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

This month, the zip code spotlight returns to South San Francisco (94080), the “Industrial City.” While its hillside moniker makes South City sound like a place no one would ever want to live, the opposite is true.

In fact, the “Industrial” turns out to be apt, as several prominent biotech firms have their industrial headquarters here. But rather than factories belching noxious fumes, these companies kick off an ample supply of high paying, stable jobs.

A quick look at the market activity graph below shows that prices have declined in the area by a staggering 40% since the height of the market, back to levels not seen in 10 years. This has brought the average home price down to $450,000 - downright cheap by peninsula real estate standards.

The next thing to notice is the steadily declining supply levels shown by the red graph on the bottom. These numbers look to be trending back towards more traditional levels, indicating that price declines in the area could be a thing of the past.

These three factors (prices at early 2000 levels, declining supply, solid white collar job market) make our mouths water here at Cirios Real Estate. Clearly there must be terrific investments to be made in South City. The question is, how?

To answer this question, we have drilled down to look at the South San Francisco market in even more detail - specifically as regards to how home condition affects sale prices.

As you can see from the next graph, we have divided sales over a three month period in this zip code into three groups based on the property’s condition. We define our groups as follows: 1 = Move in ready, great to perfect condition; 2 = Livable but in need of some upgrading or light repairs; 3 = Unlivable, needs major repairs and upgrades. We then looked at the average price per square foot for each group. As one would expect, the best condition properties sold at the highest price and vice versa. No big surprise there.

What is interesting here is the MAGNITUDE of the differences, particularly between groups 1 and 2. The average price for the best properties was ~$460/ sqft, about $68 more than those in group 2. What this means is that for a 1,500 square foot home (the average size in the area), you are looking at over a $100,000 spread between a home in need of light repairs and an identical one in pristine condition. So, if you can turn 2’s into 1’s for significantly less than $100,000, you’ve likely got yourself a great investment.

Of course, this is assuming you buy your 2’s at market prices. If you can make purchases at below market prices, returns look even better. In today’s distressed real estate market, opportunities abound to do exactly that. (Click here to see an example of a recent investment deal in South San Francisco.)

Ask most anyone familiar with Bay Area real estate which city has more expensive homes, South San Francisco or Millbrae, and the response is likely to be unanimous. South City doesn’t exacly have the reputation for high-end real estate.

But taking a look at the graph below, during the boom, South City tracked Millbrae pretty closely, as measured by price per square foot. In fact, in 2004 then again in 2005, South City even hit the same level as its neighbor to the south.

Since the market started tumbling in 2007, the gap between the two has widened. This partly reflects the fact that South San Francisco has had a higher foreclosure rate than Millbrae, so homes in poor condition are selling at a higher clip, dragging down price per square foot. In South City we’re now back to levels not seen since 2002, but in Millbrae we’ve only reached 2004 prices.

With the new appraisal guidelines restricting buyers ability to get loans, the next few months should be very telling with respect to how the already battered housing market can continue the healing process.

Cirios Verdict: DEAL

Last week, elated we had finally found a Deal, Cirios posted 269 Sequoia Ave in South San Francisco is what would be our first Deal of the Deal or No Deal column.

Sadly (or happily?), the suspense was ruined the next day when the property went under contract.

This home is well-maintained and has two bathrooms, a big plus in this neighborhood, as noted last month in Cirios Trends, 2 bathrooms + South San Francisco = Desirable. Nice landscaping and a decent sized lot makes this home very desirable. Finally, it’s actually listed at the proper price, which helps explain why it only lasted a couple weeks on the market.

A small drawback is its proximity to BART (noise), but the convenience to public transportation and amenities like Trader Joe’s and Costco are a big plus.

Home price in South City have fallen almost 50% in the past few years, but this area has held up better than most. This is due to the good schools, proximity to public transportation and relative affordability when compared to suburbs like Burlingame and Millbrae. While we do foresee further depreciation in the near term, it should be moderate and prices are well supported by median incomes not too much further than where we are now.

Address: 269 Sequoia Ave., South San Francisco, CA 94080
Status: PENDING
List Date: 3/31/09
List Price: $515,000
Cirios Value: $520,000
List Price vs. Cirios Value: 0.9% 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?

CLICK HERE to view the results of this Deal or No Deal.

