May 7, 2009

Pushing Forward With Price Discovery At The Palms (555 4th Street)

555 4th Street #313: Floor Plan

Four months ago 555 4th Street #401 broke through the $600,000 mark on the downside for two-bedroom condos at The Palms and closed escrow with a reported contract price of $599,900 (purchased for $779,000 in October 2006). It was, however, a bank owned sale and lacking its kitchen appliances.

And while 555 4th Street #313 isn’t yet bank owned and its owner hasn’t yet "freaked out" (as far as we know), it did hit the market yesterday seeking a short sale at $599,900 ($540 per square foot). The two bedroom condo (with appliances intact) was purchased for $800,000 in January 2007.

With respect to one-bedrooms (six of which are currently listed), 555 4th Street #733 hit the market in February seeking $589,000. Currently listed at $469,000 ($679 per square foot) having been reduced four times since, the listing notes "VACANT" and "possible short-sale." The seller paid $645,000 in August 2006.

∙ Listing: 555 4th Street #313 (2/2) 1,111 sqft - $599,900 [MLS]
∙ Listing: 555 4th Street #733 (1/1) 691 sqft - $469,000 [MLS]
A SoMa/Palms Wake Up Call (And Apple): 555 4th Street #401 [SocketSite]

First Published: May 7, 2009 6:00 AM

Comments from "Plugged In" Readers

Wow. I feel very bad for these owners, whom got caught up in the housing frenzy.
In the winter/spring of 2007, my company relocated me to SF, and I looked to purchase a 1-bdr w/ den and parking spot, which was located in a central location with transportation, restaurants, and other neighborhood amenities. I looked at many of the new developments, and put a deposit at the Hayes for a 1-bdr w/ den + parking spot. The purchase price was $599,999.
At the time, I was very hesitant, because I thought that the prices were absurd, but I was moving from small town USA, so I really had no idea about SF RE. Eventhough I was a new SF transplant, I questioned how many people could afford $800,000-$1 mil+ 2bdr/2ba condos in one location. I realized that the job market was strong, but it was still very amazing to me. I grew up with the mentality of a minimum of a 20% down payment and the ability to comfortably pay the mortgage. The main reason for my purchase was the absurd rental prices at the time ($2500 for a 1-bdr) and a substantial down-payment assistance from my company, if I was to purchase due to a very significant cost-of-living difference.
Once I could see things moving south and realizing that my mortgage would be a bit of a chain around my legs, I decided to get out of the purchase agreement and lose 50% of my deposit. I would have had very little flexibility to move due to the high cost of selling my condo, even if prices did not deteriorate. I am young and enjoy a certain level of living flexibility. Plus, you are not going to live in a 1-bdr for 10+ yrs.
I am curious to see how the Hayes is fairing in this environment? I feel very fortunate for using my common sense to get out of my purchase agreement, eventhough I gave up on a substantial moving package. We all need to be a little sensitive to the owners, whom purchased these condos/houses, whom are now significantly underwater. It will take them many years to build up that equity. I do have no sympathy for the people with no-money down deposits. That is just plain stupid and they should pay for their decision.

Posted by: MarinaRenter at May 7, 2009 7:32 AM

"I do have no sympathy for the people with no-money down deposits. That is just plain stupid and they should pay for their decision."

You should pay more attention to Satchel. These are exactly the buyers who aren't going to pay for their decision. You're going to pay for their decision.

Posted by: diemos at May 7, 2009 7:38 AM

"I am curious to see how the Hayes is fairing in this environment? "

I just read on another blog that only 2 units left at the Hayes. Give them a call :)

[Editor's Note: The sales office is touting reductions of up to $288,000 (26%) on those last two units (both two bedrooms).]

Posted by: chuckie at May 7, 2009 8:24 AM

MarinaRenter wrote:

> I do have no sympathy for the people with no-money
> down deposits. That is just plain stupid and they should
> pay for their decision."

