Wednesday, March 20th, 2013
44

Welcome To The New American Housing Bubble (In Coastal Elite Cities)

Well here's about $5 million in monthly rent checks!"Most of my buyers are averaging four offers before they have one accepted," my new real estate agent in the Bay Area said yesterday. "It can be an emotional and stressful time."

Probably! And especially if you're moving from a still-depressed housing market, which is roughly the area between the Eastern Seaboard and San Francisco. But, as NPR is reporting as I type these words, the American housing market (in the coastal elite cities) is "fast changing." From causing the collapse of the Earth's economy just five years ago to a breezy NPR feature about an insane couple putting in offers at 2 a.m. after driving by a new listing, at night, the simple matter of having a place continues to cause misery, heartbreak and insomnia for those who would like to not deal with landlords and $5,000 monthly rents.

When the radio man says that "historically low interest rates are driving the recovery of the housing market"—a quote I just invented that you can probably hear, word for word, on Bloomberg right now—what he's really saying is that rents are going crazy because enough people have money again to drive up the rents, but 3.4% annually on a half-million-dollar home means a monthly payment of about $1,800, after the 20% down payment of $100,000 (plus closing costs) you somehow have in the bank. Bring up your monthly house payment to $2,400 to include property taxes and homeowner's insurance, and it's still less than a three-bedroom place in a city with an economy. Especially if you need a patch of dirt outside for your dog to poop on.

If you cannot afford $5,000 a month for rent because you do not work for Facebook an hour away from San Francisco, buying is a "good idea," and also the only other option beyond sleeping beneath the 101 … but only if you've somehow maintained your credit during the worst financial crisis of our lives, and also somehow saved a hundred thousand dollars, etc. And so people are buying anything, any old moldy box of urine-soaked flooring between a poison factory and a Pentecostal church, because it "makes financial sense."

But is this growing frenzy real or is it just another bubble that will deflate as soon as underwater mortgage holders figure they can finally get out from their terrible investment of 2007? From another NPR housing story, this one about how it's not actually fixed after all:

Despite a recent upturn in sales and prices, "the housing market is still very weak," said Sheila Bair, who headed the Federal Deposit Insurance Corp. from 2006 to 2011. Bair, speaking at a Washington "economic summit" organized by The Atlantic magazine, warned homeowners that "we need more experience and data to know if it's really turned around."

Bair said lenders may be sitting on huge numbers of foreclosed upon houses that have been held back from the market. As housing prices start to perk up, that hidden inventory may come flooding into the market – and pushing prices back down, she said.

Moreover, millions of homeowners are "under water," i.e., they still owe more on mortgages than they could get by selling their homes. As soon as they can sell at prices high enough to pay off old loans, they'll put their properties on the market—and again drive down prices, she said.

This is still a problem even in fancy Twitter cities such as San Francisco, which is where Twitter is based and where Twitter itself stands as a temple to the way a cool tech company can save even a forever-doomed stretch of hobo land and plywood-covered windows like mid-Market Street.

Across from the new Twitter headquarters is an ugly brown stucco high-rise called Fox Plaza. It stands on the site of the beautiful old Fox Theater. When redevelopment bores approved the demolition of the grand theater in the 1960s, the Church of Satan's Anton LaVay put a curse on the new building. Over the next forty years, not only the hideous Fox Plaza but the entire mid-Market Street corridor suffered endless humiliation and decay. The magic of Twitter has even reversed this satanic curse: Fox Plaza with its 1970s-style prison apartments now has a waiting list for bigger units, but you can get this nostalgic 1970s' garbatecture one-bedroom for $3,070 per month.

Should all the financially strapped San Francisco homeowners suddenly put their homes on the market, it would make a dramatic difference in the current low inventory—8% of the city's homeowners still owe more on their bubble-era mortgage than the property's current market value. But with values rising so fast, even houses that sold at the height of the 2007 insanity are getting close to parity. More houses on the market might bring some sense back to people, because it is reportedly damaging to sanity when you're shown four crappy little houses that all need a lot of work, and you're outbid on all of them, immediately.

Meanwhile, just an hour away in California's Central Valley, lots of towns still have a huge shadow inventory of foreclosed homes and people waiting for the good times to return to Adobe Falls Estates behind the old Circuit City and the Applebee's.

Related: Is San Francisco The Brooklyn To Silicon Valley's Unbuilt Manhattan?


Photo by Charles Weever.

44 Comments / Post A Comment

deepomega (#1,720)

As someone looking to buy a house in LA, oh my FUCKING god this isn't gonna end well.

You didn't mention the part where it's pretty clear that interest rates are gonna be held down long enough for banks to sloooowwlllyyyy trickle out foreclosures without the accompanying price drop. Inventory will remain low until they do that, then interest will get bumped up so that people actually, you know, looking for a house to live in will still end up fucked.

