Monday, April 6, 2009

San Francisco Here We Come, Right Back Where we Started From

There has been a lot of speculation that the desirable zip codes have not fallen near as much as their less desirable counterparts. I saw a very interesting graphic on Calculated Risk last week that broke the San Francisco Case-Shiller into tiered price points. According to the chart, after tracking in lock-step for two decades, the three price points diverged during the boom. The low end shot up like a rocket, with the other two tiers lagging behind somewhat. In this context, I suppose it makes sense that the higher end homes have not fallen as much, because they also didn't rise as much.

As pointed out on CR, the higher end does have farther to fall, to be back in line with the dramatic decline of the lower end, but it is not near as steep a drop as some have suggested. Of course the Bay Area is not Sacramento....but I still think some parallels can be drawn.

If I had to hazard a guess, the higher end hasn't fallen as much as the lower end, because there were fewer sub-prime loans (i.e. foreclosures) at the higher price points. The "affordability products" for these pricier homes, Alt-A and Option ARM, are just now beginning to hit the skids.


Jeff T said...

I would think that San Francisco, higher end, would be an anomilee (sp) based upon Location, Location, Location. And the financing instruments for the higher end would allow less risk to be pushed down on the banks. Market would demand more "skin in the game" from the outset.

~tip of the hat to you

smf said...

One thing that is not mentioned in the high end market is the glut that exists there as well.

Go do a quick search of luxury homes in Granite Bay, and notice how many that are for sale were built during the boom period.

Search other high end ZIP codes and notice the same thing.

I would say that there is an exceedingly high excess of luxury homes right now, but that reality has not hit the owners yet.

More because selling at a loss for these owners really means a loss, as opposed to those who bought with little down payment.

Jacob said...

Well if a $300k home loses 50% and a million dollar home loses 20% the million dollar home has lost more $$.

The lower end will set the absolute bottom for the next level of homes but the difference in price between the better homes and cheaper homes will get smaller and smaller.

Of course the truly high end homes with huge lots in nice areas and quality construction will do a lot better than the 3500 ft2 homes with 50 ft2 backyards where you can open a window and touch your neighbors house that were selling for $700k will get crushed at some point.

The Bay Area seems like a risky place to buy. The wages don't really justify the prices anymore and if anything happens to the companies that are there and they start leaving it will be a disaster. And CA isn't doing anything to make companies stay or to draw new companies.

Buying Time said...

The million dollar plus homes are concentrated in a couple zip codes. Overall they are less than 5% of the SFH on ZipRealty for the Sac Metro area.

And you are both right, the higher end will lose much more dollar wise, even though it may not be losing as much percentage wise.

Lander said...

Unfortunately, there is hardly any local historical data out there. The best I can do is Zillow. In Q4 2006, they released a report which showed the historical Zindex back to Q1 1997, which roughly corresponds with the regional price trough (as measured by median price sources).

Trough* to Peak % Price Gains:

378% Oak Park
321% Del Paso Heights
309% Rio Linda*
294% East Sacramento*
291% Lincoln*
266% Land Park*
249% Elk Grove*
230% Roseville*
202% Granite Bay*
201% Folsom*

*An important caveat: The prices in these areas were rising as of Q2 1997. The actual price bottoms may have been in 1996 (or before). Therefore, the actual trough to peak price gains in these areas may be more than shown above.

PeonInChief said...

Sacramento and San Francisco (read: the inner Bay Area) aren't really comparable markets at all. Most San Franciscans rent, so the players in the housing market are a relatively small (and rich) percentage of the market. Also tenants there don't suffer the social disabilities that tenants suffer here. (I never, in the entire time I lived in the Bay Area, had an elected official tell me that my participation in public issues was suspect because I rented my home.)

smf said...

Regardless of price appreciation in higher end areas, the fact remains that the amount of high end housing built was disproportionate according to historical standards.

Hard to believe, but borne by simple observation, that a high percentage of these mansions simply did not exist 10 years ago.