Then diemos wrote:

> You should pay more attention to Satchel. These are exactly
> the buyers who aren't going to pay for their decision. You're
> going to pay for their decision.

I remember the first time I calculated my liquid net worth and saw a six figure number, and I remember how hard I worked to get there. I have a lot of sympathy for the huge number of people that worked hard and saved to buy a home or condo, but were not able to hang on to it.

On the other hand I get angry when I hear about people that bought with no money down (and often pulled out a couple hundred grand of HELOC cash) when I realize that my tax dollars will go to clean up the mess.

Posted by: FormerAptBroker at May 7, 2009 8:28 AM

No surprise here. This is The Palms, possibly one of the worst new condo developments in SOMA.

Posted by: anon at May 7, 2009 9:15 AM

Ha ha, the other owners in SF like anon above always find some complaint about the units selling for 20% off, ooops, now *25%* off, to delude themselves and the potential purchasers of the units they are in the process of trying to unload, but the reality is that this development at the time was considered reasonably priced, has great freeway access for those who drive to the south bay, and the loans available at the time had some owners paying less than they would for rent for a comparable unit. The Palms was an outstanding development for its demographic.

Purchasers tended to be young professionals (the garage is FULL of BMW 3 series cars), whose parents no doubt encouraged them to get onto the "property ladder", without realizing that pools have ladders too, which can lead you to being directly underwater!

Posted by: tipster at May 7, 2009 9:33 AM

Why was that Mosaica comment deleted? How did it differ from the Hayes comment?

Posted by: anonn at May 7, 2009 9:34 AM

No surprise about prices being off this much. In fact, 20-25% from peak values is probably what the average (randomly selected) property in SF is off.

Something MarinaRenter said really made sense, and is something I've often thought about in relation to SF valuation:

"At the time, I was very hesitant, because I thought that the prices were absurd, but I was moving from small town USA, so I really had no idea about SF RE."

I've mentioned before an academic study of bubbles (conducted under controlled experimental conditions) that concluded that one of the primary determinants of bubble conditions was a high ratio of new entrants (little experience with historical factors). I strongly suspect that this was a factor in the outsize gains of SF during the 1997-2007 period. The other factors in the study identified were (2) uncertainty as to fundamental value and (3) presence of easy credit conditions.

BTW, congrats MarinaRenter on not getting suckered. For people who are experienced in investing and trading markets, the foolishness of the SF real estate scene (at least since I got here in mid-2002) was blindingly obvious, but I can see how for many it would have been a tough pitch to resist. Kudos to those who "momentum traded" this market and got out in time; no tears for the suckers who didn't. (Like FAB, I'm more inclined to feel bad for the taxpaying sheeple who now have to refill the banksters coffers, but even then I'm pretty cynical about the whole thing. )

Posted by: LMRiM at May 7, 2009 9:53 AM

On the other hand I get angry when I hear about people that bought with no money down (and often pulled out a couple hundred grand of HELOC cash) when I realize that my tax dollars will go to clean up the mess.
Welcome to capitalism, American style. Profits are privatized, losses are socialized.

I get angry when I hear about traders at AIG Financial Products, who helped blow up AIG with derivatives trading, pulling down millions of my and my countrymen's tax dollars in bonuses they were "contractually obligated to".

I also get angry when I hear that my tax dollars are bailing out AIG, and paying off their counterparties and being spent cleaning up the mess these traders created.

And even more angry when I hear that a lot of these people live in London, paying $10,000 a month in rent, for example.

Posted by: Brahma (incensed renter) at May 7, 2009 10:01 AM

This may be due to socket site reporting bias, but it seems to me that the bubble is popping the hardest on condos built in the last 10-15 years, and especially hard on condos built during the bubble.

I would like to see a breakdown of price declines by age of building, or, lacking that, by district, so I can tell whether the decline is coming in stages, or all at once.

[Editor's Note: Ah yes, that old "reporting bias" (a.k.a. what the analytics show). In fact, the overall San Francisco market is actually headed up...]