And of course, low inventory and interest rates and high rents mean that most of the sales are to investors paying cash.

deepomega (#1,720)

@deepomega That said, in LA anyway, we're nowhere near 2007.

garli (#242,519)

@deepomega Ok, I would like to copy your pretty graph for my area, what's the trick?

http://graphs.trulia.com/real_estate/Santa_Barbara-California/graph.png?version=348&width=600&height=250&type=qma_median_sales_price&city=Santa+Barbara&state=CA

is the link and [img] or <> tags don't work.

deepomega (#1,720)

@garli you put

img src="YOUR_LINK_HERE"

inside those <> tags

@deepomega A+ MOOC

garli (#242,519)

As some one currently trying to buy a house in Santa Barbara holy shit this speaks to me. Last place we made an offer on had 9 offers over asking price in 24 hours AND went for 50K over asking.

deepomega (#1,720)

@garli If you wanna post those graphs, just use an image tag. Like so.

garli (#242,519)

@deepomega Thank you sir. (ma'am?)

Drawn7979 (#242,134)

@garli
interesting chart there.

jfruh (#713)

But is the Fox Plaza apartment on a high enough floor that you can't smell the hobo urine? These are important facts that should be in the ad!

David (#192)

1. Principal forgiveness would reduce negative equity, though house price appreciation is likely to have a much greater effect in reducing the number of underwater borrowers.
2. The Obama Administration may soon appoint a new director of the Federal Housing Finance Authority (FHFA) that oversees Fannie Mae and Freddie Mac (who could then change the current policy and make principal-balance reductions possible). However, Republicans in the Senate could potentially block the nomination if they believed it was likely to lead to significant loosening of rules on mortgage refinancing or widespread principal reduction for underwater borrowers. The agency has been operating without a confirmed director since 2009.
3. Rent or Buy? It's a "total occupancy cost" question– you are right– those that can will buy when the cost of occupancy (compared to renting)– is lower.
4. In time, interest rates will go up.

Jane Donuts (#2,857)

I'm kind of, sort of in the market in LA, and ugh. While it's not as bad as SF, it's pretty nuts. And even if we're still in a bubble, will houses in the city proper ever really depreciate? In the valley and inland empire, sure. But everywhere else just seems to slowly continue to gentrify.

deepomega (#1,720)

@Jane Donuts Define "depreciate." Like, over a shortish time period (under 10 years) yes it can definitely happen, and over a longish timeline (30+) it can happen too, if a neighborhood falls apart. See Hollywood, e.g., or even Central LA. As long as you're not flipping in a few years, and are willing to leave if your neighborhood gets shitty, then you're fine. Just don't get an ARM.

Sean Lai (#14,158)

@Jane Donuts Never say never, but I kind of think that core cities like SF and Manhattan aren't going to either 1) build a ton of new homes or 2) suffer a sudden and calamitous increase in crime and decrease in capital that drives all the rich people out, so we are probably stuck with high housing prices in those places for the time being.

In the far flung future, when SF is a cultural backwater and Jakarta is the hub of all things cool and happening, maybe we can have reasonable housing prices again.

Edit: comments do not apply to LA, which I know nothing about.

Ken Layne (#262)

@Sean Lai It seems like that now, but between 1989 and 1995 both the Bay Area and Los Angeles had a series of financial and natural disasters that had people rushing out of California in such numbers that the Pacific Northwest briefly turned viciously anti-Californian. City rents were giveaways, and you could have your pick of most any house in crime-ridden, run-down, brown-skied Silver Lake or Los Feliz for less than $100K.

I hope the move back to cities is real and lasting. It is certainly the most sane way for gazillions of people to live, as far as the environment and natural resources and the mental health/community-mindedness of humanity. Information-economy cities seem to be very resilient (9/11 and the financial collapse combined hardly dented New York for more than the short term.) For people who can choose where they want to work, it seems like the big forward-thinking cities with the culture and the farmers markets and the public transportation are going to be the magnet for this half of the century, but something like antibiotic-resistant plague could change us back to suburban fear machines pretty quickly.

Sean Lai (#14,158)

@Ken Layne You're right – this will sound like a joke, but I am being serious when I say you can never discount the possibility of a plague.

I wonder whether SF's satellite cities, either on the peninsula or even over in Berkeley and Oakland, will take the limited housing supply seriously. People mostly hate tall buildings, but it wouldn't Manhattanize Oakland to build some six-story apartment buildings where there are now none. And they are so desperately needed.

Ken Layne (#262)

@Sean Lai I wrote something suggesting a dense-housing remake of underbuilt/underused infill on the peninsula and people went NUTS on Twitter saying basically "HOW DARE YOU!" http://www.theawl.com/2013/01/is-san-francisco-the-brooklyn-to-silicon-valleys-unbuilt-manhattan

Kate D.@twitter (#240,597)

@Sean Lai Frankly, this Oakland resident would welcome more six-story condo buildings, so far as they're far away from me.

Morbo (#1,288)

I'll take living in the Midwest, with plenty of drinking water and arable farmland, thankyouverymuch.

deepomega (#1,720)

@Morbo We'll see who's laughing when the Second Dust Bowl happens.

Morbo (#1,288)

@deepomega That didn't hit the Great Lakes region too much.

Multiphasic (#411)

@deepomega LOLgwalla.

bootsandcats (#239,240)

@Morbo How is your aquifer doing?

