:15 PM

Posted by: satchelfan at November 18, 2008 7:06 PM

Steve...
I asked and was told, "Yeah, it(Silicon Valley) was crappy back then (compared to the dot.com bubble that followed)." But...um...how about companies like SGI? Cisco? Sun Microsystems? They were young and doing well. So, it could not have been that crappy....

Posted by: Pumpkin Patch at November 18, 2008 10:21 PM

@pumpkin, the companies you listed were tiny compared to the sizes they would grow too. I remember a long hiring freeze and Oracle and shipping/receiving stocked with new Stanford grads they didn't want to fire. the difference now is that the peninsula is much more tech dependent now than then, so we'll see what happens.

Posted by: steve at November 18, 2008 11:58 PM

HappyRenter wrote:

> My father-in-law tells me that he had a hard time getting
> rid of his Presidio Heights mansion (Clay between Spruce
> & Maple)in the early 90's. It was eventually "sold back to the
> bank", then some Russians bought it and it burned down.

Does anyone know the address of the former Iranian Consulate on Washington Street.? A friend that grew up in the area was telling me that it was (partially) blown up by extremists who didn’t like the Shaw’s government years ago but he couldn’t remember the exact house as we were walking by…

P.S. I heard that Don Fisher built a lap pool on the lot next to his house. Don was an All American swimmer as an undergrad (and even though we are neighbors and fraternity brothers I have never been invited over to the house)…

Posted by: PresidioHtsRenter at November 19, 2008 7:42 AM

Pumpkin Patch wrote:

> Even if PA or SF saw minor drops in housing prices back then,
> it was nothing like the double digit loses back east!

On average if you looked at “apples” the drop in prime areas of SF, and the Peninsula was about 25% from 1990 to 1994 (vs. about a 50% drop for S. Cal)…
If you look at the raw data you will not see as much of a drop since many super nice new spec. homes were going back to the banks and selling REO.
I won’t mention the address of the spec. homes that my contractor cousin lost to the bank in ’92 but if you look at 26 & 30 Blackhawk Lane in Burlingame on Google earth you can see a couple late 80’s spec. mansions that missed the bubble and didn’t sell for $1.5mm in 1990 and were sold REO for ~%750K each.
I sold my Eichler in Palo Alto in ’96 and bought a nice home in Burlingame (near BIS) for $360K and didn’t take my parents advice to buy a 4 bedroom REO in Hillsborough for $680K since I didn’t want to get roommates to help me pay the rent (little did I know that I could have sold the Hillsborough home for over $3mm in 2003 vs. the “only” $1.2mm that I got for the Burlingame house)…

Posted by: PresidioHtsRenter at November 19, 2008 8:07 AM

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