If 100 mansions were built, when the demand existed for only 10 of them, will create some interesting results that I cannot quite predict right now.

But we cannot be making assumptions as to how low prices may go w/o taking into account the huge excess that exists out there.

Buying Time said...

Very very interesting numbers Lander.

SMF I think you and I have debated this before...and we never seem to agree. As a pseudo-economist, I see it as a pricing problem, not a supply problem. If prices are low enough all the homes get bought. Realtors call it a supply problem cause they don't want prices to go lower =)

sacramentia said...

During the run-up, the top Quartile of homes appreciated less than the bottom Quartile according to the Case-Schiller data. Therefore, I'd expect the top Quartile to fall a little less.

I do think that parts of Bay Area aren't a lot different than Sac. (Antioch, Concord, parts of San Jose, etc...)

smf said...

BT -

You are correct that it is a pricing problem...

...and the price for some of those homes will have to be pretty low to be taken up.

Eventually, people will remember that mortgage payment is only a part of total monthly costs. And those luxury homes with pools and plenty of area take quite a monthly chunk of $$ to maintain.

Sacramentia -

The price of the luxury homes would have fallen less in a normal market.

But way too many luxury homes were built...

sacramentia said...

SMF - I understand your point about excess supply, but disagree with your conclusion. In general, I think most people will purchase the nicest home in the best neighborhood that they can afford. This means that the luxury homes will attract the buyers that normally would have purchased a slightly less expensive home -or- one in a less desirable area.

As everyone adjusts to the excess supply over time, the vacancies will be in the least desirable areas and least desirable housing.

I expect this to be in Apartments, and large homes on lousy lots in mediocre neighborhoods, since the large homes in these areas will have the highest expense ratios in comparison to purchase price. Even today in a luxury area ($200+ sq ft), the cost of maintaining the home is still a very small percentage.

The biggest thing hurting luxury right now is the cost of jumbo's, but that is changing in the last couple weeks. In 60 days we'll know from the data but I bet there will be more transactions in the luxury markets.

RV6Flyer said...

"But way too many luxury homes were built..."

But those who can purchase true luxury homes can better ride out a storm and not be forced to sell at a price less then they feel is fair.

There are a few repos in Serrano, but many of the sellers have simply pulled their homes off the market. They are not as strapped for cash as the folks outside the gates who purchased stucco luxury boxes for $600M on a neg-am loan.

I think luxury has different definitions.

Husmanen said...

"A few repos in Serrano..."

From what I see on Realtytrac that does not appear to be true. There appears to be a ton of repos in Serrano. I personally know of two. I am sure BT could look more closely with her subscription data.

Also, I personally know two other situations where they owners used ALT-A financing to buy two homes and where renting out one house out for 50% of the reset monthly PITI. They have at least another year for until reset.

Luxury does have different definitions, but luxury in Serrano may be more of an illusion than would appear at first glance.

Buying Time said...

"I am sure BT could look more closely with her subscription data."

Sorry, gave that up when we signed our contract. Now I have to rely on the free stuff again.

smf said...

"Luxury does have different definitions, but luxury in Serrano may be more of an illusion than would appear at first glance."

And I have a relative who built one of those luxury spec homes in Serrano...:(

"But those who can purchase true luxury homes can better ride out a storm and not be forced to sell at a price less then they feel is fair."

BS flag raised way high. The monthly nut for maintaining such a home is quite expensive, and can quickly start eating away at profit margins, if any left.

And the issue still remains. Figure out how many luxury homes were built from 1990-2000. Then do the same for 2000-2008. I would say, from looking at MLS for years, that 80%S of those homes were built in the last 8 years.

The luxury market is way overshot, where 100 mansions were built for 20 people. Doesn't matter how long they can hold on, losses will come.

And another thing, that most forgot, a spec luxury home was basically unheard of a few years ago. If you had the $$$, you had a custom home built for yourself.