June S&P/Case-Shiller: San Francisco MSA Up MOM Across All Tiers

@ Tipster,
Come on man.
Three straight months of growth. Huge improvement nationally. Consumer confidence up. Stock market way way above the trough.
I’m not saying that we aren’t going to plateau and bounce around the bottom for another year or two here. But we ain’t having any more freefalls, and it’s now very possible that we won’t go below the 110-115 threshold ever.
Locally, I think that it will be another year before we start to FEEL some improvement in terms of prices and rents, given that the SF employment market stinks… but whatever… I’m happily employed and enjoy living in my home, so I will tough it out.

The seasonally adjusted data seems to point to an uptick as well, with the lower tier unchanged, the middle tier up 2.0%, and the upper tier up 2.1% month-over-month.
Should any of this be surprising given current low interest rates and tax incentives for first-time buyers? What happens when the tax credits dry up and interest rates tick up a point?
We probably won’t see either of these things happen before the 2010 elections, but all bets are off in 2011…

The Case-Shiller hath spoken. Long live the Case-Shiller!

I think that it will be another year before we start to FEEL some improvement in terms of prices and rents
It all depends on your definition of improvement.
High rent is an improvement?
High purchase price is an improvement?
Having to delay life plans, push back retirement, send your kids to a lesser school, eat less healthy food due to overpriced housing is not called an improvement to many.
Anyways, enjoy the small bounce. The roller-coaster is not stopping anytime soon though.

Sadly, Trip, I don’t think this bounce is due to people putting up their own money. $8,000 gets you 3.5% down to $228K, and if you’ve got $10K in your pockets you are on your way to a $500,000 home. The losses have not been shifted to those with money, just the taxpayers, as ALL of this action is in gov’t guaranteed mortgages.
Imagine having a net worth of sub-$20,000, but thinking you should be in a half million dollar home. The American Dream lives!

It is either a RE bottom 2nd quarter 2009, with up trend now, or a DD recession is coming.
Looks like bottom to me.

What about “investors” coming in at these levels? Won’t that provide some price support too? A number of Chinese firms, flush with capital, are getting interested in US commercial and residential real estate. It makes sense.
It seems for all the good reasons prices could go down more, there are also good reasons they won’t.
I also wouldn’t discount the fact that a lot of people in the Bay Area have tech jobs and AAPL, HPQ, CSCO, INTC, et al are doing just fine. Given the huge purges that have already taken place, the days of mass layoffs are likely behind us. So tech workers, at least, are less worried about job loss now. Furthermore, the people who work downtown at mutual funds and asset managers are back to the days of huge bonuses – seriously. Confidence is way up, at least among certain local populations.
People want to buy homes in San Francisco and they’re feeling much, much better now. They don’t analyze valuation like a lot of people here do. They decide they want something, check how they feel about it, and then act accordingly.

@Zap
Thank you for enumerating your bundle of preferences. If you want to spend so much time outside of your home, then it probably makes sense for you not to own one.
You may think that ‘painting the walls’ is trivial. In my opinion, the right to do as I like with my living space is important. I recently did paint the walls and redo the lighting, and both of those things had a surprisingly positive impact on my mood.

NewBuyer, IIRC you bought at peak. You do seem to be in remarkably good mood. I am curious how the purchase has worked out financially on a mark to market basis. Maybe you can write a haiku to update us “plugged in” busybodies. Of course, a spreadsheet is welcome too 🙂

If we didn’t have an uptick in the summer (as we did every year in the last downturn), I’d be really worried. I think this is gonna leave a mark in the coming year (yep, its different here, all right):
These figures forecast the percentage of homeowners who are expected to be at least 60 days behind on their mortgages in the fourth quarter of 2009.
U.S.: 6.93 percent
Bay Area*: 9.45 percent
California: 14.16 percent
Source: TransUnion

Seriously…what’s the benefit to owning a home?
When doing the rent vs. buy calculation only look at after-tax interest payments, not the principal repayments since that is a form of forced savings.
The central benefit of owning a home, especially with Props 13 and 58, is being able to own property at ~1% of the purchase price per year (+ maintenance) forever.
I stand to inherit my Mom’s place that’s now paid off and so I’m happy renting now, but only having to pay $100/month for housing is going to rock.
Buying now is tricky though. Interest rates moving up to 7%, the $8000 subsidy going, continued job losses and decreasing rents, increased taxes on the middle class are all downward gradients on prices, and I don’t see any upward gradients (except foreign capital looking to put their dollars into something safer than treasuries).

