Cirios Trends: Insight & Commentary on Bay Area Real Estate

My Take on 38 Harriet, Patrick Kennedy’s Latest Micro Development

June 11th, 2013

By Andrew Jeffery

After touring Patrick Kennedy’s newest micro-unit development, 38 Harriet, I am more convinced than ever that small living is not just a fad, but is a development trend that’s here to stay. The 23-unit property is being marketed for sale by Michael Thomas and Toby Costello at CBRE for $7,395,000.38 Harriet exterior
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State of the Markets June 2013: Know Who You’re Betting Against

May 28th, 2013

We are indeed in a brave new financial world.

On a macro level, fundamentals barely matter. With central banks around the world aggressively debasing their currencies to prop up exports and keep interest rates low, even impending crises in the Middle East, Europe and Asia barely spook investors. US stock markets are at all-time highs, despite a nearly universal sentiment that it doesn’t feel quite right.

Meanwhile on a micro level, fundamentals have never mattered more. However tenuous our domestic economic recovery, certain segments are booming. Just ask anyone trying to buy a house, or rent an apartment in San Francisco. The feeling here – among a certain subset of the population – is that things have never been this good. It’s more than just more bubble mania – the landscape of the city is changing, and fast.

So we are left with this unsettling feeling, the nagging worry that another crisis is just around the corner at the same time policymakers promise us they have it under control. And for the time being, they seem to.

In the last Trends, we asked: “So what is our ‘subprime’? What is that singular assumption we all ‘know,’ and that when proven false will set the spool unraveling?”

There are a lot of theories out there. Many pundits are predicting that student loan debt is the next subprime, that the bubble is about to burst and it could be worse than housing. Or maybe it’s Treasuries, as investors bet the Federal Reserve will keep rates low for the foreseeable future. It could be inflation – that looming threat we’ve been told for years is just around the corner.

Or countless others: faltering economies like India and Brazil; China’s real estate bubble; Europe’s impending collapse; renewable energy’s false promises; the list goes on. Yet as we noted above, so long as governments appear willing to step in and stem the panic with a flood of cash, the risk of another downward spiral is greatly reduced.

And there you have it.

The subprime market didn’t collapse simply because home prices went down. Or because borrowers in geographically diverse regions all started defaulting at once. Or because banks gave up on underwriting. The market collapsed because the core assumptions of the financial models underpinning the system were proven wrong. Namely that home prices would never go down, geographic default correlations would always be low and buying properties with no down payment did not adversely impact repayment.

It is this relationship between what is assumed and what actually happens that disrupts markets. And right now, the single assumption that the entire financial world “knows” is that governments will be there to step in and protect their respective economies. And further, that they will go to extreme lengths to do so.

We’ve all heard the expressions: “pushing on a string,” “out of bullets,” and so on. Which mean that governments can only backstop the economy for so long. That at some point the wave will crest, and break, despite bureaucrats’ best attempts to hold it back. And maybe it will.

But I wouldn’t bet on it. At least not any time soon.

In the late 1970’s, it took a radical change in monetary policy to break the back of runaway inflation. Paul Volker made some very unpopular decisions because he held the conviction that near-term pain was well worth the long-term benefits.

Our next “subprime” will be a similar shift in government philosophy, rooted in the view that perhaps all this stimulus and free money will end poorly. Sure, there are a few elected officials out there expounding this opinion, but they are marginalized by the majority that are far more interested in reelection than in effecting any real, meaningful change.

So if you really want to be on the lookout for the next crash, understand what you’re betting on.

Neighbors Can Kill Your AirBnB Dream

April 3rd, 2013

Think tenants leasing out their rentals on AirBNB are the only ones who risk losing their homes? Owners can get busted too.

I was out this week on the San Francisco broker tour and happened upon a charming Bernal Heights bungalow at 3704 Folsom St. Huge garden at the front of the lot leading to a quirky tree house like home replete with lofted beds, views and an in-law unit below. No parking and small, but for under $600,000 and a block North of Cortland, the house had a lot going for it.

And then I heard the story.

Apparently the owners had been using the lower unit as a vacation rental through AirBnB and one of their neighbors complained. The city came in, noticed there was a list of code violations a mile long and recorded a nasty report against the property. The owners don’t have the money to fix the problems, and it probably wouldn’t be worth it to anyway. More than likely, someone will come in, scrape the house and build a new one in its place.

It doesn’t take all that long in the San Francisco real estate market to become familiar with the term “NIMBY” or “Not in my back yard.” If you don’t  know what it means, just wait until you become a property owner … you’ll find out soon enough.