Pulse Of The Market (Pulse 80 - The Market Feels Squishy*!)
Jun 04, 2010
That’s the comment from a client who had been in negotiations to buy a condominium at one the of Seven Sisters. She just returned from a holiday in Italy, flown back the evening before the Dow took a 376-point dive (on top of a 1,000 point plunge two weeks earlier), and was a bit jet-lagged.
My comment – would you rather buy Apple after a 25-point jump or would you prefer to buy after a 25-point plunge? The market probably feels pretty squishy after a 25-point plunge: same company though. It’s tough to pull the trigger in a squishy market. Nevertheless, that is when the best deals are made – not at the height of the market!
Would any of us want to have bought in 2007? With 20/20 hindsight, I doubt it. Everyone felt pretty good back then, right? Not at all squishy.
So why buy now?
Dwindling Inventory: There is a lot less new product on the market than a year or two years ago. The Infinity managed to sell 300+ units in 2009. In February 2010 they had 20+ condos available. Now they are down to two – out of 650!
Both One Rincon Hill and The Millennium are pretty closed-mouth, but my G-2 tells me that they have been making good sales progress in 2010.
SOMA Grand, Arterra, the Hayes, One South Park, Park Terrace and Radiance are all sold out.
New Inventory: One Hawthorne, a new 165-unit development, came to market in April: too early to tell how it is faring. In my opinion, they should do ok because they are well located and they are the only new development to open its doors this year: and the units are reasonably priced.
As you may know, the 248-unit proposed development at 555 Washington was shot down by the Planning Commission.
I don’t know of any other major development that had/has a chance of breaking ground during the next 12 months: maybe Radiance Two in Mission Bay toward the end of 2010, though doubtful.
New Product: Before we get more inventory, prices need to rise to justify new construction and lenders need to be convinced that a large development can sell out in a reasonable time. For example, a Seven Sisters-quality building, with underground parking and an offsite affordable housing element would probably cost $700+/square foot to build and need an average of $900+/square foot to pencil. The average sales price for units selling at $750,000 or more in the last six months south of Market St. was $887/sq. ft. However, four units at the Four Seasons changed hands at more than $1,100/sq. ft. since November 2009.
Demand: San Francisco has a population of less than 800,000 and many renters who would like to be homeowners. Demand also comes from the 7+ million Bay Area souls who live in the surrounding counties, a number of whom are drawn to the city by the sirens of entertainment and dining and end up buying a pied-a-terre. And when the kiddies are gone and these folks are no longer willing to ply the freeways, they may end up down-sizing and buy in San Francisco.
Who’s to say that a condominium is worth $900 or more per square foot? Many condominium re-sellers are trying to recoup at the price they bought during the 2005 – 2007 run-up. Is their condominium unique? That’s a question very hard to answer in the affirmative when you have a 40+ storey building and all the A or B or C units are essentially the same, the only difference being 10 feet in height, upgrades notwithstanding. The fact that 24 A sold for $1 million three months ago is not really an indication of value or worth. A share of Apple may have traded for $250 six months ago. There is no guarantee that it will trade for $250 tomorrow.
While the market may feel squishy to my client, what she is really saying is there is not enough certainty of the future that provides her the confidence to make a major financial commitment. I applaud her diligence and caution. For others, it is a great time to act. No one said this is easy, and 2005-2007 serves as an important lesson. Call me when you need help.
*Note: Squishy: (1) Soft and giving under pressure (2) Overly sentimental or romantic (3) Weak – lacking in courage or resolution. Synonyms – soggy, soft, squashy, spongy.