No, but it was better than the likely alternative option (leaving my money in stocks and bonds).
LOL. Comparing buying at the peak vs. holding through the second coming of the 1929 crash is apples & apples there, Lou.
Your third option was going to cash and renting like all the smart bears were doing. That would have saved you $$$.

You were right. The sky was falling.
Thing is, it was obvious the economy was running rich on home equity drawdowns 2004-2006. It was a classic bubble economy. I didn’t expect the March low but I certainly expected the S&P to be at 1050 by the Dec 2008, and planned accordingly.
Prices were driven up by unsustainable lending practices, 2004-2008, and rents were driven up by the echo dotcom bubble, 2004-2007. These have largely been taken out of the equation and prices are finding their new equilibrium, which is DOWN from here.

Troy,
I don’t blame you for taking advantage of your inheritance, after all it’s the law. But it’s the dumbest, most inequitable part of a very bad California tax code. Bragging about it is more than a little tacky.

@NewBuyer
Yes, I understand it’s all personal and I was just stating a personal preference to show as an example. I’m glad you enjoy painting and housework. Personally, I don’t…I’m remodeling my folks’ bathroom right now and I don’t find it all that much fun.
But I also don’t understand your calculations. First off, if you’re not buying, why do you have to have your money in stocks and bonds? Secondly, you didn’t account for your tax rebate because it basically offsets property tax and HOA (iffy math, but I’m on board). However, how come you didn’t include the money lost to the bank on interest?
I don’t know how much your home cost you, but going with low prices on redfin for a 3BR TIC in Russian Hill is $900K (I’m just going off MLS…dont’ know what you paid)…with a 25% down like you had and a $675K balance at 5% rate (generous estimate…TIC loans are usually in the 7% range, right?), you will have “lost” $33,500 in interest to the bank, with only $10K going into your principal.
So $33,500 lost to the bank
vs.
$8K lost to rent.
Plus your down payment has now been converted to a share in a house which the bank and other people own. Remember, you don’t own this house, you’re only a very minority owner.
I’m really glad you enjoy painting.

So $33,500 lost to the bank vs. $8K lost to rent.
I’ve got a buy-vs-rent spreadsheet and going with $900K/25% down/6.5% interest I’m getting a carrying cost of $3900 per month.
Assuming the mortgage is paid off in 20 years this will fall to a carrying cost of ~$1000/mo in 2030.
Trying to “time” the market is pretty tough so I think as long as Mr NewBuyer continues to pay down the mortgage balance he’ll be OK sooner or later.
Depends on which way rents go in the future, and nobody knows that since there are too many moving parts involved in the calculation.

this will fall to a carrying cost of ~$1000/mo in 2030.
Ack, I see a flaw in my spreadsheet; it only factors in opportunity cost of the down payment, not the total principal repaid.
So at 4% interest the opportunity cost of $900,000 is actually $3000/mo, bringing the TCO of the TIC to $4000/mo again.
Will rents be $6000/mo in 2030 or will they be what they are today? If Tokyo is any guide, rents are lower there now than they were in 1992, but Tokyo builds up a lot more new housing stock than here, so there’s that.

Interesting that the peak buying season resulted in increasing housing prices (as I said it would last month and the one before, I believe). We’ll see how things in the next 6 months though — hard to call bottom in the summer.
It’s pretty clear from the DataQuick data that the mix of houses being sold had a big effect. I think we should expect to see some medians go up as more expensive houses keep dropping in value.
Also, expect a drop in value as mortgage rates go up, as they inevitably will. They can’t stay at this ridiculously low subsidized rate forever, especially if the Fed slows down or stops its liquidity injections.

