January 24, 2013
As jazz strains wafted over from the brand-new SFJazz Center and homeless people lounged on the sidewalk, Gregg Nelson and Arden Hearing stood in front of a Mid-Market property where they plan to build 120 condos and pointed to buildings where marquee companies Square, Twitter and Dolby have set up shop.
“There’s been a tremendous creation of jobs here and huge demand for housing,” Nelson said. “There is a compelling, increasing demand for new for-sale housing in San Francisco.”
Their company, Trumark Urban, hopes to meet that demand.
In a city where most current construction focuses on rental apartments, Trumark Urban plans to build small and midsize condominium complexes – ranging from about 25 to 130 units each – in core areas around San Francisco, tailoring each complex to visions outlined in neighborhood plans.
Trumark has lined up six sites – in the Mission, Potrero Hill, Cow Hollow, South of Market, Nob Hill and Mid-Market – where it hopes to build 550 condos, ranging from 500 square feet to 2,500 square feet, and from $500,000 to $2 million, plus some below-market-rate units as required by the city. The first groundbreaking is set for spring; most would start construction next year.
By year end, it hopes to have identified more San Francisco real estate, with a goal of 1,000 condo units coming over the next few years.
Trumark is targeting two populations: Gen Y tech workers “who want to live in urban areas near their jobs,” and Baby Boomer retirees who prefer “walkable neighborhoods to Sun City-style senior housing environments,” Nelson said.
Gabriel Metcalf, president of the nonprofit San Francisco Planning and Urban Research Association, or SPUR, said Trumark’s vision sounds like a good fit for San Francisco.
“It’s a really neat thing they’re trying to do,” he said. “If they figure out how to make these small infill projects work, it will be a great contribution to the city. Most of the fabric of San Francisco is small sites. It’s one of the things that makes this city what it is. We want to have small-parcel builders be successful and fit into our neighborhoods.”
Of course, San Francisco’s notoriously difficult building-permit process and the challenges of securing capital mean there are no guarantees for any developer.
“We have always focused on high barrier-to-entry markets, and San Francisco is the epitome of that,” Hearing said. “We mean that in a good way; we don’t want to build homes in Texas. We like that there is a process here. It’s not easy to develop in San Francisco, especially not in the neighborhoods, but it’s where people want to live.”
In lower Nob Hill, for instance, a run-down auto repair shop “that is a blight on the block will turn into a phenomenal neighborhood amenity with a public art gallery in the alley,” in addition to 128 condos, Hearing said.
“We see an advantage to be diversified across several neighborhoods,” Nelson said.
The below-market-rate component for low-income people will range from 12 percent to 18 percent of total units, depending on location. Trumark said it’s letting the neighborhood plans guide it in whether the low-income units will be on-site or not.
Home building in San Francisco almost ground to a halt during the economic downturn – only 269 new units were built in all of 2011, according to SPUR. But that turned around in 2012, and now the city is having “the biggest residential construction boom that we’ve had in many decades,” Metcalf said.
The vast majority of current residential construction in the city focuses on rental units.
“There are 8,117 apartments in the pipeline in San Francisco right now to be delivered over the next three years,” said Chris Foley, a principal in the Polaris Group, a sales and marketing company that has done consulting for Trumark. “Less than 10 percent, probably just 7 percent, could potentially be converted to condos” because of how the projects are financed.
By contrast, the condo pipeline offers slim pickings. Besides Trumark’s proposals, Foley said only a couple hundred condos a year are expected to be built in the city over the next three years. “The reality is there is almost no condo inventory in San Francisco, and the demand is very large,” he said. Nelson co-founded and is a principal of Trumark, the parent company in Danville. It has been doing residential and commercial development for about 20 years throughout California but has primarily handled land and entitlements, leaving the building to others. In 2008 it started a home-building division that does “soup to nuts” development and construction. It also has projects in San Jose and Milpitas.
It spun off Trumark Urban as a subsidiary based in San Francisco to manage the infill condo developments. Hearing is its managing director. Trumark Urban plans to develop in Los Angeles, San Diego, Seattle and possibly Portland.
Trumark expects its six sites in San Francisco will cost about $300 million for land, design, construction and marketing, while the planned 550 units would sell for about $400 million.
It has financing the projects internally so far, but it is conferring with some large equity partners, Nelson said.
December 1, 2012
San Francisco Housing Market Remains Upbeat Throughout Holiday Season
Even though the city’s housing market has had to deal with month-after-month of low housing stock in 2012, it has not stopped a wave of motivated buyers from making San Francisco their home. Families have been rushing all year round to purchase and settle into their new homes, eager to take advantage of historically low interest rates, knowing that rental prices will only continue to rise.