Posted by: rr at May 7, 2009 10:01 AM

To provide needed perspective, The Palms is great. Anon is likely "inadequate" and bitter.

Posted by: grrr at May 7, 2009 10:01 AM

Everything leads into sloppy bail out talk nowadays.

The only way to prevent bail outs is to prevent or limit bubbles up front. We had a long time to try cooling things down, and we collectively failed and just let the fire burn out.

The bust is punching a six trillion dollar or bigger hole in the economy and the government is only patching up a tiny fraction of that around the fringe.

People who got bogus loans, whether they are subprime or prime or 80-20 or first and HELOC or whatever else, got them from crooked bankers who should have known better and pocketed an even bigger share of the frenzy. On the way down the economy will wash out much of this, but the vast majority of the mess was caused by and will be absorbed by the banks that were involved.

There is nothing pleasant about any of this, but pretending that the narrative of this story is that buyers walked away with bags of free government money is missing most of the interesting stuff, especially the regulatory failings that we should be patching up to avoid things getting this bad again soon. There are always business cycles, but the nature and extent of these cycles is in our control.

Regarding these units specifically, the location is not bad, and the commercial style construction is solid if not all that charming. This is only a block or two away from the super stylish places on South Park that we just got a look at. The cheap studio unit with the direct entrance (not mentioned yet) seems like an interesting low point to measure.

Posted by: Mole Man at May 7, 2009 10:02 AM

I concur with grrr.

And tipster, you're right on in regards to the demographic that The Palms was targeting after during it's selling campaign kick-off in late-2006. The trendiness and the convenient location of the building really attracted a lot of the younger professionals that were looking to buy their first place.

Posted by: SC at May 7, 2009 10:11 AM

Totally off topic, but I kind of like that floor plan.

That's how you put two bedrooms next to each other but have some privacy - the closets in between and the doors spaced away from each other. I don't know why more of these condo developments didn't do it that way.

Posted by: kthnxybe at May 7, 2009 10:19 AM

Braham wrote:

>This may be due to socket site reporting bias, >but it seems to me that the bubble is popping >the hardest on condos built in the last 10-15 >years, and especially hard on condos built >during the bubble.

>I would like to see a breakdown of price >declines by age of building, or, lacking that, >by district, so I can tell whether the decline >is coming in stages, or all at once.

The rising tide lifted all boats, and now that the tide is receding, its revealing which boats truly wore no pants (sorry for the mixed metaphor).

I think you are seeing the newer condos lead on the way down since they were purchased on the way up by an increasingly less financial secure marginal buyer. Meaning, as each year went on and lending standards eroded, less and less qualified buyers were paying more and more for homes (and condos).

Now that the bubble has burst, Option ARMs are starting to reset, jobs are being lost, etc, those new marginal buyers are the ones being forced to sell (or their banks). Price discovery is happening there first because that's where the sales are.

How many non-forced sales have their truly been in the past 2 years? I would wager very few, since most are of the mind that selling into this market is a terrible idea. But is it really? I mean, sure you may take a haircut to today's "market" price by selling quickly, but if that haircutted price is 10% above the price 12-month out, I'd say you made the right call.

Posted by: Andrew @ Cirios at May 7, 2009 10:29 AM

Price discovery is happening there first because that's where the sales are.

I'm wondering if the drop in condo price will affect the SFH market. I'm really in the market for a house, and I've noticed that the SFH price are holding steady and may even have gone up a bit (for quality ones under $1M). Some houses have reportedly gotten multiple bids and some sold above asking. Condos, on the other hand, seems to still be falling. I'm still new to SF RE and I can't wrap my head around it. Shouldn't the drop in condo price eventually put downward pressure on SFH? Or are the condo/tic and SFH individual market with little relation?

Btw, almost all the SFH that I like (not a fixer and in good nabe, etc) and within my price range (under $1M) are flying off the shelf (in some cases after a price reduction, but still). It seems like SFH have bottomed out, at least for those segment.