Zap B: The reason why you didn’t enjoy the bathroom remodel job is simple – It DIDN’T belong to you. I redid the house I have owned since the ’80s room by room and I enjoy every second I spent in my house, especially the newly finished master bath. It is like how pleased and proud I am next to my newly waxed mint red ’71 BMW 2002 tii. I can understand I probably won’t share the same sentiment next to a rental or leased car. The rental, I am sure, functions just fine and may be cheaper to drive, but it belongs to someone else. There is something to be said about pride of ownership. As long as your primary goal for owning your home is not to generate a boatload of profit in a hurry, a little up and down is how it had been the last four decades. On the other hand, if you are in to make a quick buck, than home ownership is no difference from owning 2000 shares of Google purchased on margin.

By the way, for those of you interested – read excerpt from Tom Sugrue’s new book on August 15-16 WSJ titled THE NEW AMERICAN DREAM: RENTING.
There is also an interesting essay on the 8/24/09 WSJ by David Kansas titled A TOE IN THE WATER – anecdotal stories on some financially stable folks edging back into real estate and why.
Sorry to lazy to put up a link…

The long steep drop starting in mid-2006 was an epic event
Dotcom echo bubble 2004-2007? Falloff halfway through 2006?

Here’s a question for you financially-minded people that’s been in the back of my mind for some time. We all know that with Prop 13 it’s not unusual to see homes in SF with a ridiculously low tax basis for properties that have been held by the same owner for a couple of decades. And when I see those properties, the 20% difference between a $20,000 basis and a $25,000 basis seems ridiculously insignificant.
So, if I intend to hold a property for 20 years or more (and Prop 13 remains for the duration), does it really matter if I buy for $1.4M at the peak or $1.12M at the trough?
I’m not trying to be ignorant here, and yes $280,000 is a lot of money to me. But is it really valuable in terms of the personal opportunity cost of time spent trying to time the market, staying involved in pursuing different properties, etc — only to see the relative difference in cost basis shrink to marginal over the years? How do others view this?

The sky is falling, the sky is falling!! All hail those who rent!
Mean ugly greedy owners! What were you thinking spending money!
Rent and let the landlord clean up and smell your stinky asses after you leave, trash the place, leave all my unwanted shit on the street for the city to pick up (you don’t pay taxes, so what the hell), and leave your designer beer bottles on the street (after a street fair)…yeah, let’s blame the day laborers too!!!!
What a shitty class of people…whiners! And I voted for Obama…hmmmm….

@AverageJoe:
I think you have to consider also the chances that Prop 13 will exist in 20 years’ time.
While there presently may be very little popular desire to overturn Prop 13 with respect to owner-occupied, residential property, I can’t help but wonder if, one day, when property tax disparities are far greater than they are even today — note that Prop 13 caps tax increases at below the historic rate of inflation — people will finally be fed up and overturn it.

av joe,
I don’t even remotely belong to the financially-minded crowd, but I’ll bite:
a difference in house price of $280K means almost $2k/month in additional mortgage payment (assume it’s a wash-out among tax savings, prop tax, maintenance, higher HOA, what not) and if that doesn’t move the needle to your buying decision process, more power to you
however…
1. you may not be personally price sensitive but $2k/month is a lot of money to a lot of folks; think of all the things you can do with that extra money (saving for your offspring, buying a heck of a nicer car, paying for school or college, rainy-day funds, charity, etc.)
2. $280K less in house price could be the difference between qualifying or not qualifying for the necessary mortgage
3. I’m sure you have all the intention to stay put 20 years, but so did so many of the folks who bought at 100 and had to sell at 85 four years later, with a total wipe-out of their down payment, or -worse yet- having to bring a check to closing
I am sure the F-M people can come up with more and better reasons as well