Single-Family Home Sales
Compared to November of last year, the inventory of single-family homes for sale in the city fell by 38.1 percent, to a total of 516 properties. The number of homes under contract improved by 1.4 percent, while the number of homes sold also increased by 14.2 percent, to a total of 265 properties sold.
For homes that were priced below $700,000, the months of supply inventory dropped by 56.6 percent to a reading of 0.9 months. For higher-priced homes between $700,000 and $1.2 million, the months of supply inventory also fell, by 63.8 percent to 1.2 months.
(These exceedingly short time frames are indicative of a seller’s market, where sellers have more leveraging power over buyers who are all vying against a limited amount of properties.)
One region of the city that experienced a heightened boost of activity is in the northwestern section, more commonly referred to as the Richmond District, which includes such neighborhoods as Laurel Heights, Outer, Central and Inner Richmond and Sea Cliff. Since November 2011, the number of homes sold in this area jumped by as much as 64.3 percent, to a total of 23 properties sold.
With its close proximity to Golden Gate Park, Ocean Beach and the ethnic shopping corridors of Geary Boulevard and Clement Street, there is a never a shortage of activities to do here. Growing families will find the neighborhood vibe of the Richmond District and its abundance of turn-of-the-century Edwardian homes and stucco houses alluring. The median price for a home here is $1,280,888, which is up by a dramatic 49.8 percent from this time last year.
Another region of the city which continues to experience vibrant sales activity is in the area of San Francisco known as Twin Peaks West. Compared to this time last year, the number of homes under contract here moved ahead by 13.8 percent, while the total number of homes sold boosted by a whopping 100 percent, to 46 properties sold. Located in the mid-western part of the city, Twin Peaks West has a total of 16 neighborhoods, including the upscale and exclusive St. Francis Wood and Forest Hill, and the more approachable and family-friendly communities of Diamond Heights and West Portal. There is an array of architectural styles available for everybody here, from stately Spanish Mediterranean homes to charming craftsman bungalows. The median price for a home here is $950,000, which is up by 20.3 percent from November 2012.
Along with single-family homes, the inventory of condominiums for sale in the city fell by 36.3 percent, to a total of 660 condominiums. The number of condominiums under contract rose by 20 percent, while the number of condominiums sold increased by 25.1 percent, to a total of 259 units sold.
For condominiums that were priced between $500,000 and $900,000, the months of supply inventory tightened by 48.4 percent to a reading of 1.4 months. For luxury condominiums priced above $900,000, the months of supply inventory also dropped by 46.7 percent to 1.6 months.
One area which saw a robust increase in condominium sales activity is in the Marina, Cow Hollow, and Pacific and Presidio Heights neighborhoods of the northernmost section of the city. Since November of last year, the number of condominiums under contract here increased by 43.5 percent, while the number of condominiums sold has also magnified by 54.5 percent to a total of 34 units sold. Successful professionals, both young and old, who prefer to live in what many consider to be “old San Francisco,” will find satisfaction in any of these four neighborhoods where luxury condominiums reside next to posh shopping destinations and unique restaurants. The median price for a condominium here is around $1,041,250, which is up by 12 percent from this time a year ago.
The consumer confidence index, which had increased in October, posted a moderate increase in November. The index now stands at 73.7, up from a reading of 73.1 in October. Lynn Franco, Director of Economic Indicators at the Conference Board, says that, “The Consumer Confidence Index increased in November and is now at its highest level in more than four and a half years (76.4 Feb. 2008). This month’s moderate improvement was the result of an uptick in expectations, while consumers’ assessment of present-day conditions continues to hold steady. Over the past few months, consumers have grown increasingly more upbeat about the current and expected state of the job market, and this turnaround in sentiment is helping to boost confidence.”
CNN Money recently reported that, “In another sign of a housing market rebound, home prices posted the biggest percentage gain in more than two years in the third quarter, according to the closely followed S&P/Case-Shiller index. The 3.6% increase from a year earlier is more than three times the rise in the previous quarter and was the biggest jump in prices since the second quarter of 2010. But that 2010 rise was much more of a temporary blip caused by a homebuyer’s tax credit of up to $8,000 on homes purchased in late 2009 and early 2010. This latest rise comes as the housing market has shown numerous other signs of recovery in recent months. The rebound is spurred by a combination of record low mortgage rates, an improving jobs market and a drop in foreclosures to a five-year low, reducing the supply of distressed homes available. There is also a tighter supply of both new and previously owned homes on the market. The improvement in housing market fundamentals have helped to lift the pace of both home sales and home building.”
