This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market

For anyone who has tried to rent an apartment in the past six months
– especially in big cities like San Francisco or New York — the
pickins have been extremely good, to say the least.

As the economy has remained mired in its post-almost-financial-apocalypse quagmire, tenants’ willingness and ability to pay what now seem like exorbitant rents has evaporated. In particular, a traditionally reliable source of rental demand which came from new attorneys, investment bankers and other young professionals armed with absurdly large paychecks has disappeared.

(Source: The Wall Street Journal)

Landlords, in turn, are slashing rents as vacancies rise and tenants move out of ritzy buildings in favor of more modest, affordable digs.

In one particularly poignant example here in San Francisco, a renter who paid $2,200 for a 1-bedroom apartment in North Beach last September, just months ago renegotiated his rent down to $1,600 per month. That’s more than a 25% drop in a year! I mean, his landlord is the largest apartment owner in San Francisco and has seen scores of buildings foreclosed on by its lenders, but who’s counting.

As you can see from the chart in the top right of this page and from the table of cities with the biggest rent declines over the past year, California has not been spared in this decidedly deflationary trend.

The easy — and accurate — conclusion to draw from rents tumbling is that sales prices for condo, especially in big cities, aren’t stabilizing any time soon. Rents are typically leading indicators for condo prices (both on the way up and on the way down), since rental turnover is more regular and transactions are much shorter. Rents therefore react more quickly to changing market dynamics.

This analysis, however, isn’t terribly helpful other than for warning would-be condo buyers that now may not be the time to stretch for that penthouse apartment in SoMa.

What is interesting is what these falling rents mean for real estate investment opportunities in the not too distant future. Apartment buildings are traditionally valued using some multiple of the cash flows generated by rents, less the monthly operating costs for the building as a whole (including loan costs).

So, as rents fall, naturally so too do the values of apartment buildings. But, since apartment buildings are not often bought and sold, it can take months, if not years for a drop in rents to translate into meaningful price depreciation for multi-family buildings. Price
Discovery, a concept often-discussed at Cirios, is delayed, as buyers are wary of making investments in a declining rental environment.

And as owners of these multi-family buildings are pinched with weak rents, many will become distressed and motivated sellers. These are the sellers opportunistic investors should look for in the months and years to come.

This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market

First-time homebuyers shopping in San Francisco almost inevitably encounter units that look like condos, but are listed as “Tenancy in Common” or “TIC.”

While physically a TIC unit may look no different than a condo, financially TICs generally sell for less than condos and thus often pique would-be buyers’ interest.

Why does this price discrepancy exist between TIC units and condos? The answer is due in large part to the differences between the legal structures of TICs and condos, and consequently, how those legal differences impact a buyer’s ability to obtain and maintain financing. These different legal structures, in turn, create different risks for buyers and lenders alike, which play into the market value of the unit.

For condos, each owner separately owns their own unit, while simply co-owning structural elements and common areas of their building. In TICs, however, the owners (or “TIC group”) collectively own the entire building, and each TIC member owns a percentage share of the entire building. This share is generally determined by the size and condition of the unit that each owner will occupy. Each TIC owner is thus responsible for each and every obligation of owning the entire building.

Traditionally, many TIC groups share a common mortgage and each individual TIC member owes a predetermined percentage of that mortgage. With condos, an individual owner has their own mortgage that only ties to the individual condo unit. This difference between TIC and condo financing means that an individual TIC member must be concerned with whether their neighbors will be able to pay their share of the mortgage. If one TIC member fails to pay their percentage share of the mortgage and defaults, a lender could foreclose on the entire building rather than just the individual unit occupied by

the defaulting neighbor.

In less extreme instances, the non-defaulting TIC owners could have their credit negatively impacted by another defaulting member. In the uncertain economic world of today, with unemployment nearing 10%, this scenario is important to consider before purchasing a TIC unit. Furthermore, when one TIC member wishes to sell their share of the building to a new member, complications can arise with restructuring the group mortgage.

Because of the unique sharing structure in TICs, obtaining individual mortgages based on only a percentage of a TIC building is less common, but possible. Known as “fractional” or individual TIC mortgages, some lenders allow individual TIC owners to obtain separate mortgages based on only a percentage of a TIC building. With a fractional mortgage, the default of a fellow TIC member does not damage the other TIC members’ credit nor does it create the risk of foreclosure against non-defaulting TIC members. While these advantages are significant, they are usually coupled with higher interest rates and less favorable mortgage terms. Moreover, the number of mortgage lenders offering this type of mortgage appears to be on the decline.

What does this all mean for home buyers debating between a secure condo and a cheaper TIC unit? It all depends upon each individual buyers’ situation.

The difference in potential financing related issues between condos and TICs and the implications to each individual home shopper is unique and should be discussed in full with a real estate professional or real estate attorney.

This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market

This month’s zip code spotlight shines on one of the hottest real estate markets in the Bay Area. Ironically, it’s one precious few have even heard of. Looking at the map below, this area is squarely in-between Berkeley, Oakland and Emeryville, an amorphous collection of gentrification, liquor stores and opportunistic real estate investors.

Some call it Temescal, the map has it listed as Gaskill, while others refer to it as Emeryville.

