Yet another front-page story in the Chronicle about the housing market this morning, purporting to spell "more trouble ahead".
Let's break it down and see if there's meat to the story.
-- Rising unemployment. It doesn't take an economist to realize people will not buy homes if they're worried they might lose their jobs.
Unemployment also will spur supply. While the first wave of foreclosed-upon homeowners comprised people who could not afford their homes from the get-go, as more people lose their jobs, they are likely to lose their homes because they no longer have enough income to make the payments.
Verdict: truth nationwide, but here in the Bay Area, firms sending out pink slips seem to have leveled off months ago. See
this link from the EDD that shows a decrease in unemployment in SF County from March to April, down to 8.8%
-- No "move-up" buyers. In a normal real estate market, about 80 percent of buyers are "moving up" or "moving across" - people who sell one home before buying another, said Mark Hanson, principal of Walnut Creek's the Field Check Group, a mortgage consultant. Remaining purchasers are split between first-time buyers and investors.
In today's market, about half of buyers are first-timers and a third are investors, leaving just 15 percent of what he calls "organic" buyers. Those first-timers and investors all troll for bargain-basement foreclosures - leaving few buyers who are interested in the homes being sold by "Ma and Pa Homeowner." That, in turn, leaves Ma and Pa unable to move up to a nicer home. "The organic seller is left out in the cold," he said.
Verdict: IMO, the first-time buyer numbers are accurate, or even higher than 50%, but they certainly aren't exclusively "trolling for bargain-basement foreclosures". Sure, it would be nice to buy a one-bedroom condo in Noe Valley for $300,000, but that simply doesn't exist. If you know of one, let me know, because I have a pocket-full of first-time buyers who would love to buy it.
-- Tight credit. Even people who do want to buy a home can't necessarily find someone willing to give them a mortgage. The standards of 20 percent down payment; solid, provable income; and good credit are back in force. While that more-stringent underwriting represents a return to classic values that should avoid future delinquencies, it leaves quite a few potential borrowers out in the cold. Most notably, self-employed workers - even ones with high income, such as doctors - are finding a less-cordial reception from lenders.
Verdict: True, but none of my buyers are having any problem getting approved for loans. Even excluding those without 20% down payments (which is inaccurate because my lenders can do 10% down now) there are still plenty of first-time buyers ready to buy.
-- Homes still overpriced. Home values have plunged nationwide. The authoritative Case-Shiller index shows prices nationwide at 158, down from a spring 2006 peak of 226. (That compares to a base value of 100 in January 2000.)
So that means homes are now affordable, right? Not so, say many analysts who believe prices are still wildly inflated compared to historic appreciation rates. From 1950 to 2000, home prices grew 4.4 percent a year, modestly outpacing inflation, said Andrew Schiff, a spokesman for Euro Pacific Capital in Connecticut. Following that metric, the Case-Shiller index should be at 132. "We're still way above where we should be in a normal market," he said.
Verdict: From 226 three years ago, to 158 now, with a metric of 132 as "where we should be in a normal market". So let me get this straight: 68 basis point drop already, yet only 26 points from "normal" is "wildly inflated"? If 68 points equated to a 15% drop in SF (which I've seen in prime neighborhoods), 26 points would mean a further 5-6% drop. Possible, but with plenty of first-timers in the market and deals galore for move-up buyers as well, we'll see.
On the plus side for the Chronicle, they're setting up the next round of "housing bubble" articles about affordability and price metrics from which to write many tens or hundreds of stories in the coming years.
-- High end taking a hit. Until recently, most of the market activity and price drops have been among lower-cost homes. Homes under $350,000 have had the most severe price drops, while those above $750,000 have remained relatively stable. That appears to be changing, as foreclosure woes spread to the upper end. The difficulty of getting "jumbo" loans to buy pricey houses has exacerbated the situation to the point where unsold inventories of high-end homes are swelling.
"The mid- to upper-end housing market is sitting on the exact precipice that the lower-end market was sitting on in early 2008," Hanson said.
Verdict: This is just wildly inaccurate and shows a lack of understanding from the Chron and this writer. If Ms. Said thinks that price drops of 15-20% on homes over $1M is "remain[ing] relatively stable", I'm not sure she's qualified to speak on this subject. But prices have dropped across the board, at all price points, since last summer. This paragraph is flatly untrue. Taking that into consideration, any effect this paragraph was intended to have has already been factored into the market, many months ago.
And since this posting is getting rather lengthy, I'll sum up the other 5 points (out of 6) under the "supply likely to surge" section as such: not in SF. There is no secret, massive supply of foreclosures waiting to come on the market in SF; at least not in any neighborhood my buyers would want to live (maybe in Hunters Point, but not Hayes Valley). My professional opinion is that barring any further doomsday economic news, which has leveled off in the past few months, the supply of workers in SF will remain mostly employed, and anyone facing hardship will dispose of their property in the normal fashion. Will some people lose money by having to sell below what they paid a few years ago? Yes, but those price decreases are already factored into the market as a whole and likely won't pull down the greater market in SF.
All in all, the story is accurate on a nationwide, macro scale, but probably won't mean much for San Francisco's micro real estate market. Only time will tell.
SOURCE: SF CHRONUPDATE: Looking at the actual figures from Case-Shilling, San Francisco's index is 117.77, well below the 132 metric stated by the Chron. So when will we see articles saying SF is undervalued??