According to USA Today, “Apartment rents will go up again next year for the fourth consecutive year as the economy improves—good news for landlords but tough on renters. Rents for apartments—which make up about half of all rental housing—will jump 4.6% nationally next year after a 4.1% increase this year, the National Association of REALTORS® predicted Monday [November 26, 2012] in its commercial forecast. Rents will keep rising, more than 4% a year for 2014 and 2015, says market researcher Reis.”
From the SF Chronicle, “San Franciscans appear to have avoided slashed library hours, surging swim lesson fees and fewer street sweepers, at least in the near term. The city has a projected deficit of $129 million for the fiscal year that starts July 1—the lowest shortfall in five years and one that isn’t expected to mean draconian service cuts, according to budget projections that Mayor Ed Lee’s office released Tuesday [December 11, 2012]. San Francisco’s improving fiscal picture is due to a recovering economy and the early effect of reforms implemented in recent years, including two-year budgets and pension program changes, officials said.”
J.K. Dineen, Reporter
Friday, November 16, 2012
South of Market property owners are rushing to take advantage of a plan to rezone the area around the Central Subway, submitting proposals that would add up to more than 2.5 million square feet of new infill development in San Francisco.
Responding to an invitation from the city, developers have quietly submitted new proposals in the last few weeks. They include TMG Partners, Zappettini Properties and Cresleigh Development. Tishman Speyer filed an application last summer.
The largest of the preliminary proposal applications is San Francisco-based Cresleigh Development’s 1.3 million-square-foot project on Harrison Street between Second and Third streets. The $420 million “mixed-use integrated” development, which is being designed by Skidmore Owings & Merrill, calls for a 478,000-square-foot office building, a 406,000-square-foot residential tower and a 300-room hotel along the south side of Harrison. Restaurants and retail would line the streets and the development would incorporate a small historic building at 645 Harrison. The residential tower and the hotel would have rooftop gardens.
“We think this is a desirable project for a lot of reasons,” said Denise Hannon, a senior vice president with Cresleigh. “The site itself is close to the Central Subway station and close to the Transbay entrance on Second Street. It would be the closest hotel to AT&T Park and also close to the planned Warriors arena on Piers 30-32. It would create jobs and housing and, given the size of the site, we think it’s feasible.”
Cresleigh Development is run by Lawrence Lui, who also is the president of San Francisco-based Stanford Hotels Corp., which owns 17 hotels. Lui was traveling and not available for comment.
A few blocks south on Brannan Street, developers have submitted plans to build 1.4 million square feet in three separate projects. At 501-505 Brannan St., TMG Partners is proposing a $20 million, 200,000-square-foot office building on a surface parking lot that is owned by Bank of America. Heller Manus is the architect. Amy Neches, a partner with TMG Partners, declined to comment.
Tishman Speyer has filed an application to build a 700,000-square-foot office complex on a 97,000-square-foot parcel at 598 Brannan St. The property is owned by the Hearst Corp., which has used it to store and maintainSan Francisco Chronicle delivery trucks and newspaper racks.
At 610-620 Brannan St., Zappettini Properties is seeking permission to construct a 567,000-square-foot office building on the southeastern corner of the San Francisco Flower Mart. The property is partially used as a surface parking lot, although the smaller building at 620 Brannan St. is occupied by a tenant of the wholesale flower market. The parcels together represent less than 10 percent of the Flower Mart facilities, according to John Zappettini, who heads Zappettini Properties.
“We are exploring all our options — it’s early in the Central Corridor process. We want to balance the interests of our family, the city and our immediate neighbors in parallel with the Central Corridor planning process,” said Zappettini. “I appreciate that one of the goals of the Central Corridor plan is to incentivize creative office space, so obviously that use is going to be sorted to the top.”
The slew of proposed projects comes as the city’s planning department is nearing completion of its draft Central Corridor Plan, which planners hope will create enough new space for 30,000 new jobs in an area bordered by Second and Sixth streets on the east and west and Mission and Townsend streets on the north and south. The plan will then undergo a two-year environmental review, which is required under the California Environmental Quality Act, before the Planning Department and Board of Supervisors weigh in on it.
The Central Subway, scheduled for a 2019 opening, will extend 1.7 miles from the Fourth Street Caltrain station and will have stops in SoMa, Yerba Buena, Union Square and Chinatown. The proposed rezoning would favor technology-friendly buildings on larger parcels of available land, limiting housing to lots under 20,000 square feet.
But the plan — and the slew of projects it is spawning — threatens to run into early obstacles.
Since 1985, Prop M has limited approvals for large new office complexes to 875,000 square feet each year. Even before the TMG, Zappettini and Cresleigh applications were submitted, the San Francisco office pipeline exceeded Prop M limits. There is currently 4 million square feet of space under the cap, while currently 2 million square feet of office project applications are pending, another 2.2 million square feet of projects are in the pre-development design review stage, and 2 million square feet of projects — including the Central Corridor projects — have applied for preliminary project assessments, the first step in the development process.
