Time for the Nutty?

It’s December Already, the time when real estate in SF may be a bit nutty

It’s the time of year when people are in the shopping mood, when folks feel the days running out, when the thought of the tax year closing suddenly compels some to act. Whatever the reason, December can be a frenzied time of year with people doing — well — nutty things like buying exuberantly or faster than they would otherwise. And we’re starting to see some more normal properties come onto the market. This is why it’s important to be working with yours truly who’s been watching and observing the market for quite some time now to give you the proper context and perspective to make sure you’re not the nut.

What was on the market this week?

What was on the market this week?

As I noted last week, it is the weird part of the year that draws out the weirdo properties. There are still some weird birds out there. Examples include: a house/lot that is located behind another house with a 7 foot x 50 foot access path to a house that needs to TLC, which would be worthwhile because of phenomenal views and complicated tenants; the incomplete post-fire Dogpatch house that is being sold with lumber, which is good as the house is only framed on the inside with no systems being installed (the lighting inside was done ala extension cord); to the lots in Bernal Heights that have no road access, utilities and a 20%+ steep grade on the market that, quite naturally have title issues — did I mention it’s unclear if you can even build on them?! Nuts.

Despite that, just as the Thanksgiving week arrived, Vanguard’s sales activity still remained good and strong — still exceeding spring and summer highs but now also showing a steadying of prices. Median prices are predicted to rise only 6% next year in the Bay Area and California compared to 2+ years of 25%+ growth. Why? 
Does this mean trouble ahead? No. Instead median price (which is in itself a somewhat flawed data aggregation point) reflected sales of all types of properties including foreclosures and short sale distressed properties. That inventory has now been largely resold and no more exists. Regular sales are the norm again and median prices will steady as a natural consequence. 
So, most observers take this to mean that there is no sign of a bubble having formed or one forming in the near future. Why not?

(1) San Francisco remains in high demand as evidenced by a rehashing of the anti-gentrification sentiments of the late 1990s as reported in the New York Times last week (

Backlash by the Bay: Tech Riches Alter a City”) and, for better or worse, as the New Republic summarizes:
“Cities like these [New York and San Francisco]  are where young people want to live now. The course San Francisco and New York chart in the next few years will determine whether all but the wealthiest of them will be able to to grow older in them.”

Only this time it’s supported by new construction and a grounded jobs market.

(2) A bubble is nearly impossible to imagine with interest rates remaining as low as they are. Interest rates are remaining nice and stable and no one expects the Fed to alter its plans at least until the end of February 2014. The mere rumors of an easing of the Fed’s policy of buying T-bills in May this year caused a 1/2 point rise in mortgage rates that we’re only now finally cycling out of now. As I wrote last week, lenders are (still) looking to lend and to lend now. Lenders from Citibank to First Republic to Wells are all looking to lend and are looking voraciously. From Tony Alencar at Citibank, here are the most current rates:

  • JUMBO 30-year fixed 3.875% 0 points (Vanguard preferred rate with Citibank) up to $2M, with 20% down 
  • 5/1/ ARM up to $2M, with 20% down, 0 pts, rate = 2.625% 
  • 7/1 ARM  up to $2M, with 20% down, 0 pts, rate = 3% 
  • 10/1 ARM up to $2M, with 20% down, 0 pts, rate =  3.375%

(3) Applying What You’ve Just Read: 
In working with a set of new buyers yesterday, they asked me what a monthly payment would look like if they bought now or waited a year from now when rates are predicted to be 5.3% (when rates get to that point again is moot as the main point is that they will at one point). Here’s what we calculated:

Assuming you had $150,000 to put down now on a purchase using a conventional 30-year fixed loan that would be 20% of a $750,000 purchase…

  • Purchase in Q1, 2014, Interest rate @ 4.0% your mortgage and property tax obligation would be:$3,563.74/month
  • Purchase in Q4, 2014, Interest rate @ 5.3% your mortgage and property tax obligation would be:$4,031.08/month
​This may seem like an okay proposition, but consider this from the payment point of view. When you’re able to afford a $4000-ish per month payment you could buy something for $850,000 today instead because of the difference in interest rates. Here’s the math: This assuming you put an extra $20,000 down. Therefore, $170,000 down @ 4.0% at $850,000 purchase price your monthly P, I and T would be $4,038.91!

Net effect: You lose $100,000 worth of buying power with a rate change of about 1% (And don’t forget you can deduct mortgage interest)