This post first appeared in the June edition of: Cirios Trends: In Search of Real Estate Opportunities

Humans, as a species, are lousy fortunetellers.

A few intrepid visionaries aside, most people simply cannot grasp what the world will look like in 20, 10 or even five years.

And for good reason. Trying to envision the future doesn’t mean picking some individual aspect of society and dreaming up “how cool would it be if …” Proper forecasting requires taking into account all aspects of human interaction, projecting advances in each area out into the future, envisioning a world with those new, unknown rules, then deriving a hypothesis within that framework.

Investing - whether it be real estate or stocks - requires just that predictive aptitude in order to make truly good decisions. The ability to look forward and predict what things may be like based on a set of projections is what separates great investors from those who are content with “market” returns.

In real estate, effective forecasting is impossible without examining and understanding demographic shifts. Populations move slowly, but with great inertia. Trends develop over time, based on fundamental factors that develop over decades, not years or months.

Ask any successful real estate investor and they will tell you that getting in front of demographic movements is the best way to build real estate wealth. Time horizons may vary wildly, whether one is spotting hipster migration within a city that typically foretells more affluent gentrification; or entire towns that over 60 years transformed into an almost exclusively upper middle class Asian-American community.

But how can you know, before, and buy accordingly? And here we are back to the human inability to predict the future.

This month’s Cirios Trends is devoted to one of the most controversial, yet potentially important development projects in the Bay Area, and how its relative success or failure could accelerate a demographic sea change in San Francisco that is already underway.

The Hunters Point/Bayview neighborhood is best known for being the most dangerous part of San Francisco. Gang violence is common, the streets are far from safe and, as one might expect, home prices are lower here than anywhere else in the city.

But Hunters Point also includes the largest untouched piece of land within the San Francisco city limits. Mired in environmental, social and political controversy for decades, plans to redevelop Hunters Point are edging closer to reality. Coupled with ongoing socioeconomic changes in San Francisco, the project is part of a potentially massive shift in demographic orientation within the city.

In the following pages, we barely scratch the surface of what the successful redevelopment of this area could mean for the city. In order to truly grasp the potential opportunities, sit back, close your eyes and imagine a world that is, in a word, unimaginable. (Click here to read the next story)

This post first appeared in the June edition of: Cirios Trends: In Search of Real Estate Opportunities

Over the past several years, precious few shovels have broken ground in San Francisco. The credit crisis and economic slump have caused developers and investors to pull back, as builders have focused on surviving, rather than thriving. But despite the slowdown, Lennar Corp., a Florida-based developer, has been moving steadily forward with plans to redevelop large portions of the San Francisco neighborhood known as Hunters Point.

In 1999, San Francisco awarded Lennar with a contract to redevelop Hunters Point. A decade later, Lennar is making strides to move forward with its ambitious plans, despite myriad setbacks and opposition from local community groups. Last week, the San Francisco supervisors overwhelmingly approved Phase II of a project to transform the abandoned Hunters Point Naval Shipyard into a new waterfront community of homes, businesses and green technology. Major Gavin Newsom called the Shipyard project a key to the city’s future.

The development is massive in size, covering over 702 acres at Hunters Point. Plans include building 10,500 residential units, creating 320 acres of parks and open spaces including the planting of over 10,000 new trees. The project will include waterfront retail and entertainment facilities, commercial space designed for green businesses and a bridge across Yosemite Slough, connecting the Shipyard with Candlestick Point. Plans also include a new 49ers stadium, which are, however, likely to be scuttled thanks to Santa Clara voters’ decision to approve the team’s to move to Silicon Valley.

In order to understand the scope of what is being planned at Hunters Point, one must appreciate the history of the area and the community that has grown up around the former Navy shipyard there.

Hunters Point Shipyard is located in the Bayview neighborhood in southern San Francisco. Established around 1870, the Shipyard was the first dry dock on the West Coast. It was also well known for its butcheries.

From World War II to 1974, the Navy managed the Shipyard, employing tens of thousands of people, while massive developments built up around the site in support of the industry that the Navy provided. Unfortunately for the residents of Hunters Point, the Navy’s activities at the Shipyard contributed to massive pollution in the area.

The Hunters Point Shipyard has been plagued with both chemical and radiological contamination, which the Navy believes was primarily the result of efforts to decontaminate ships that participated in atomic weapons testing in the Pacific Ocean.

In 1989, the US Environmental Protection Agency listed the Hunters Point Shipyard and other nearby areas on its Superfund National Priorities List and closed the base in 1991. Under Superfund law, the Navy became responsible cleaning up the area. Over two controversial and litigation-filled decades, the Navy and other groups have been busy with the required environmental cleanup of the surrounding areas. In November 2000, San Francisco voters passed Proposition P, which required that the Navy clean the Shipyard site to the “highest practical standards.”