In addition, the Brannan Street proposals highlight conflicts between two plans now under way: the Central Corridor Plan and the Western SoMa Community Plan, which seeks to protect blue collar jobs and the arts west of fourth street. As things stand, the Brannan Street parcel could be rezoned for industrial and arts uses later this year under the Western SoMa plan and then rezoned for office use under the Central Corridor plan two years later.
SoMa activist Jim Meko said the West SoMa plan prohibits office use along Brannan Street between the west side of Fourth Street and Sixth Street. “The Planning Commission is set to adopt the Western SoMa plan as written. Office is not permitted, period. The notion that the Central Corridor plan may go off in a different direction is a totally unsettled issue. The planners are going through a fantasy if they think they can put in all this tech office, protect light industrial jobs and have nightclubs and housing. It’s a real song-and-dance routine.”
Space for jobs
Planning Director John Rahaim said the department didn’t set a hard and fast deadline for preliminary project applications. But planners made it clear that the department aimed to set “the range of alternatives by the middle of the fall.” He said the proposals “are all a little higher density than what we had talked about, but that’s OK. We told them we wanted to finalize the alternatives so they are trying to get their ideas out on the table so we can consider them,” said Rahaim.
While property owners seem to be pushing for maximum density, not uncommon during the early stages of an entitlement process, most of the proposals coming in are in line with the principles of the Central Corridor plan, the planning director said. “The focus is on commercial office space, on space for jobs, which is the intent of the Central Corridor plan,” said Rahaim.
Developers have been circling the Flower Mart site for decades, though redevelopment has always been complicated by the fact that the marketplace has dozens of owners and tenants who would need to be relocated should the site be developed. Zappettini said Flower Mart owners and tenants “continue to evaluate all options for the future as their businesses and markets evolve.” He stressed that his parcel could be redeveloped without adversely impacting the overall flower market operation.
“We are very proud of our family heritage in the flower business and our contributions to the flower market for the past three generations. We hope to continue to be a strong supporter and advocate for what is best for everyone there,” he said.
©2012 Bloomberg News
September 25, 2012
(Updates with reaction from consumer and industry groups beginning in fifth paragraph)
Sept. 25 (Bloomberg) — One in five U.S. consumers is likely to receive a credit score different from the one given to lenders, potentially closing off access to credit for millions of Americans, the Consumer Financial Protection Bureau found in a study released today.
The study comes five days before the consumer agency, created by the Dodd-Frank law of 2010, begins supervision of credit-reporting companies’ records and practices. The work involves direct review of about 30 businesses, including the three biggest, Equifax Inc., Experian Plc and TransUnion Corp.
“This study highlights the complexities consumers face in the credit scoring market,” Richard Cordray, the agency’s director, said in an e-mailed statement. “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.”
Under the Fair Credit Reporting Act, consumers are entitled to a free copy of their credit report each year. Consumer advocates have charged that credit-reporting companies provide varying scores to lenders, potentially raising the cost of credit or depriving consumers of it entirely.
“This is like choosing what college to apply to without knowing your SAT or ACT scores, or whether the college uses ACT or SAT,” Chi Chi Wu, an attorney with the Boston-based National Consumer Law Center, said in an interview.
Wu said the report highlights the need for new legislation that would give consumers access to any credit report or score prepared about them.
He said that in the cases where there is a difference between the information the lender and consumer receive, it may have no effect on what kind of loan is or is not made. Much will depend, Pratt said in an interview, on how the lender uses the score in its decision-making.
“We can’t take this as absolute truth,” Pratt said.
The CFPB found that one in five consumers would likely receive a “meaningfully different” score than their lender, potentially resulting in harm to those consumers. At the same time, consumers are unlikely to know about the discrepancy.
“Consumers who have reviewed their own score may expect a certain price from a lender, may waste time and effort applying for loans they are not qualified for, or may accept offers that are worse than they could get,” according to the study.
Friday, August 24, 2012
San Francisco property values, as seen through the prism of annual tax assessments, are showing strong signs of rebounding, according to Assessor Phil Ting.
Meanwhile, a separate report showed the number of underwater homes in the nine Bay Area counties slowly subsiding as values rise.
“It is starting to come back, there is no question,” Ting said. “San Francisco remains probably the strongest real estate market in the state.”
Throughout the housing downturn, San Francisco was a Teflon-coated county compared with the rest of California, with more moderate declines in real estate values than elsewhere. It was the only county in California that never saw its overall tax roll shrink during the downturn. For the 2012-13 tax year, the assessed values in San Francisco grew 4.17 percent, or $6 billion.
