The hurting SF SOMA housing market

The housing market is hurting all across the country. San Francisco seems less affected than most other areas since supply is so low, and for the most part tech jobs are safe.

However, I think SOMA is going to get hit hard. All around us, new condo developments are being built. This was a good idea in the housing boom, but now? Not so much. Come on guys, SOMA is not really that cool. Prices are already coming down, and thousands of additional condos are coming soon.

We’re living in a beautiful ultra-modern building that opened just a few years ago. We’re renting it from the original owner. There was an open house in the unit just 5 doors down from us. I popped in to check it out. It was the mirror layout to what we have now, but otherwise pretty much identical. 

The details:
1 bedroom, 1 bathroom, Condo, 691sq feet
Originally listed for $579,000
Now listed for $549,000

The gory details:
Last sale: 09/18/2008: $645,000

OUCH! Someone bought this unit just 6 months ago, possibly at the peak of real estate in San Francisco. And they are immediately selling it at a huge loss. After selling fees, their loss could be close to $150,000! Seems like they might have bought the condo as a second home, or simply as property to flip. With the economy tumbling, they can’t hold it to weather the storm.

I’ve considered purchasing something several times in the past, and I’ve built some gnarly excel spreadsheets to model it all. Bottom line: don’t buy to flip. You only make money if your property goes up by a lot. Otherwise, it’s cheaper to rent. If you buy, buy a home you will live in for years. It’s a home, not just an investment.

I love Redfin.com and Zillow.com. I spend way too much time on those sites.

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9 comments

  1. My dad (who lives in a nice SoCal suburb) did a calculation on the value of our house. The average return over some 25 years averaged only ~6% per year! And he lives in a nice neighborhood.Furthermore, much of the rise in home prices over the past 30 years has been due to a one-time demographic anomaly: the baby boom and their associated echoes. In the future, such demographic trends are less likely to drive home prices as population stabilizes.This underlies the point that housing ought to be treated as durable consumption, or at most something to live in that happens to be an investment vehicle with [possibly] modest returns.

  2. @dustin I do like the idea of owning 500k homes in Detroit. You could probably even be the lord of your own slum …

  3. @vince totally agree. There’s been this false assumption recently that buying property is much better than renting, or that it’s a great way to make quick money. In fact, even if you go to the nytimes housing model (which roughly matches my own excel spreadsheet so I know they are accurate 😉 ), it’s actually somewhat difficult to make buying better than renting. it only happens if you assume huge increases in value.<div><br></div><div>So as you said, purchase a home when you want to own a home (when you want to settle down, have a family, whatever), and it just happens to also be an investment.</div>

  4. I will say that I was raised to think that having a house is the ultimate end-goal. Saving up for the down payment is what you do throughout your 20’s and 30’s. Having a house means you’re established. It’s where you raise you kids. What you spend your weekends fixing and maintaining and filling with suburban kitsch. Financially, it’s not the sure-win that we’ve been brought up to believe, but I still think there are positive effects, but only for those who can afford it. People are more invested when they’ve got their own grubstake.

  5. The builders of several of the new condo buildings in SF have decided to not even try to sell them in this market. They’re making them all rentals, at least for now.

  6. At least in the US there is a tax credit for buying houses such that the government is basically paying for inflation instead of you. Here, the government will basically give you $750 for buying a house (http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhbtc-eng.html).I have been seeing the same condo explosion here in Vancouver. New condos EVERYWHERE. So I think I’ll check out those prices again after the Olympics.

  7. I’m a realtor here in SF and indeed the city has seen price and volume declines. Real estate is no longer an industry where you can make quick money, the day of the "flip" is gone. Real estate has now become a long term investment; and still a great one in SF. If you have the down payment, if you will have a job a year from now and there are properties out there that you like this is a great time to get into the market. The fact of the matter is interest rates are extremely low and buyers have a lot of leverage in this market.

  8. If you think the SF condo market is bad, take a trip over to Oakland. More condos are coming online soon and developers can’t get rid of the ones they’ve already built. I’ve been looking at condos in Jack London Square and you can get a nice 2bd/1ba for about $300K.

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