With cleanup in certain areas of Hunters Point now meeting San Francisco’s strict standards, development plans are moving forward. On June 3, 2010 the San Francisco Planning Commission narrowly approved the Environmental Impact for Lennar’s Hunters Point development. Despite this big step forward for Lennar, future lawsuits by local groups and environmentalists could arise due to disputes over the environmental impact of the proposed bridge over Yosemite Slough.

In addition to environmental concerns, the social impacts of the project are troubling for the local community. A 2000 study found that 50% of current households in Bayview could not afford even Lennar’s proposed “very low income” units. Despite the likely social impact on local residents, the San Francisco supervisors rejected adding a provision that would require Lennar to make over 50% of residential units “affordable” housing units.

And so, with the project on track to move forward, Cirios is monitoring the progress and impacts of the Hunters Point development, which will be ongoing for the next decade, and beyond. The impact on real estate in the city will be, to say the least, significant.

This post first appeared in the June edition of: Cirios Trends: In Search of Real Estate Opportunities

This month’s zip code spotlight falls on 94124, the Bay View/Hunters Point area of Southeast San Francisco. This area is well known as the most dangerous part of the city, but as we discuss elsewhere in this issue, that could change over the next several years as the Hunters Point Naval Shipyard is redeveloped.

Looking at the market behavior over the last few years reveals some interesting facts about prices in this area, particularly when compared to the three immediately adjacent zip codes, which represent more affluent parts of San Francisco.

First, prices in 94124 are lower by around 25-30%. Given the high crime rates in the area this should come as no surprise, but 94124 remains the most affordable part of San Francisco. An optimist would say that in an area which may see positive changes in the future, real estate values here have a long way to come up.

A second and perhaps more interesting point to note is that the price disparity between 94124 and its surrounding environs is growing. While the three surrounding zip codes have, like most areas, experienced price declines since the market peaked in 2007, 94124 has been hit even harder. Furthermore, the surrounding area has seen a meaningful recovery of around 10% since last year’s lows, while 94124 has been basically flat since that time.

What this means, historically speaking, is that real estate in 94124 is relatively inexpensive compared to its surrounding zip codes. To be sure, a big part of this is due to effects of the economic downturn, both in the form of high foreclosure rates in 94124 and spikes in the crime rate. However, when you look at the long term potential of the area for economic development and infrastructure improvement, this relative price drop could present a terrific opportunity. Furthermore, high foreclosure rates mean high levels of inventory, resulting in a wide selection of investment opportunities.

We at Cirios will be following this area closely over to the coming months to redevelopment efforts get underway.

This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

There is no ambiguity about the goal of current US government policy when it comes to housing: Prevent home price depreciation at all cost.

As such, this month’s State of the Markets was going to discuss shadow inventory, diving into the numbers to see just how long we’ll have to live with looming supply of bank owned homes. At current repossession rates (around one million per year according to Lender Processing Services), it will take around four years to work through all loans that are more than 90 days delinquent. Morgan Stanley agrees, pegging 47 months as the time required to work through the backlog of distressed loans. And those figures assumes no additional loans get added to that severely delinquent bucket.

Sobering stuff, and evidence that foreclosures are going to be a dominant market force for the foreseeable future.

But as we dug through the data, something wasn’t adding up. Many are fearful that supply will flood the market as banks push through foreclosures. Housing bears often cite this inevitable inventory spike as evidence housing is in for a second leg down.

This is a very valid concern, and in order to remain ahead of the curve, Cirios closely monitors real time foreclosure and new listing data, watching out for early signs of a supply shock.

Our antennae were tripped in April as Trustee Sale activity began to ramp up and repossession levels began rising. Nervously, we waited for the natural increase in listings that were sure to follow. It never came. It still hasn’t come. Something isn’t adding up.

When banks take back homes, the next step in the process is to list those homes for sale. But that wasn’t happening. Banks were foreclosing on more homes but the trail stopped there.

So we went to the tape. Since 2000, the average increase in new listing activity from April to May was 2.9% on the Peninsula and in the South Bay, while over in the East Bay, new listings rose almost 5.5%. During good times, the typical increase is a bit higher, while during bad times new listings in May can actually decline. In fact, they have declined in each of the past three years.

But this year, throughout the Bay Area, new listing activity in May plummeted relative to historic norms. East Bay new listing activity fell 15.8% while Peninsula and South Bay activity dropped 12.8% - both the highest on record. So what gives?

Without sounding like conspiracy theorists, we’d like to put forward the following, very logical thesis: Imagine you are the government. The tax credit expires, the economy starts to sputter, Europe begins to melt down, the Gulf is literally full of oil and the job market turns out not to be on the mend after all, and you have a stated policy of propping up home prices, what would you do?