Commercial properties led the growth surge, particularly in emerging areas for biotech and technology firms: Mission Bay, the South of Market portion of the Financial District, and the Inner Mission.
“Even during this very challenging recession, we’re seeing (strength in) those markets driven by industries like life science, biotech and health care as well as tech companies,” Ting said.
Under Proposition 13, properties are reassessed by more than the annual 2 percent limit when they change hands, undergo significant renovation or are newly built. All three factors were at play in the surge in values in areas such as SoMa and Mission Bay.
On the residential side, the recovery is more checkered, with weak areas particularly in the southeast and western parts of town.
Proposition 8, passed in 1978, lets assessments temporarily drop to match lower property values. Around the city, 15,811 properties got such reductions this year, averaging $175,980 in reduced value per home.
Ironically, Mission Bay, South Beach and South of Market – home to lots of new condos – were among the residential areas with the most Prop. 8 reductions, despite their boom on the commercial side.
“That whole cluster was heavily impacted and had the biggest overall declines in roll value,” Ting said. “They had a significant amount of new building, which created a bit of temporary oversupply.”
Lower-income areas, such as Bayview and Excelsior, continue to struggle.
“Those generally have been the softest real estate markets over the past couple of years,” Ting said. “They are entry points for the first-time home buyers. They were the first to show softness and the last to show strength.”
Meanwhile, perennially popular – and pricey – neighborhoods such as Pacific Heights, Noe Valley and Russian Hill saw assessed values rising.
“Areas that traditionally have been in high demand remain fairly strong,” Ting said.
Overall, Ting said, “I feel our recessionary recovery is U-shaped. We’ve definitely stabilized. It doesn’t feel like it’s jumping back in a sharp V shape the way it did in 2004 or 2005.”
Assessments look at property values as of Jan. 1, so this year’s exceptionally frothy real estate market is not yet factored in. But a report from real estate service Zillow showed that rising home values decreased the percentage of underwater properties between the first quarter and second quarter.
“It’s good news that negative equity is dropping, but we expect the overall recovery to be fairly slow,” said Stan Humphries, Zillow chief economist. “We are now mostly at bottom in most markets.”
Alameda and Contra Costa counties – two of the hardest-hit areas locally – saw significant changes in negative equity, which went from 33.8 percent of mortgaged homes in Alameda to 30.9, and from 42.8 percent in Contra Costa to 40.1.
“Besides a very healthy appreciation in home values, the high pace of foreclosure activity is also pushing negative equity down” in those counties, Humphries said.
That’s because once underwater homes are repossessed by banks and resold at lower prices, the new owners start out with equity through their down payments.
San Francisco stands out for having a relatively small pool of underwater homes.
“The big driver is that home values there are down just over 12 percent from their peak,” Humphries said. “That’s a very modest decline, which leads to a very low rate of negative equity.”
By comparison, Alameda values are down 37 percent from peak, Contra Costa almost 51 percent and Solano County almost 60 percent, he said.
Negative equity slowly subsides
The percentage of underwater homes, with mortgages larger than the value, decreased in every Bay Area county between the first and second quarters of this year.
|County||Second quarter||First quarter|
Where home prices are rising
These neighborhoods saw the biggest increase in total assessments, which look at the values of all properties as of Jan. 1.
|Financial District South||373,349,727||4.08|
|South of Market||261,243,035||3.98|
Source: San Francisco Assessor’s Office
Tuesday, June 12, 2012
A proposal to create a one-time bypass of San Francisco’s strict condominium conversion lottery could pump as much as $25 million into the city’s affordable housing fund and help more than 1,000 tenancy-in-common owners escape the financial shackles that now constrain them, proponents assert.
Supervisors Mark Farrell and Scott Wiener plan to introduce legislation Tuesday that will allow eligible TIC owners to skip the city-run condo-conversion lottery if they pay a $20,000 fee for the privilege. The money would be used to help fund the city’s affordable-housing programs.
This year 2,392 units were in the condo conversion lottery for just 200 coveted slots, and the wait to eventually win can run a decade or more. Under TICs, the ownership of a multiunit building is shared, and the individual units cannot be financed with a traditional residential loan. That has made it difficult for TIC owners to refinance and take advantage of the near record-low interest rates.
“This is creating an opportunity to assist TIC owners who are in dire financial straits, to help them keep their homes, and to help create more affordable housing,” Farrell said.
Similar attempts have been tried before, but were beat back by tenant advocates who say that such a program would open a floodgate to condominium conversions and should be defeated.
“It will lead to more evictions and the loss of rental units,” said Ted Gullicksen, who represents the San Francisco Tenants Union.