Wilkins (#242,301)

@deepomega We'll see who is laughing when your state goes bankrupt…oh, too late.

bluebears (#5,902)

I live in the midwest in a market that has been fairly depressed however in the last oh about 18 months everyone I know who has bought a house has averaged at least 4 offers and been outbid with prices going over asking.

As a survivor of two SF/Bay Area bubbles, I'm shocked that Pets.com couldn't make it.

Ralph Haygood (#13,154)

"The magic of Twitter has even reversed this satanic curse": Oh nooo, Preciousss! Haven't you heard? Twitter is itself the spawn of Satan. This is merely the next phase in the fulfillment of the curse: from literally stinking hobos to figuratively stinking yuppies.

ls (#9,728)

I can assure you that Twitter is not "saving" my neighborhood unless you mean saving it from being affordable

TM5 (#242,522)

I can vouch for how insane the market is. We've been looking in the Bay Area and are on offer #5. We've seen 30+ offers come in on some of the homes we've tried to buy and up to 200K over asking (not an exaggeration), all cash, no contingencies. Close to giving up.

julebsorry (#5,783)

What's wrong with me that I said "Hey, it's got a dishwasher and a view – that's not too bad at that price?"

Ugh, I think I have Stockholm syndrome after too long living in NYC.

Kate D.@twitter (#240,597)

I used to deliver pizza for the fancy Hayes Valley pizzeria, Patxi's. I made deliveries to Fox Plaza at least once a shift and those deliveries were always my least favorite. Logan is absolutely right in describing it as a prison—it's a small, claustrophobic, stucco and plywood hellscape. The halls are dark and dank and the units demoralizingly stark. I wouldn't pay $700 to live there, let alone $3,000. Insane.

daemonsquire (#9,523)

My wife and I have dropped by a few open houses in SF in the past month or so, coming face to face with the phenomenon of the "million dollar fixer upper".

My landlord is retiring and wants to sell the cottage I've been renting from him for the past 20 years, so we're stuck facing exactly the situation you're describing, if we'd like to stay in SF, which we do. There's no option available that isn't going to at least double our cost of living.

Fortunately, the city has a lot of resources to help, starting with the rent controls that have kept cost of living tolerable thus far (and which the Tenants Union reminds us, are forever under legislative attack, sftu.org). Granted, someone smarter or more disciplined might have thus had the wherewithal to implement a healthy savings regimen… but, alas, we can't approach the 20%+ down that banks are demanding for loaning into a tenancy-in-common (which is what staying where we live would involve, lumped in with two other cottages on the same plot of land), even on a property for which we're being asked to pay somewhat less than half a mil (gratefully?).

We attended a first time homebuyers' workshop last week, as a pre-requisite to be eligible for the city's "below market rate" housing, to open that up as an option, and there, we learned that SF has a Down-payment Assistance Loan Program (DALP): depending on one's household income, city residents who have never owned real estate anywhere ever, are eligible for up to $100,000 loaned at 0% interest for a 40 year term!

So, we think, unless we're missing some caveat somewhere (like, does the DALP wreck our credit score for the rest of the loan?), that might help ease us into the heretofore unimaginable privilege of being nearly $500,000 in debt for some 540 sq. ft. With no parking.

scrooge (#2,697)

Apparently, a lot of those all-cash offers are coming not from would-be homeowners but from institutions like Blackrock, which has so far spent $3.2bn to buy 20,000 single-family houses and just got a $2.1bn credit line to buy more. At one point, they were buying 100 houses a week. Inequality grows and grows until we are back at feudalism.

Ken Layne (#262)

@scrooge Wow …

I knew there were a lot of investor/flippers out there — San Francisco has the highest rental to homeowner ratio outside of New York — but that is really actually kind of terrifying that it's on the Blackrock scale. Well, I'm sure they'll suffer just like the rest of us when *this* bubble pops, right?

scrooge (#2,697)

@Ken Layne Yeah, you have to wonder in places like California whether the rise in prices isn't actually due to institutions like BlackRock and will stop when they stop buying.

I just wonder why more San Franciscans don't move to Oakland, 20 minutes away by BART and crumjumfull of friendly neighborhood hipsters. Kind of like Brooklyn vs Manhattan 10 years ago. If they can find the downpayment, the monthly payments are lower than what you'd pay in rent.

banksters (#239,738)

As a Calabasas real estate agent in California, I see that prices are only going up because there is an artificial lack of supply. This is due to the banks holding off from foreclosing on defaulted homes. Banks are allowing residents to live in the houses so that they don't become dilapidated and will snatch them up as soon as the market turns.

PITAR (#243,191)

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anmanblack (#275,833)

that…my neighbours mother woz like they say truley receiving money in their spare time from there computar one of Brian\'s posts

anmanblack (#275,833)

that…my neighbours mother woz like they say truley receiving money in their spare time from there computar Specificatii

03212616077 (#272,775)

it's still less than a three-bedroom place in a city with an economy. Especially if you need a patch of dirt outside for your dog to poop on. Palette opinie

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