This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

This month’s spotlight falls on East Palo Alto, CA, perhaps one of the Bay Area’s most interesting pockets of real estate and an excellent illustration of the effect of housing boom and bust on marginal areas. Surrounded by islands of almost inconceivable wealth, East Palo Alto (or “EPA”), for many years remained a low-price, crime-ridden enclave that more wealthy residents in the area wouldn’t dare set foot in.

Towards the peak of the boom, the forces of real estate pricing began to bring change to EPA. Entire neighborhoods were bought up, torn down and redeveloped into either commercial space or new residential housing. Gentrification began happening at an accelerated pace, during which time prices rose almost 70% in just four years. When the bust hit, the market tumbled even more quickly than it rose. Prices fell 60% in a single 12-month period. On the graph below, witness the massive supply spike that coincided with prices falling off a cliff (note also the scarcity of blue data points during this time, indicating an extremely illiquid market). Since that time prices appear to have stabilized at around year 2000 price levels and supply has returned to more normal levels.

The question, of course, is where will EPA go from here? With crime again on the rise and municipal budgets slashed by plummeting tax revenues, EPA could again be plagued by the troubles it has known for decades. But the fact remains that EPA has by far the most affordable housing on the Peninsula. Investors are finding value on these once dangerous streets, betting the disparity between EPA home prices and everywhere else will narrow in the years to come.

This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

If there is a theme we at Cirios harp on more than any other, it’s that just because a particular city or neighborhood is considered “more desirable” than another, that does not mean by extension it’s also a better place to buy real estate. The following slides compare four different markets, and we challenge readers to put their preconceived notions aside when evaluating the home price trends in each area. Making sound real estate decisions doesn’t just depend on one’s ability to identify where he or she would like to live (that’s pretty easy), but rather where large groups of people are going to want to live. Demographics drive home price trends, and understanding demographics, population movements and macro culture shifts enables savvy investors to position themselves in front of, rather than behind, trend shifts and market movements.

Albany, what’s not to love? Great schools, good weather and even a decent selection of restaurants. BART makes for an easy commute into San Francisco and the city’s quiet suburban streets attract families young and old. But what about home prices? Since the market peaked in 2005, which notably was well before most high end markets peaked in 2007, prices have been in a steady slide. Even over the past 12 months, a time period when many Bay Area housing markets were actually improving, Albany remained sluggish. And while there are many explanations for the continued declines, if the graph above tells you anything, it’s that just because a town has great schools and a strong community, that doesn’t mean its housing market is immune from factors affecting what most would
consider a significantly less desirable area … like, Pittsburg.

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Pittsburg (California, not Pennsylvania) lies about 45 minutes east of San Francisco and is a fairly typical working class community. North of Highway 4, neighborhoods can get fairly rough, but south of the Highway you can find quiet streets and generally affordable homes. Pittsburg schools are not going to win any awards and they are certainly not on par with nearby Brentwood, but then again, home prices are lower too. The price trend here is pretty clear … up up up DOWN DOWN DOWN flat flat up. The drop in late 2007/early 2008 was dramatic, to be sure, but since early last year prices appear to have stabilized. And while much of the rebound can be attributed to government intervention into the market to prevent foreclosed homes from being sold, affordability also played a key role in the recovery. Not only is buying at times cheaper than renting, but investors can also earn solid rental yields. These two factors lead to a stronger housing market, government meddling notwithstanding.

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94112 is not the sexiest zip code in San Francisco. Encompassing such neighborhoods as the Excelsior and Ingleside, this suburban, gritty section of San Francisco is far from the city’s most coveted spots. Prices are down to be sure, but demographics and affordability bode well for these fringy areas. Single Family homes remain one of San Francisco real estate’s most prized possessions, and this zip code is chalked full of single family homes. As buyers are forced to move further and further from the city center to find affordable housing, this area should benefit from its relatively low prices. As for demographics, these ethnically mixed neighborhoods are home to populations where the middle class is growing, not shrinking. Think of it like comparing the developed world (Pacific Heights) to the developing world (Excelsior). Developed countries grow more slowly while developing countries expand at a sometimes blistering pace. True, less established areas are often more susceptible to economic headwinds, but remember the bit about wanting to be where the people are going, not where they already area.

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Pleasant Hill is a quick 35 minute drive from San Francisco through the Caldecott Tunnel or one stop past Walnut Creek on BART. Not quite as nice as Walnut Creek but a touch better than Concord, Pleasant Hill is a, well, “pleasant”, option for homeowners looking for a desirable area, quiet streets and big lots. Home prices were slow to stabilize last year, likely since Pleasant Hill had a fair number of aspirational homebuyers who moved up too far, too quickly during the boom. But since last summer, prices have popped as investors and regular home buyers have found value. Similar to 94112 in San Francisco, Pleasant Hill could be classified as a place where people are going, not necessarily where they already are.