Farrell and Wiener said they have addressed that concern by offering protections for all tenants who live in the TIC buildings by guaranteeing them lifetime leases if their buildings are converted. Currently, those protections apply only to senior and disabled tenants. But critics say that once those units are vacated, the rentals can be lost forever.
– Rachel Gordon
May 17, 2012: 1:27 PM ET
By Julian Hebron, contributor
(StockTwits) — The Basis Point is a popular mortgage and housing blog that tracks consumer critical issues and data. It is edited by Julian Hebron, a retail mortgage lender who runs the San Francisco branches of RPM Mortgage.
Three weeks ago, some clients wrote a $1.25 million offer on a 1,400 square foot 3-bed, 1-bath house with original kitchen and bath near San Francisco’s Dolores Park. They weren’t even close. There were 51 offers. It sold for $1.4 million and closed 8 days after offers were due.
That’s the most offers I’ve seen in 10 years. And a different property at that week got 23 offers.
Two weeks ago, another client offered $245,000 over list price on a 3-bed, 2-bath Pacific Heights condo. One of the other 9 offers was the winning bid in this $1.6 million to $1.9 million market segment. That was my client’s fourth rejected offer. He’s looking at two properties in this price range this week, and the listing agents are reporting similar demand: about 10 serious buyers circling.
That’s the norm. It’s what some are calling The Facebook Effect on San Francisco real estate.
There are three main themes that set fire to this trend starting in late-2011:
1. Rushing to buy before IPOs set ever higher bars for tech firm valuations
2. City incentives keep tech companies in San Francisco, amplifying wealth effect
3. Limited housing inventory and rising rents in San Francisco
Let’s take them one at a time …
1. RUSH TO BUY HOMES BEFORE TECH BOOM PUSHES PRICES UP
The San Francisco buyer mindset is that they want to get in before they’re priced out, but they either haven’t reaped their firm’s windfall yet or don’t expect much if any windfall from their firm.
This mindset dictates a common approach: buy ASAP for the least down. A high-priced market often means jumbo loans above $625,500, which means that the least down is 20%.
Jumbo loans are still quite painstaking to get approved and closed. When San Francisco was in a similar (but less intense) frenzy in 2005-2006, it was easy to close jumbos in 15 days. Now it’s 25 days at best (the occasional deal heroics aside). And even though a fast close is a critical factor, price still wins most of the time when sellers receive a stack of offers.
Tech valuations are a huge reason for this buyer mindset.
It started slow with LinkedIn’s (LNKD) IPO one year ago and picked up steam ahead of Zynga’s (ZNGA) December IPO and through Yelp’s (YELP) March IPO. Then as though the Facebook IPO hype machine needed any fuel, they bought another San Francisco company, Instagram, for $1 billion last month.
Facebook has set the tone for billions rather than mere millions like we saw with Yelp. And there are plenty of still-private San Francisco firms with valuations in or near the billions, like these:
- Twitter: $8 billion+
- Dropbox: $4 billion
- Square: $1- 2 billion
- Path: $1 billion (if Google & Facebook fight for it)
- AirBnB: $1 billion
Don’t forget companies just down the road in Silicon Valley that employ lots of San Francisco residents like:
- Pinterest: $1- 5 billion
- Quora: $1 billion
You can argue against these absurdly high valuations all you want but thousands of liquid millionaires are being created before and after these firms go public — and the impact on our property market is real.
On top of this you have your tech money machines like Apple (AAPL,Fortune 500), Google, (GOOG, Fortune 500) eBay (EBAY,Fortune 500) and Salesforce (CRM) that provide high incomes for thousands more AND remain a ready takeout option for countless startups all over Silicon Valley and beyond.
But let’s be clear: I’m talking about San Francisco, not Silicon Valley.
And that leads us to the second huge reason for the San Francisco home buyer rush.
2. JOBS NOW FAR MORE LIKELY STAY IN SAN FRANCISCO
With Mayor Ed Lee’s re-election in November 2011, tech firms became more confident about controlling cost structure if they stay in the city.
Lee, a 23-year veteran of SF government, was appointed interim mayor January 2011 when Gavin Newsom vacated the slot to begin his post as California’s lieutenant governor.
Lee’s top priority at the time was to keep Twitter from leaving.
Twitter was looking for space to meet goals to grow from 350 employees back then to 3,000+ in the next few years. The math wasn’t working because San Francisco is the only California city that requires employers to pay a 1.5% tax on gross earnings of all employees (yes, it blows). Obviously payroll tax would be quite prohibitive given all those high paid employees who’d earn even more if/when a multi-billion-dollar IPO came along.
