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 September edition of Cirios Trends: Getting to the Bottom of the Housing Market

If history has its way, housing inventory is set to rise.

And for all the potentially complex and controversial explanations for this coming bump in homes listed for sale, Occam’s razor will likely hold: The simplest explanation usually wins out.

Seasonality is the reason it snows in the winter, leaves change in the fall and bronzed Jersey Girls and beefy guidos head down the shore from Memorial Day to Labor Day. Seasonality explains what happens when the calendar changes, whether it’s weather patterns or consumer behavior.

The simplest explanation of seasonality in the financial world can be seen by looking at WalMart’s quarterly revenue figures. Q4, which includes the Christmas shopping season, is typically 50% better than any other quarter. So, when financial analysts tally up WalMart’s results, they have to back out this seasonality in order get good apples-to-apples comparisons. (For a more complex look at seasonality, please see Cirios statistics guru Austin Nelson’s piece entitled: The Magic of Seasonal Adjustments.)

So, back to housing.

Looking at the graph in the top right corner of this page, courtesy of Socketsite, a San Francisco housing blog, it’s fairly obvious that if the past 4 years are any predictor of the future, housing inventory (at least in San Francisco) is set to rise. This could blunt the recent exuberance of housing bulls around the country.

As anyone who has been paying attention to the financial media of late can attest, the view that the housing market has found a bottom is quickly becoming the opinion-de-jour. It’s clear, optimists argue, that buyers are stepping back into the market to take advantage of
screaming-hot deals.

Pessimists, on the other hand argue that the bottom will remain elusive, that recent strength can be attributed to government intervention into the market in the form of tax credits, artificially low interest rates and de-facto foreclosure moratoria preventing banks from unleashing their swelling portfolios of bank owned homes onto the market.

And here we are, Labor Day, when buyers typically refocus their energy on things like a new school season, the upcoming holidays and preparing for winter, rather than getting out and shopping for that new home.

The question then becomes, if pessimists and optimists can agree on the fact that positive sentiment, or social mood, is partly to blame/credit for this nascent housing “recovery,” what happens when data emerges in the coming months that maybe, just maybe, calls for a bottom in housing were premature?

Will buyers head for the hills, sending prices swooning once again? Or will they shrug, don their winter coats and leather gloves, saving the home search for the Spring … like they do every year?

The housing market got another piece of “good” data today, as the S&P Case Shiller Home Price Index registered its first month-over-month uptick in almost 3 years, according to Bloomberg. The increase was nominal, to be sure, at a mere 0.5% from the prior month, but it was an increase nonetheless.

As can be seen by the graph below, the 20-city composite index is back to where it was in May 2003.

(click to enlarge)

Taking a look at the California markets included in the survey, markets in the Golden State have corrected further than the nation as a whole:
San Francisco – August 2000
San Diego – August 2002
Los Angeles – August 2003

(click to enlarge)

Keep in mind, as we do our best to reiterate here at Cirios, that these broad measures may or may not be relevant to an individual, local market. Home prices in San Francisco proper are down around 20% from the peak, while the metro area has seen declines of more than 45%. Brentwood, Antioch and other parts of Contra Costa county, on the other hand, have seen declines of 60% or more.

We will continue to monitor this measure as an indication of broad, national and statewide trends, but ignore this data when it comes to evaluating individual homes. Have a property you’ve seen and our want our professional opinion? Send it to us info@ciriosre.com and we’ll take a look!

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

As jumbo mortgages continue to be extremely difficult to get, we at Cirios keep asking ourselves: Is it a buyer’s market for borrowers who manage to qualify for a jumbo loan? To answer that question, we took a look at a home which seems to have everything: location, updates and parking (which in San Francisco is like gold).

Neighborhood Overview: The Castro district in San Francisco is one of the most desirable areas in the city. It has all the key amenities (shopping, restaurants, grocery stores and numerous public transportation options). Recent price declines can be blamed on the fact that its nigh impossible to get the big loans needed to buy these pricey homes, along with the general downturn in the economy. However, the Castro remains a very desirable place to live and price declines should be moderate, as qualified buyers look to take advantage of lower prices.

Original List Price: $1,495,000
List Date: 5/27/2009
Current List Price: $1,495,000
Previous Sale: $1,575,000
Previous Sale Date: 11/2/2007
Estimated Down Payment: $373,750
Estimated Monthly Payment: $8,535.96*
Bedrooms: 3; Bathrooms: 2.5
Liv. Area: 1,915 sqft; Lot Size: 8,000 sqft

Positives:
+ Large back yard, parking
+ Centrally located
+ Wine room, office and sun room

Negatives:
- Common bathroom (upstairs) does not have a shower
- Kitchen is a bit small
- Third bedroom doesn’t have a closet (how is it a bedroom without a closet?)

Value Approach:

Step #1 – Location
As mentioned above, the subject is located within walking distance of bars, restaurants, shopping and all major public transportation lines, and is in an area of well-maintained homes. The property itself is unique in that it has a large flat lot with a well landscaped yard, which is a rarity in San Francisco.