Close to Berkeley and the trendy Oakland neighborhood of Rockridge and a quick trip to the City on BART or on the nearby Bay Bridge,
convenience and a short commute reward intrepid buyers who aren’t bothered by a neighborhood that is definitely “in transition.”

The area is not without some grit; crime seeps in from other parts of Oakland. But things are getting better.

On the housing side of the equation, examining the graph below, which measures sales price as a percentage of list price, one can see that since 2005 the market has steadily cooled. Then, earlier this year, as foreclosure moratoria kept housing supply off the market and buyers began to regain some of their lost confidence, demand has leapt above supply.

Now, when a turn-key, move-in ready home pops up on the market, there is a veritable bidding war to get in. After all, where else can you buy a newly remodeled home so close to the City for under $500,000?

But although oftentimes investors – or home buyers – are rewarded for dipping their toes into a risk-laden pool, we still remain cautious on this part of town.

If the employment picture does not turn around in the not too distant future and Oakland isn’t able to clean up its act, it would not be shocking to see this neighborhood slip backwards a bit, reversing some of the gentrification of recent years. Buyer beware, to be sure, but it’s worth a look.

Reward, it appears, is still not without its risks.

This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market

Since this month’s zip code spotlight highlights the Sale Price vs. List price ratio and how it can provide insight into current activity within a defined geographic region, we have reprinted an earlier Cirios Trends piece on the subject:

In today’s real estate market, there is often an enormous difference between the listing price for a property and what it eventually sells for. When looking to buy a home, it is very important to keep this fact in mind. Examining sale price versus list price (SP/LP) ratios can help you compare one area to another, or one time period to another.

Let’s take a look at a previous zip code spotlight locale, Berkeley, CA 94703. In the graph below, you can see the running average of SP/LP for this area. Interestingly, the graph shows a few spikes corresponding to relative booms in Bay Area real estate. Currently, the ratio is hovering just above 100%, indicating that on average homes are selling just over their final listing prices.

Examining the same SP/LP ratio for the area of San Mateo, CA east of the 101 Freeway shows a similar, but noticeably different pattern. Areas with ratios over 100% are likely to be getting multiple offers on listed homes, indicating high demand. Areas with SP/LP ratios below 100% are likely to have relative low demand, with resulting long times on market. By looking at areas with ratios less than 100%, a prospective buyer can more effectively seek out good “deals.”

Looking at this information can also help in the bidding process. If you have chosen an area where properties are regularly selling for more than their listed price, you should be prepared to put in an offer that matches this trend. On the other hand, if a particular area has a SP/LP ratio below 100%, you can feel more confident that an offer below list will get accepted.

To be sure, just because an area has a SP/LP ratio below 100% doesn’t mean all houses should be considered cheap. Plenty of people, even after dramatic price declines, are over-paying for homes. Remember that a list price is what a seller “wants” for their home, and may or may not accurately represent what the market will bear.

And of course, the information presented here represents a broad stroke in looking at a particular area. Within any given region, different types of homes may have different SP/LP ratios depending on a variety of factors. By digging down into the nitty gritty details, the professionals at Cirios Real Estate can make sure you have all the data on your side when buying a house.

This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market

Property taxes should not be over-looked.

Most first time homebuyers don’t consider property taxes when looking for their first home. With all the excitement (and at times confusion) of buying a new home, it’s one of those details that can easily get lost in the shuffle. And while property taxes are a small fraction of the value of the home (less than 2% in most parts of CA), they are not insignificant when first time homebuyers are trying to determine if they can afford a home.

Let’s look at an example to get a better understanding of how property taxes work in California:

Purchase Price: $500,000
Down Payment: $100,000 (20%)
Monthly Mortgage Payment: $2,208.81 (5.25% interest rate, 30 year fixed rate loan)
Tax Rate: 1.2% (including city, county and state)
First Year Tax Bill: $500,000 x 1.2% = $6,000

Property taxes are paid twice per year in California, so that means you will have to make two payments of $3,000. However, most expenses when it comes to owning a home are broken down by month, which makes it easier to include the cost of home ownership in your monthly budget.

In our example, this buyer should allocate $500 per month ($6,000 / 12 months) for property taxes. $500 is not an insignificant amount, and could tip the scales for someone deciding whether to move from renting to buying, or in determining their price range for the home buying search.

In addition to just the expense, first time homebuyers should also understand the importance of paying property taxes on time. Failure to pay can result in a lien on your home which is the first item to be paid off when you sell your home — even before your mortgage. So: Pay your property taxes!

Back to our example, adding the monthly property tax expense to the mortgage payment, the total comes to $2,708.81. This represents a 22.6% increase in your monthly housing expense compared to your mortgage payment alone.

Unlike the fixed monthly payment of the mortgage in our example, property taxes typically increase every year.

Here is an example of what second year property taxes would be (in California, property taxes increase approximately 2% every year until you sell your home):

Purchase Price: $500,000
Annual tax increase: 2%

Year Two Tax Base: $500,000 x 1.02 = $510,000
Year Two Tax Bill: $510,000 x 1.2% = $6,120

Property taxes are more than just annoying. They can make a material difference in what a home buyer can afford. Buyers should also note that most mortgage calculators do not include property taxes in their estimations. Further, most lenders ignore property taxes when using your income to determine how big a loan you qualify for.

Always include property taxes when forecasting your monthly housing expenses — or you could end up with a surprise every six months.