Folks, I’m sure you realize that we’ve just had the equivalent of a 9.0 financial earthquake. The epicenter of this one was New York City, but tremors were felt in London too. And the worst thing about this quake is that it was all manmade. The aftershocks are still being felt throughout the world – and there will be aftershocks aplenty to come.

The current situation reminds me of something that happened a few years ago when I was living in Los Angeles. It was a Saturday afternoon in mid November, very dry, and the Santa Ana winds were blowing hard. All of a sudden, I heard screams of “Fire Fire!” I looked out my window and saw that the roof of the house behind mine was engulfed in flames. I scampered up onto my rooftop with a garden hose in hand, ready to protect my hearth and home. About 20 neighbors quickly gathered in my backyard to watch LA’s finest firefighters bring the blaze under control.

Eventually I descended from my rooftop perch, having done my job: We survived. I then learned that two boys belonging to a neighbor about 100 feet down the block had been playing with matches and had set a tree on fire. The dry heat and strong winds had caused the sparks to flare up and jump across to my neighbor’s house. He lost most of his home, but the fire easily could have destroyed the entire neighborhood, if not a large part of LA.

There was one question I kept turning over in my mind: Where was the adult supervision when this happened? Fortunately, prompt action prevailed over panic and fear caused by the boys’ irresponsible behavior. This event reminds me only too much of the natural calamity that is now taking place in the financial, real estate and other markets.

The Flip Side of the Coin
Mayor Newsom spoke at a Business Times breakfast a week or so ago. He rattled off a bunch of impressive statistics*:
• Since 2004, over 475 technology companies have committed to lease approximately 5.6 million square feet of space.
• In the first eight months of 2008, 34 companies relocated to San Francisco, expanded their premises in the City or announced their intention to do so.
• The City has experienced 20 quarters of net office absorption (soon to be interrupted) what does that mean?
• First quarter 2008 sales-tax revenues are up.
• Conde Nast Traveler magazine has ranked San Francisco as the top travel destination in the US for the 18th consecutive year.
• There were 16.1 million visitors to San Francisco in 2007, who spent an estimated $8.2 billion.
• And my favorite: 2/3 of the jobs being created in the Bay Area are in San Francisco.

It’s clear that the San Francisco economy is propped up by some basic economic supports. Yes, we are going to feel the effects of this financial earthquake – probably for some time – but I would rather be here than in New York, where the financial community represents a much bigger piece of the economic pie, or in a city like Detroit, which was already experiencing hard times and scandal before this, or in one of the  many smaller communities just 25 miles outside of San Francisco, where subprime and Alt A (another type of substandard loan) have run wild.

Taking Stock
I understand that most people are scared and in shock, but the thing to keep in mind is that not everyone is feeling this way. I took an informal survey of real estate agents last week, asking them two questions: (1) Do you perceive a slowdown in traffic for resales?, and (2) Do you perceive a greater hesitancy among buyers? The majority answered yes to both questions, but not everyone did. One agent said that there is slightly less traffic for B properties but strong traffic for A properties, with some buyers feeing that this is the right time to get a great deal.

My sense is that as long as the media, politicians and others who feed off our attraction to drama stir that pot, 80-90% of potential buyers are not going to do anything for awhile, and I have no idea how long that while is going to be.

But I also sense that 10-20% will take action based on a real need to buy, either because they have made a commitment to relocate to the City for a job or because they are empty nesters and have already made a decision to move. There are also investors who have saved up for rainy days and waiting to buy when prices drop. Remember, even as the Dow Jones plummets some 300-400 points on a given day, there is always a buyer on the other side of every trade.

Another key data point is that some 10-15% of new listings are going into contract the same week that they are listed! Some people out there are not hesitating to “pull the trigger” when they find what they are looking for.

A majority of people are probably afraid that the earth is going to open up and engulf us all. But the more astute see opportunity in the chaos. No matter what, we always seem to prevail despite countless earthquakes, wildfires and economic disasters.

A Few Bright Spots
Buying residential real estate is not a short-term trade; at the very least you need to be comfortable with a 5-7 horizon to get a return. Looking at average San Francisco prices for both single-family homes and condominiums over the last 20 years, if had you bought real estate during that period you would have experienced appreciation over the ensuing 5-7 years.

Yes, I know this is history and that the current situation is dire. And yet, although we are not all the way through 2008, for the nine months to September 30, compared to the same period last year, the average price of a single-family home in the City has been flat, while condominiums are up 2.4%.

Certainly, some neighborhoods in the City are suffering mightily. For example, homes in Bay View, Hunters Point and Visitacion Valley at the southern end of the City are down about 19%, and this has probably pulled down the single-family average. As whole, however, the City is holding up well so far.

Take, for example, the South of Market Street area, where some people say that there has been excessive construction over the last few years. The good news for those who have recently bought a condominium here is that the value of their property is probably going to get a boost because of the current financial crisis. This is because there is going to be less construction over the next 3-5 years. Some projects will be cancelled outright, while others will be delayed. Lenders are going to sit on their money until their collective confidence and capital are renewed. On top of this, the cost of construction is up significantly and no major projects will be built until the financial situation stabilizes and sale prices go up.

Fewer condominiums on the market, even in the face of lesser demand, probably bodes well for today’s buyer. Add in the fact that (the majority of) sellers are also nervous, and this means that attractive deals are to be had right now.

My counsel to buyers in any San Francisco neighborhood is to take the time to learn and understand the basics of San Francisco residential real estate and connect with a trusted and savvy agent who can negotiate and execute the transaction.

My counsel to sellers is that there are still buyers out there, but you need to price your property extremely attractively – giving it a price that you yourself would pay in this uncertain market.

*Source: Mayor’s office of Economic and Work Force Development – Economic Data Book.