my pet hate has resurfaced again this month, the overall change does not look consistent with the tiers, how can they improve 0.8, 2.4, 2.8 but have an overall increase of 3.8%? This happened alot when prices were falling, too.
Even though Case-Shiller only considers qualified apples (arms-length SFH re-sales with a hold period longer than 6 months) it is still distorted by mix effects because not all regions contribute the same number of apples, and price changes can differ by region. Moreover, changes in apple-contribution rates can cause shifts in the index. Those effects are exacerbated because it is a price-weighted index (so it measures the “average” apple price, not the median price).
Here is a simple example:
Suppose our MSA consists of The City and The Burbs. At the peak, prices in the City were 1.2 million, and prices in The Burbs were 350K, and each area provided an equal number of apples, for an average apple price of 775K. Assume this corresponds to an index value of 100.
In what follows, all apples are assumed to be bought at the peak and sold in the month that the index is published:
In January ’09, the burbs have many forced sales and the city market is frozen:
80% of apples come from The Burbs, in which prices were 60% down from peak at 140K
20% of apples come from The City, in which prices were down 15% from peak at 1,002K.
Then, the average apple is = .8(140K) + .2(1002K) = 316K, giving an index value of 41 (normalize by dividing by 775K).
Now, suppose by June ’09, the city market thaws a bit, and foreclosures in the burbs subside, so volume becomes a bit more even:
60% of apples come from The Burbs, in which prices are down 65% from peak, at 122.5K
40% of apples come from from The City, in which prices are down 25% from peak, at 900K.
The index is at 56! So the index shoots up solely because of mix effects, even though prices in all areas continue to fall.
Next, let’s look at the “top half” and “bottom half” in June ’09:
The top half of apples in June ’09 is 4/5 city apples and 1/5 burb apples. The average price of the top half is 745K, for an index value of 96. In June, those apples had an average price of (4/5)*1002K + (1/5)*140K = 844K, for an index value of 109.
The bottom half consists entirely of burb apples, which decreased from an index value of 18 to a value of 16.
So even though the total index increased, both the top half and the bottom half decreased.
You can imagine the craziness that ensues in an area with 5 counties and wide price-disparities/shifting sales volumes. Of course, over time, things settle down, but we have been experiencing some market dislocations and forced sales, etc, so this can result in some C-S instability. Evidence of this is how the various tiers split apart, and how price action within each tier is not consistent with the overall index.

You guys are doing it again. You’re letting facts get in the way of a good story.
Whatever happened to Innovation Mecca and proximity to wine country/ski country? Are Messieurs Case and Shiller even aware that Noe Valley is a World Class City?

Check out the two WSJ excerpt and essay I listed at 1:11pm on THE NEW AMERICAN DREAM: RENTING by Tom Sugrue, professor of history & sociology at Penn (8/15/09) as well as A TOE IN THE WATER by David Kansas (8/24/09). Answers part of the question.

anonn, you’re back to that ol’ argument that “the internet” caused prices to rise in SF during this last bubble? Puh-leeze
No? I was just wondering why two posters picked such funny years. What tech bubble was in 2004? What falloff was in 2006? That’s all. Go jump down someone else’s throat. I’m not interested.

Whatever happened to Innovation Mecca and proximity to wine country/ski country? Are Messieurs Case and Shiller even aware that Noe Valley is a World Class City
Somebody is “doing it again,” that’s for sure. Yawn.

who knows what a YSP (Yield Spread Premium) is
YSP is the spiff to the broker from the originator, paid because you are getting screwed. Run away.

Is it already too late?
Why would it be too late? It’s not like anyone is going to be priced out if they could afford summer prices! That’s soooo 2005! Loans don’t grow on trees anymore and a 150K salary only allows a 700K purchase tops. No more liar loans. No more Negative equity. No more loans made with the next 15%/Y appreciation priced into the risk. Sure demand is still there. But it’s smarter and no need to panic, overpay and be the next “winner” to lose his shirt 3 years from now.
Furthermore summer is the peak of the season statistically and there should be better deals in the fall or winter, imho. Of course what you find in the fall can be different than the “prime” offerings from spring and summer, therefore do your due diligence. Plus the flow of foreclosures is not really abating. There’s no hurry…

Do you honestly look for a more expensive rental, or do you go ahead and buy?
A decision to purchase is always a blend of investment and consumption, and the prospects for each are often at odds. So ask yourself:
Am I OK if this declines in value by 40%?
If the honest answer is yes, then consume away. Maybe you are sure you will never move, and don’t care about the opportunity costs. But if not losing money is very important to you, then you should only buy when it makes sense from an investment point of view.
The flipside is also true: maybe there is a property that is great from a rent vs. buy comparison, but not so great from a living-there perspective. The east bay isn’t so far away, after all.
You only live once, so make whatever trade-offs you want regarding money and enjoyment, but go into it with open eyes. There’s too much of this “you can have it all” deception in which people become convinced that a property that they really want to live in has to also be a good investment.