Step #2 – Data Analysis
% of Zip Distressed: 0.27% (Low)
% of Zip For Sale: 0.27% (Low)
% of Zip Sold over last 3 months (year-over-year): -42.7
Elementary School API: N/A**
AHA (Affordable Home Amount): $656,817

The drop in sales activity in the past year is further evidence that high end markets are getting hurt by the lack of jumbo mortgages and the continued economic contraction. We expect sales activity to remain low in the near term, as there are few signs that the jumbo loan market is improving.

Step #3 – Comparable Properties
Click here for our CLEAR Valuation, or on the image to the right.

Step #4 – Value Analysis
The subject is one of the lowest listed properties in its immediate vicinity, which will likely result in a lot of interest from potential buyers. S1 sold for $1,425,000 and is located across the street from the property, which is evidence of demand in the area. Although S1 is a superior home to the subject, it backs up against the Castro Theatre, which should be considered a material negative, due to the noise which is likely to emanate from the bars and restaurants close by.

Cirios Value: $1,375,000
Over Listed Amount: 8.0%

Cirios Verdict: DEAL

San Francisco isn’t for everyone, but with the rental market still expensive relative to just about everywhere but New York, buying a condo or TIC (Tenant in Common) is a pretty viable option. It didn’t used to be, but low-end condo and TIC prices are falling, as overbuilding, lower rents and the general economic malaise is hitting developers where it hurts. No, not there. Their pockets.

As a result, some of the smaller units in older, renovated buildings are being offered at reasonable prices. To be sure, its likely they’ll keep getting cheaper, but some are starting to get interesting.

In particular, S1 listed on the CLEAR below is a lower unit in the same building, which sold for $440,000 after being listed at $410,000. And while we believe TIC and condo prices will keep sliding in the near term, prices will be supported as they come more in line with rents in the area.

Address: 3322 16th Street #6, San Francisco, CA 94114
Status: ACTIVE
List Date: 3/31/09
List Price: $469,000
Cirios Value: $485,000
List Price vs. Cirios Value: 3.4% under-listed.
For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?
Make a comment below or email us!

This week’s Deal or No Deal is a remodeled condo in the Mission District of San Francisco. Rehabilitated after a fire a few years ago, this building has been completely redone and the units are being unloaded onto the market. This neighborhood is desirable for young professionals looking to live near bars and restaurants, as well as one of the best views in the city from Dolores Park. (click images to the right to enlarge)

DEAL or NO DEAL?
Comment below and tell us what you think!

Address: 3322 16th Street #6, San Francisco, CA 94114
Status: ACTIVE
Bedrooms: 2; Bathrooms: 1
Living Space: 850 square feet
Lot Size: N/A (condo)
List Date: 3/19/09
Original List Price: $469,000
Current List Price: $469,000
Average School API: Varies
Zip Code Sales Last 3 Months (year-over-year): -43.1%
% Homes in Foreclosure in Zip: 0.16% (Low)
% Housing Inventory For Sale in Zip: 0.77% (Moderate)
MLS number: 354297

Real Estate Agent Comment:Bright, top floor 2BD/1BA flat in the Heart of Mission Dolores. Newly remodeled top to bottom, this unit offers private deck, in unit W/D hookups, custom kitchen/bath. Only steps to Dolores Park and Valencia Corridor shops and restaurants. Close to Church St. Muni transfer and BART. Low dues, only $240/mo. Independent parking available for $50k. These units are priced to move, don’t miss this!

Last week, we posted a graph showing home sales over $1,000,000 in the entire Bay Area. Despite the obvious seasonal trends, sales are slowing significantly.

Below is the same data for San Francisco. Notably, although sales definitely fell of the proverbial cliff in Q4 of last year, declines were barely perceptible until this year.

Click here to enlarge

By ANDREW JEFFERY

The broken record rambles on: Home prices keep falling.

The latest reading from the S&P/Case Shiller Home Price Index showed another record decline, as prices tumbled 18.5% from a year ago. And again, the worst performing metro regions were out west, with Phoenix, Las Vegas and San Francisco leading the way to the downside. The 20-city index has now slid 27% from its 2006 peak.

The ongoing home price declines, which many attribute to steadily rising foreclosures helped spur the latest government-backed efforts to rescue the housing market. And while most commentators heavily criticized the Obama Administration’s $275 billion housing relief plan, take a read of Cirios’ Austin Nelson’s excellent take — a little optimism never hurt anyone, especially with the resounding and ubiquitous negativity we read in the daily headlines.

There isn’t much new to glean from the latest Case-Shiller Home Price Index, it’s still just bad out there. However dire the data continue to be, keep in mind home sales transactions typically bottom prior to prices. In the markets first to see precipitous declines, Cirios data analysis indicates ongoing increases in sales. And while the most distressed areas certainly show the strongest rises in transactions, mid-range areas are seeing more activity as well. Not so for the high end, where buying activity has all but evaporated.

But you, our Cirios readers, already knew that.

Far from being a bottom call, this is trend an example of the housing correction at work. While we would argue prices will continue to decline for foreseeable future, the reality is that homes are more affordable today than they were yesterday. And will be more so tomorrow. And tomorrow. And so on.

At some point in every market, prices begin to make sense again and buyers gingerly step into the water. The sharks are still circling, to be sure, but most are full and lazy, the new arrivals having more and more trouble finding a tasty snack.