News & Research Archive

Pulse Of The Market (Pulse 69 - Aftershocks)

Jun 01, 2009

In October 2008, I wrote a Pulse entitled 9.0 Worldwide Earthquake! San Francisco Survives. Much to my amazement, I found that not everyone reads my Pulses and when they do, they seem to have very little recall of them. Notwithstanding the fact that the height of chutzpah is to quote oneself, here goes:

Folks, we just had the equivalent of a 9.0 financial earthquake, this one with an epicenter in New York City and London, and it was all man-made. The aftershocks are going to be felt throughout the world, and there will be aftershocks aplenty.

This Pulse is about aftershocks.

Aftershock One

During the period 2000-2005, an average of 3,115 single-family homes were sold each year. For the year 2009, there will probably be about 1,650 sales, down from 2,148 in 2008 and off 47% from the 2000-2005 average. There was an average of 2,494 condominium re-sales for the 2000-2005, not including new construction units.* The year 2008 had 1,887 condominium re-sales. For 2009, my current estimate is for about 1,150 re-sales - a decline in re-sale transactions of 54% from the 2000-2005 average!


Back in the good old days, a buyer could purchase a piece of San Francisco's expensive real estate with 5% down. Today's lenders require a minimum 20% down payment, which is a very high hurdle for most people to clear. Financing greases the real estate market, and there just aren't a lot of people who can qualify for the grease these days.

Aftershock Two

It doesn't matter which pundit is right about when the economy will return to normal, because there is no normal to return to. Sorry folks, besides predicting aftershocks, I forgot to make the point that the earthquake caused some deep fissures in the structure of the U.S. and California economies that are also impacting San Francisco real estate.

Washington is furiously printing money, which will inevitably lead to major inflation. California and San Francisco are incurring major deficits with the result likely to be higher taxes and reduced services, probably causing fewer people to want to try the California experience. The implications of these combined factors are yet to be fully appreciated, even if San Francisco continues to enjoy more resilience than other parts of the country.

Aftershock Three

Now that the shaking has stopped and people are able to assess their personal damage, bargain hunters are out in force. In many instances, distressed properties are bringing multiple offers. Sure, they are at lower price levels, but it's a good sign that people are buying when they smell a bargain, and this is very encouraging for the entire market.

Aftershock Four

Thirty-year fixed rates can be had for less than 5.0% right now. There is plenty of money available to grease the transaction; you just need to qualify for it. See Aftershock One. A not insignificant problem, however, is that lenders are inundated with refinancing existing mortgages, so the process is taking longer than normal. Encore: We are not necessarily going back to normal.

Aftershock Five

Transactions at the higher levels are down more than they are at the lower levels for obvious reasons, the most important of which is that there are more lower-priced than higher-priced homes on the market and more people are able to buy at the $750,000-level than at the $7.5 million-level. That said, there is another reason: While a buyer may be willing and able to pay $7.5 million for a home, because the number of transactions is way down, the appraisal may come in at $1 million short of that, and therefore the deal may get scuttled. Appraisers need comparables to justify an appraisal, and if they don't exist, then the deal may not get done. While one might say that market value is determined by what buyers are willing to pay, the other part of the market includes the lenders who are party to the transaction. As a penance for their excesses, they are now being as conservative as they once were reckless, and if the only recent sales data for an appraiser to go on are short sales, that's the new market too.

Aftershock Six

Just as there was a big spike in the birth rate about nine months after the blackout in New York City in the mid-1960s, there will be a huge number of births in the next few years as a result of parents not being able to afford evenings out. (Disclaimer: I cannot prove this). Of course, all of these future Twenty- and ThirtySomethings will have been fully indoctrinated by their parents as to the perils of easy credit and hefty leverage. They will emerge in 2029 - 2039 to bail all of us out of this current financial mess. It takes a generation to forget the lessons of the previous one. So just think long term.

Summing Up

Though it will take time for the aftershocks to abate, demand/supply economics continue to prevail in San Francisco. No new single-family homes will be built (no land) and the construction of new condominiums has been throttled back until prices rise to justify the increased costs of construction. San Francisco residential real estate has been and will likely continue to be a profitable investment, but it is a long-term game. As a unique and highly desirable place to live, however, buying a home in San Francisco is a great personal investment, especially at bargain prices that are more affordable.

*New construction sales are certainly adding to the number of transactions and are competing with the condominium re-sale market.

Written by: Malcolm E.A. Kaufman


Starboard TCN is posting this article on its website and blog with Malcolm E.A. Kaufman's approval.

Malcolm E.A. Kaufman is Top Producer at McGuire Partner. He refers you to his website,, where you can see recent issues of Pulse of the Market and learn more about him. He invites your comments, suggestions, and questions.

Contact Us

Name must not be empty
Please provide a valid email
Message should not be empty


TCN Worldwide