[Editor's Note: Keep in mind the condo market tends to be a leading indicator (and keep an eye on those apples).]

Posted by: sam at May 7, 2009 11:09 AM

Keep in mind that the stock market is a leading indicator, and it has had a remarkable bull run since its March lows. That's where the down payments come from.

Posted by: Unwarrantedinlaw at May 7, 2009 11:31 AM

"That's where the down payments come from."

Ummmm....the market is still down like 40% from it's late '07 peak. So if you had $100K in the market in late 2007, it shrunk to less than $50K earlier this year, and is now back up to around $60K. Sure, you're less hosed, but it's not like you have some overnight windfall to put into a condo.

Posted by: Legacy Dude at May 7, 2009 11:52 AM

Right. And every single investor who had money in the market in 2007 has completely ridden the storm out in its entirety.

Posted by: anonn at May 7, 2009 12:16 PM

Take a look at some random stocks and you will see that most are up dramatically from their March lows. It's a powerful effect that you don't read about in the media.

Posted by: Unwarrantedinlaw at May 7, 2009 12:55 PM

a buyer says almost all the SFH that I like ... under $1M... are flying off the shelf

he must be an Agent in disquise... right????

Posted by: hangemhi at May 7, 2009 1:44 PM

Keep in mind the condo market tends to be a leading indicator

I hope you're right. I want SFH to drop even more so I can jump in.

Btw, there is an article on the Examiner today that says SFH is rebounding.
S.F. housing market warming up. I hope they're wrong.

hangemhi - no, I'm not an agent. I'm speaking from experience. If the house is in bad shape or is asking for the sky, of course those houses aren't moving and like I said, those aren't the SFH that I like. The ones I do like are priced right, in good shape and in good nabes. Those are selling like hot cakes imo. I saw one in Sherood Forest for $799K that sold within a week after I went to its open house. It was probably on the market for less than a month. Mind you, maybe

Believe me, I don't want price to go up. I want them to keep falling.


Posted by: sam at May 7, 2009 2:05 PM

I meant to say that, mind you, maybe selling a house under 30 days is not a big deal in SF. But where I'm from, it's astounding to be able to sell a house at a reasonable price in less than a month! Usually a house has to be priced way under market to attract offers and usually only banks owned properties can do that.

At any rate, for all you bears out there, I'm rooting for you.:)

Posted by: sam at May 7, 2009 2:14 PM

thanks for qualifying "like hot cakes" as 30 days or less.

i'm an agent... the arm chair economists on this site believe no anecdote from anyone is worthy of consideration... and anything said by anyone that is positive about real estate must mean it's a lying agent. afterall employment is only at 90% (see, there i go with positive spin, danged agent coolaide they feed me)

fyi, prices on SFH's are down... that same home might have been anywhere from 10% to 20% higher this time last year

Posted by: hangemhi at May 7, 2009 2:51 PM

I don't think they are too wrong, a SFH a couple of doors down just went into contract and they were asking 2 million and NO parking. It was on the market for about a month. It'll be interesting to see if it falls out of contract or the final price. Pretty shocking.

Posted by: viewlover at May 7, 2009 3:18 PM

"I've mentioned before an academic study of bubbles (conducted under controlled experimental conditions) that concluded that one of the primary determinants of bubble conditions was a high ratio of new entrants (little experience with historical factors). I strongly suspect that this was a factor in the outsize gains of SF during the 1997-2007 period. The other factors in the study identified were (2) uncertainty as to fundamental value and (3) presence of easy credit conditions."

You really have to split this era up into two parts. In the SF region there was a very local bubble due, in very large part, to the dotcom craze from 1997-2001.

After the crash, the SF housing market started a market correction that was never completed due to the onset of the 2002-2007 bubble, whose underpinnings were national in scope.