Who are you trying to convince, outsider? Us or you?
I always love that “I’m not going anywhere so it doesn’t make a difference” argument. Yes it does. If you buy when prices are higher, you pay more in interest every month, and you make less or lose more when you sell. So paying a higher price only hits you EVERY DAY, and kicks you in the ass on your way out the door!
kthnxybe, your problems are solved with a very high credit score. I’ve never had anyone turn me down for a pet, including longtime owners who never allowed a pet, ever. You show up with a perfect credit score and they take the pet tiger, snake and elephant. And paint? They never care. That’s why the “I can paint my own home” argument never makes sense to me: so can I.

i never understand the paint argument as well. i painted my walls. I changed out the light fixtures. I figure I’ll just paint it back when i leave and change the light fixture back. No big deal. I’ve seen apartments where renters remodel the apt on their own dime if they decide that they will stay there for awhile. Most of the landlords are more than happy to oblige as long as they can see and approve the remodel before hand. Sometimes renting + remodeling the unit you are renting still beat out buying here in SF. Crazy but true.

I’m curious as to what drives those that do not believe in home ownership to a site about real estate.

I’m curious as to what drives those that do not believe in home ownership to a site about real estate.
Real estate is a fascinating topic. And proper valuation is at the heart of that, although not all of it by any means. You have a nexus of design, social pressures, city politics, small business, inter-generational wealth transfers, tax policy, urban planning, schools, mobility, mortgage bond rates, and pet-ownership — where else can you tie all these things together in a way that is specific and important to so many people?
But I would hope that by 2009, we would have abandoned platitudes about “believing in home ownership” — the days of faith-based real-estate purchases ended with the Bush administration.

Yeah we just allowed our tenants to paint as well.
of course, the other argument on the does if matter if prices fall when I don;t intend to move is this” if you waited you could actually have bought a bigger/better place.
equivalent in some ways to paying less each month on the same place if you waited, but a slightly different angle…

ebb tide seems forever
receding darkness
invites spring sunshine

The country didn’t get any wealthier in the last few months, it gets poorer every day. But my sense is that the feeling of doom has dissipated, and so that gives people more confidence. That’s what we’re seeing in this data.
Although the income isn’t really there to support any increase in prices, artificially low interest rates coupled with artificially low downpayment FHA loans that no investor would touch without government backing, coupled with an artificial tax credit for first time buyers, and an artificial foreclosure moratorium, can all work together to produce a bounce. I suspect things will continue to be up for the next couple of months.
If the government was trying to produce an increase, rather than slow the decrease, they’ll continue all of those artificial things, but those things all have negative effects. If the government was only trying to slow the decrease, but overshot, you’ll start to see interest in those programs wane.

Speaking of faith-based, there is something primeval about home ownership. The longing for home appears ingrained in all living beings by the evolution. You see this in people who lost their homes to a natural disaster, how they get devastated as if they lost a loved one. (“This is my home. I have nowhere to go!”). This longing for home fuels desire to own home, which makes people willing to shell out huge premium for the ownership. Renting, on the other hand, is totally utilitarian. It’s just a cold economic calculation.
BTW, viewlover, real estate is not just about owning. It’s about the roof and owning is just one method.

“You see this in people who lost their homes to a natural disaster, how they get devastated as if they lost a loved one.”
I think the only people who could feel that way are those who have never actually lost someone they loved. Homes are replaceable.