This week’s Deal or No Deal comes to us straight out of the Industrial City. While 50 years ago that moniker meant factories, today South San Francisco’s industry means Biotechnology. Genentech (Roche) and numerous other Bio-tech firms call the Oyster Point section of South City home. Proximity to San Francisco either by car or train, along with booming biotech profits has transformed this once middle class city into one of the up and coming parts of the Bay Area. Schools have improved, crime is down and new swanky developments dot the hills.

While home values have declined with the rest of the state, we believe South City’s housing market area will emerge as one of the first to stabilize when we move from housing correction into housing recovery.

This property is updated, clean, and although small is close to Bart, a Trader Joes, Costco and displays good pride in ownership. It’s been on the market for just a few weeks and may not last.

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

Address: 269 Sequoia Ave., South San Francisco, CA 94080
Status: ACTIVE
Bedrooms: 3; Bathrooms: 2
Living Space: 1,000 square feet
Lot Size: 5,350
List Date: 3/31/2009
Original List Price: $515,000
Current List Price: $515,000
Average School API: 790
Zip Code Sales Last 3 Months (year-over-year): -16.3%
% Homes in Foreclosure in Zip: 2.4% (Low)
% Housing Inventory For Sale in Zip: 0.80% (Low)
MLS number: 80916066

Real Estate Agent Comment: Beautiful updated home with gorgeous deck and backyard located in a wonderful family nieghborhood!!!

Who wants to share a bathroom with their children?! Not anyone in this office.

Many Bay Area markets are dominated by small homes with only 1 bathroom. In these areas the premium for an extra bathroom is material … as it should be.

Neighborhood Overview: South San Francisco is the self-proclaimed “Industrial City” located just north of San Francisco International airport. While 50 years ago that moniker meant factories, today industrial means Biotechnology. Genentech (Roche) and numerous other Biotech firms call the Oyster Point section of South City home. Proximity to San Francisco either by car or train, along with booming biotech profits has transformed this once middle class city into one of the up and coming parts of the Bay Area. Schools have improved, crime is down and new swanky developments dot the hills. While home values have declined with the rest of the state, we believe South City’s housing market area will emerge as one of the first to stabilize when we move from housing correction into housing recovery.

382 Gardenside Ave, South San Francisco, CA 94080

Original List Price: $649,900
List Date: 3/10/2008
Current List Price: $574,900
Previous Sale: $760,000
Previous Sale Date: 7/22/2005
Estimated Down Payment: $57,490*
Estimated Monthly Payment: $3,376.42*
Bedrooms: 4; Bathrooms: 2
Liv. Area: 1,570 sqft; Lot Size: 4,500 sqft
Positives:
+ 2 bathrooms
+ Centrally located near amenities and public transportation
+ Quiet street with high pride of ownership
Negatives:
- Needs significant updating, improvements
- Floors creak, could be sign of foundation issues
- Back fence doubles as left-center field fence of school baseball diamond

Cirios Valuation Approach:

Step 1: Location

First, we review the subject’s location on Google Earth to see if there are any negative obsolesces. The 2 main detractors are the baseball field over the back fence and a small back yard.

Second, we look for positive factors: The subject is within walking distance of Sunshine Garden Elementary, which is one of the best schools in the city and a short walk to the South San Francisco Bart station. Costco, Trader Joes and Starbucks are all close by.

Step 2: Data Analysis

% of Zip Distressed: 2.3% (Moderate)
% of Zip For Sale: 0.5% (Low)
% of Zip Sold Over Last 3 Months (year-over-year): +19%
Elementary School API: 790 (above average)
AHA (Affordable Home Amount): $461,093

The most concerning number here is the distressed level, since as the economic downturn continues, foreclosures are likely to rise from already elevated levels, pushing down prices. However, supply is currently very low and schools are good, both of which should be viewed as positives. Finally, we are encouraged by the affordability level. Since this property is one of the larger in the neighborhood and could be very desirable after some quality improvements, we expect some higher earners in the area to be interested in the home.

Step 3: Comparable Properties

Please visit www.ciriosre.com and click on “Market Commentary” for our CLEAR valuation with a full list of comparable listings and sales. Note that this property needs work, so is likely to sell below what move-in ready homes are going for.

Step 4: Value Analysis

The subject is one of the larger homes in the area and is in a very desirable location. Our biggest concern is the squeaky floors, which could indicate foundation issues. This concern notwithstanding, we believe this property would attract numerous buyers if it were listed at a slighter lower level than its current list price. As you can see from our CLEAR valuation, we are valuing this property slightly below our comp sale #3 since the subject is slightly smaller but is in a very similar location.

Cirios Value: $525,000
Over-Listed Amount: $49,900 (-8.7%)