So Twitter threatened to split and (this time last year) the city responded by limiting total annual payroll tax on stock compensation of newly public companies to the higher of $750,000 or a firm’s 2010 payroll tax bill.
It kept Twitter in the city … with a couple strings: they had to move to a designated redevelopment area so their growth can contribute to revitalizing the rougher mid-Market and Tenderloin areas West of downtown — which they’re doing now by refurbishing the old San Francisco Mart at 1355 Market. And the payroll tax break on stock income runs out in 2017.
Not that the policy will even last that long. The city already bent the rule and allowed the tax break for Zynga even though they’re not in the redevelopment zone (they have a lease in the Potrero Hill neighborhood that runs through 2018). Also there’s already talk of replacing tax on payrolls with a tax on gross revenues.
But the theme is clear: San Francisco will do what’s necessary to keep tech firms in town.
And if the firms stay here to create stability and wealth for thousands here, those thousands spend their money here.
Which of course leads us to third huge reason for the San Francisco real estate fervor.
3. RENTS SPIKING, HOUSING INVENTORY INCREDIBLY LOW
Now we’ve established that hundreds or thousands of people are looking to buy homes that weren’t doing so in the past several years, what’s their available inventory?
My friend Patrick Carlisle, chief market analyst at Paragon Real Estate Group, helped me answer this question.
Only 5,500 to 6,000 homes sell in San Francisco each year. If you focus down to better neighborhoods, that reduces the number to about third of that range.
So when droves of newly wealthy individuals suddenly rush to a low-inventory market at the same time, it can drastically impact the market. Especially in the higher price points above $1.5 million, a segment in which there are only 550-600 sales per year.
And yeah sure, sellers are holding back until they see even more buyer froth. So inventory can jump short-term when more sellers finally list their homes. But those numbers I just laid out are still the annual ranges.
And here are three more detailed charts on pricing. First up is a short-term chart of median house and condo prices that shows a sharp price increase since November. Then the next two provide some longer-term context for house and condo prices across the city.
So yes, The Facebook Effect on prices is real. And rents are rising even faster. Here’s some key data points (and accompanying charts) I pulled from RentBits:
- Rents for all apartment sizes: +16% since January
- Rents for 1-bedroom apartments: +23% since January
- Rents for all house sizes: +25% since January
- Rents for 2-bedroom houses: +40% since January
I know this post has gone a bit long, but hopefully it helps you understand what’s going on at ground level in San Francisco. And even then, the data I’ve given is not specific enough for individual decision making.
Housing decisions are street to street, house to house. Housing isn’t efficient like other capital markets so you have to price houses one at a time. And I’ve covered how to price a home.
You also have to to buy vs. rent math one at a time. But for now the trend (since late-Fall) is still holding where more than half of scenarios I review pencil in favor of buying.
That’s math I understand. Can’t say the same for the Facebook IPO math. And because of the wealth effect it represents, I can’t say buy vs. rent math will continue to pencil either. But I’ll keep watching it for you…
3/09/2012 @ 10:23AM
Mark Greene, Contributor
The media has it all wrong – securing mortgage approval and satisfying credit underwriting guidelines are not the difficulties plaguing mortgage consumers. It’s in meeting the rigorous documentation requirements that most people fall flat. The good news is, the fix is simple. Just scan, photocopy, fax, and deliver every aspect of your financial life. Then, shortly before closing, check everything again.
Mortgage consumers who enter the mortgage approval process ready to battle their chosen mortgage lender will come out with a nightmare story to tell. As the process, requirements, and guidelines are the same for everybody, your mindset is the game-changer. Accepting the redundant documentation necessary for lender approval will make everyone’s life easier.
When I was a kid, my father occasionally issued directives that I naturally thought were superfluous, and when asked why I needed to do whatever it was he wanted me to do, his answer was often: “Because I said so.” This never seemed to address my query but always left me without a retort, and I would usually comply. This is exactly what consumers should do during the mortgage approval process. When your lender requests what seems to be over-documentation and you wonder why you need it, accept the simple edict – “because I said so.” You will find the mortgage approval process much less frustrating.
So, what’s the perfect loan? Well, it’s one that (a) pays back the lender and (b) pays back the lender on time. Underwriting the perfect loan is not the goal that mortgage lenders aspire to today.
The real goal is the perfect loan file.
Mortgage lenders have suffered staggering losses and gone out of business because of the dreaded loan repurchase. As mortgage delinquencies increased, FannieMae and FreddieMac began to audit mortgage loans they had purchased and discovered substandard and fraudulent underwriting practices that violated representations and warranties made, stating these were high quality loans. Fannie and Freddie began forcing the originating lenders of these “bad” loans to buy them back. So a small correspondent mortgage lender is forced to buy back a single mortgage loan in the amount of $250,000. This becomes a $250,000 loss to a small mortgage business for a single loan, because it will never be repaid.