It does seem that the high ratio of "new entrants" (with little (local?) experience with historical factors) in SF was a critical factor during the dotcom boom. That said, I'm not so sure that all the funny money sloshing around wasn't more critical.

In the second bubble, for the conclusion to be valid I think that "new entrants" would have to be defined differently (given the national scope of the bubble).

In this context, it would best describe people nationwide (including but obviously not limited to people in SF) who never should have been allowed to enter the housing market as buyers in the first place.

And "little experience with historical factors" could, with a bit of nuance, describe the ignorance of a different and larger group of people (again, nationwide) who would then, in essence, fit into your concept of "new entrants".

Posted by: nnona at May 7, 2009 3:20 PM

"Take a look at some random stocks and you will see that most are up dramatically from their March lows."

Indeed. Isn't it interesting that a number that was down -56.8% from it's high and is now 34.1% above it's lows is still -42% down from it's high. Fun with denominators.

Posted by: diemos at May 7, 2009 5:38 PM

Sam --

The reason you are seeing homes priced under $1M in good shape selling quickly is because the supply of those homes, relative to the demand for them, is low. We see that everywhere, not just in SF as well-priced, move in ready homes sell in a matter of weeks with multiple offers.

What you have not seen (yet) is true price discovery. You are seeing it in condos, and slowly in SFHs, but there is still more demand than supply, partly because of the pervasive, long standing view that SF real estate is immune from the ails that affect the rest of the country. Ironically, as demand picks up for homes, you'll start to see sellers sell into the strength and the process of price discovery can begin.

I am an agent, by the way, full disclosure, but tell each of my clients that the opportunities are in front of us, not behind us or happening now.

The idea that sales are "heating up" and that this will lead to a bottom displays at best a profound misunderstanding of what drives housing prices, and specifically appreciation, and at worst is your typical real estate broker spin tactics.

Your patience will be rewarded. But I stress patience. What we may see here is a dead cat bounce, and while the San Francisco SFH market may be more resilient than others, 30 years of bubble conditions don't get worked out in 20 months.

-Andrew

Posted by: Andrew @ Cirios at May 7, 2009 8:42 PM

555 4th Street #733 has fallen out of escrow and its list price has been reduced to $449,000. Once again, purchased for $645,000 in August 2006.

Posted by: SocketSite at June 16, 2009 9:01 AM

Two days after falling out of contract and reducing its list price to $449,000, the asking price for 555 4th Street #733 has been reduced to $419,000.

Posted by: SocketSite at June 19, 2009 8:33 AM

Down 35% and it's not sold yet. That's fanstastic news for people who waited to buy here!

This looks like an ideal place for long term income investors, except for the still way too high price of course. When units like this get down to about 100-125x monthly rent I think they'd make sense.

I can't see any real rationale to buying something like this as an owner occupied unit.

Posted by: LMRiM at June 19, 2009 9:21 AM

Unit #602 (fore)closed on June 10 for $376,416. This a one bedroom condo with approx. 670 sq.ft. of living space. The Coalition of the Willing grows by one more.

Posted by: EBGuy at June 30, 2009 2:47 PM

re: #602:
That's still $562/SF. It wouldn't rent for $5-6/SF (~$3600/mo), so that price is still high.

Posted by: avwh at June 30, 2009 3:31 PM

Unit 847 was just foreclosed on for $390k on August 25. No square footage that I can tell but it appears to be a 1/1. Bought in June 2007, it was assessed at $560k for tax purposes.

Posted by: EBGuy at September 15, 2009 11:26 AM

The listing for 555 4th St #313 was withdrawn from the market today without a reported sale. Once again, purchased for $800,000 in January 2007, last seeking $599,900 as a short sale.

Posted by: SocketSite at April 27, 2010 3:03 PM

At some point the prices here will be low enough to make sense. Compared to other buildings, the HOAs here are low, the location is good for those that use CalTrain or have to commute down the Peninsula. The finishes are not that bad either.

Posted by: SFRE at April 27, 2010 3:09 PM

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