the sheridan report
by Matthew Sheridan
Las Vegas, Stockton and Detroit–these cities now have the unenviable distinction of experiencing the highest foreclosure rates in the country. Just a few short years ago, housing prices in two of these towns reached a frenzied state–with Las Vegas seeing a 38% growth in home prices in 2004, followed by Stockton’s 28% rise in 2005. Detroit’s housing market, meanwhile, has been anemic for years. The popularity of subprime loans, coupled with real-estate speculation and waning economies, have now reduced all three housing markets to rubble.
Mortgage Meltdown
According to RealtyTrac, in the first half of the year, Stockton reported the highest foreclosure rate among the nation’s 100 largest metro areas, with 1 foreclosure filing for every 27 households. Closer to home, foreclosure activity is a mixed bag. In San Francisco–blessed with handsome hills, “painted ladies” and cultural attractions–foreclosure filings in the month of July (65) were roughly the same as a year ago (63). But over in Alameda County, foreclosure filings increased 300% from a year ago, rising to 1,522 in July from 477 in 2006.
The rapid rise in foreclosures across the United States is just one example of the ongoing fallout emanating from the subprime lending crisis that rattled the world’s capital markets this past summer. Some lenders have declared bankruptcy, and a few have even shuttered their doors.
In the rental housing industry, many are asking important questions. How is this going to affect the cost of borrowing? Will it affect the local apartment building and rental market? One thing is clear: the era of cheap money is over. Lending standards were quickly tightened, rates jumped up, but then moderated. But how far will lending institutions go in passing the enormous losses from subprime loans onto the backs of legitimate buyers?
Locally, multifamily loans are tougher to secure. Some veteran players in the San Francisco apartment market smell blood and are openly questioning whether some of their bigger counterparts will be facing a “margin call” of sorts on their properties or simply be unable to re-up on their short-term loans. The 5-9-unit sector–already priced for TIC conversions–has leveled off over the last two quarters, and according to one local broker, “is inflated to the max, with no more room to inflate.” Simply put, at these prices TIC conversions simply don’t pencil out for developers.
However, local economic indicators and demographic trends bode well for San Francisco, especially the rental market. With the media’s obsession with the subprime mess and the actual fallout from the situation, many potential buyers will shy away from home ownership, happy to ride out the chaos and hype by renting. This will be true across the country, but even more so here in San Francisco. Opposition to housing developments across the city–but especially in lefty enclaves like the Mission District–continues to be the norm.
Supply and demand–always out of whack here–is getting even more unbalanced these days. Tenants are evolving into homeowners through TICs, a real boost to San Francisco overall, but the result is a gradual reduction of the rental housing supply.
Job Growth, Rents Trend Upward
With the jittery markets, job growth nationally crawled to a stop last month, while in the Bay Area, employers continue to add jobs to their payrolls–at least for now. The unemployment rate for the San Francisco Metropolitan Division, which also includes the counties of Marin and San Mateo, stood at 4.3% in July 2007, the same rate as a year ago.
Year over year, the region expanded by 22,000 jobs or 2.3%, according to the state’s Employment Development Department. In its latest employment report, the EDD concluded that the area has registered job gains on a year-over-year basis for 28 consecutive months. The biggest chunk of these gains was in the “Professional and Business Services” category–the suit-and-tie jobs found in the Financial District. Translation: you may want to install a squash court next door to the laundry room on the ground floor.
Rents continue their push upwards, but just barely, with MetroRent reporting that the average asking rent for all units stood at $2,232 in the second quarter of 2007–just above the first quarter’s rents, but 7% higher than a year ago. The three neighborhoods fetching the highest rents were Presidio Heights, South of Market and Pacific Heights. The bottom three were Nob Hill–gasp–Inner Richmond and Lower Haight. (Who would have ever thought that Nob Hill would fall out of favor with the worker bees? But, then, there didn’t used to be high-end rentals with parking South of Market.) Unit type asking rents in the second quarter broke down in the following manner: studios: $1,216; one-bedrooms: $1,851; two-bedrooms: $2,504; and three-bedrooms: $3,169.
U-Haul, my favorite source for data, provided “The Sheridan Report” with this tidbit of info on their moving-truck patterns: during the summer of 2006, 10% more families moved into San Francisco than out. The top three cities people moved to San Francisco from were Sacramento (which has the fifth-highest foreclosure numbers nationwide), San Jose and Los Angeles. Interestingly, these same cities were also the top three cities moved to from San Francisco, using U-Haul trucks.
Newspapers are in the business of selling papers. When they print above-the-fold headlines three days in a row with descriptions of the sub-prime lending crisis, do pay some attention. But keep a closer eye on actions by the Federal Reserve Bank, local employment numbers and announcements of company layoffs.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or SF Apartment Magazine. “The Sheridan Report” does not make any guarantee, warranty or representation as to the completeness or accuracy of the information contained herein. Matthew C. Sheridan is the editor of SF Apartment Magazine and the East Bay’s Rental Housing magazine. Please visit www.sheridanreport.com for more information. Copyright © 2007 by SF Apartment Magazine. All rights reserved.