It doesn’t take many of these bad loan buybacks to close the doors on many small mortgage operations. The lending houses suffered billions of dollars of losses repurchasing loans from Fannie and Freddie, and began to do the same thing for loans they had purchased from smaller originators.
The small and medium sized mortgage originators that survived created underwriting guidelines and procedures to eliminate the threat of future loan repurchase losses. The answer? The perfect loan file.
It’s no longer necessary to have excellent credit, a big down payment and stable employment with income sufficient to support your debt service to guarantee your loan approval. However, you must have a borrower profile that meets the credit underwriting guidelines for the loan you are requesting. And, more importantly, you have to be able to hard-copy-guideline-document your profile.
Every nook and cranny of your financial life has to be corroborated, double- and triple-checked, and reviewed again before closing. This way, if the originating lender has created a loan file that is exactly consistent with published underwriting guidelines and has documented while adhering to those guidelines, the chances are that your loan will not be subject to repurchase.
Borrowers also need to prepare for processing and underwriting. Processors and underwriters are the people trained and charged with gathering (processors), all of your required-for-approval financial documents, and then approving (underwriters), your loan. You can assume these people are well trained and very experienced, as they are tasked with assembling and approving a high-quality-these-people-will-pay-us-back loan file. But just how do they go about that?
The process begins with the filter – the loan originator (a.k.a loan officer, mortgage consultant, mortgage adviser, etc.) – tasked to match the qualifications of a particular mortgage deal to the appropriate underwriting guidelines. It is the filter’s job to determine if a loan scenario is approvable and to gather the documentation to support that determination. It is here, at the beginning of the approval process, where the deal is made or broken. The rest of the approval process is just papering the file.
The filter determines whether the information provided by the borrower can be validated and documented. This is simple, since most mortgages are approved by automated underwriting engines such as Desktop Underwriter, and the automated approval generates a list of the documents needed to paper the loan file. An underwriter can, at this stage, request additional supporting documentation evidence at their discretion, as not all circumstances neatly fit into the prescribed underwriting box. If the filter creates a loan file with accurate information, then secures the documentation resulting from the automated underwriting findings, the loan will close uneventfully.
So, let’s begin with the pre-approval call. Mortgage pre-approval is typically accomplished with a telephone interview. A prospective borrower calls a mortgage rep (filter), and the questions begin. There will be lots of questions as this critical phase of the process is akin to the discovery period in a trial – you’ll need to disclose everything. Expect to answer queries on what you do for a living, how long you’ve been employed in your current field, and what your salary is. If there is a co-borrower, they will have to answer the same questions.
Every dollar in checking, savings, investments and retirement accounts, also known as assets to close, as well as gifts from relatives and non-profit grants, has to be accounted for. Essentially everything appearing on a borrower’s asset-radar-screen has to be documented and explained.
If you were previously a homeowner and sold your home in a short sale, or if you own a home now and plan to keep it as an investment or rental property, there are new and specific underwriting guidelines created just for you. In these cases, full disclosure of your credit and homeownership past can potentially eliminate unforeseen mortgage approval woes. For instance, FannieMae has a new underwriting guideline called “Buy-and-Bail,” for current homeowners’ planning on keeping their existing home as an investment/rental property. Properties not meeting the 30% equity test for “Buy-and-Bail” result in additional asset requirements to purchase a new home. Buyers with a short sale history may have to wait two to three years before they are eligible for mortgage financing again. Full vetting of your previous mortgage life will save you the dreaded we-have-a-problem call from your mortgage lender.
It all comes down to your proof. If the lender asks for a specific document, give them exactly what they are asking for, not what “should be OK,” – because it won’t be. This is where the approval process tends to go off the rails, when the lender asks for specific documentation and the borrower supplies something else. Here, too, is where both sides get frustrated. So if the lender asks for a bank statement and there are 5 pages for that bank statement, send them all 5 pages, and not just the summary. If you send them the summary page and they ask again, don’t complain that the lender keeps asking for the same thing when you never sent it in the first place. This may sound elementary, but the vast majority of mortgage approval process woes stem from scenarios just like this.
The reason the mortgage approval process is now so rigorous is simple. Avoiding defaults and loan buybacks has become the primary goal of mortgage lenders. Higher standards are reducing loan defaults, which should mean fewer foreclosures in the future. Government data shows that less than 2% of loans originated in 2009, that were resold to Freddie Mac and Fannie Maewent into default after 18 months, down from more than 22% default rates for 2007 loans.
So when your lender requests specific documents from you, give it them just “because they said so.”
You can thank my dad for that.