NewBuyer,
If you has a large downpayment, you have to take the opportunity cost of this downpayment into account. For instance 320K on a 800K purchase (a huge 40% down) is 320K stuck and not producing any interest. From the past 5 years’s CD rates, that’s everything between $500 and $1200 / month.
In addition, you have a ~1% cost to keep these 320K in good shape, plus the same cost on the 480K you borrowed!!! You are paying the bank interest, and you are paying the bank’s share of the maintenance to have the property retain its value! The same applies to the taxes and insurance. Sucker!
Also, as a buyer you have an instant 6%+ expense (closing fees + commission), some of it cash, some of it lost equity. If you amortize it over the first 5 years, that’s 1.2% of the purchase per year. The same as property taxes.
As I always said, there should be a discount to be a homeowner. You’re maintaining it and you are usually not the real owner! But marketers and salesmen have done a nice job with lobotomizing the masses into renting from the bank AND overpaying for it.
But I agree the nice thing about being a homeowner is you can chose the color of the water heater when it breaks down! I take solace in the fact that my bank account is growing month after month out from all the savings on NOT overpaying for a house. I could afford a few ones all cash but I have better things to do with my money (like watching it grow and enjoying hassle free week-ends).

here’s a kind of round number story of 30 year property hold in SF:
bought building between 100-150k about 1980
sold building 2009 for about 1m.
refi a few time, extracted some equity and mainly used to fix house. condition poor upon buying, pretty good when sold. ended up with about 400k mortgage, netted about 600k, leaving aside any capital gains taxes.
will you buy for 1m in 2010 and sell for 10m in 2040?
i don’t think the monthly payments over the years were out of line with an equivalent rental

will you buy for 1m in 2010 and sell for 10m in 2040?
Absolutely not, since by that logic, I would hold on and sell for
$100m in 2070, or better yet
$1 billion 2100
Alternately,
houses must have cost
$10,000 in 1950
$1,000 in 1920
$1 in 1830
Maybe, the period 1980-2007 was anomalous?

this particular property went from about 40-50k to about 125k between 1970-1980. so we were part of the early panic to buy sf.
big inflation years those, tremendous interest rates in the early eighties.

“I think the only people who could feel that way are those who have never actually lost someone they loved. Homes are replaceable.”
Well, I have lost both before, and I can say that the trauma is not that different: it eventually fades and new home/people come into your life, but you end up longing for years. Apparently, I’m not the only one. There was an article in NYT a few months ago about how some people got so traumatized after selling their homes, they repurchased.

A moment of silence please; another million dollar Noe home is hitting the auction block today. The 3bed/2bath (1612 sq.ft.) house at 2350 Castro has an unpaid balance of $981474.

I’m curious as to what drives those that do not believe in home ownership to a site about real estate.
This is a good site for learning the facts of SF real estate.
“home ownership” is a glittering generality and not really useful to believe in one way or another.

jaja – regarding your comment about renting, making improvements and still coming out ahead over those who have bought – it’s even more possible when you factor in rent control. My wife and I are looking more and more like lifers in our rent-controlled 1BDR in the Marina. While we’d love to have a bigger space and maybe a backyard, it’s just simply not worth the money to jump from what we’re paying now to about $4K a month for the “pride of ownership”.

That’s a bit idiosyncratic, Fish, because people are quick to unload their houses and move often. It’s usually a positive experience, although it can be disconcerting. Not sure about longing.
Maybe they do that to loved ones, too, but I think the pain you talk about only refers to involuntarily giving up the house, whereas the loss of a loved one is pretty horrific even if it is voluntary on your part. The difference being in ego.
I do get the sense that some people have their ego/sense of self-worth so invested in housing that it borders on mental illness — not a specific comment comment about you, Fish, but a general sense from the way people approach this topic.
There are, after all, many achievements to be had in life, and owning a house is fairly common and easy to do — much more common than attaining an associates degree, for example. I hope this level of ownership fetishism is rare.

“ownership fetishism” LOL I love it!
…I love opening her beautiful french doors in the morning and massage those plump round tomatoes in earliest of morning. then slowly I exercise my ancient pruning techniques on climbing plants crawling up her sweet pergola. In the afternoons, I love to passionately use my plunger in her toilet,
in and out, in and out, to clean out my pipes for
the next watery flush…

Yeah, you started off all right. But plunger and toilet, really? Cleaning out pipes? Ouch.

I have explained before how it is a fundamental axiom of city planning that real estate in the core area of a growing metropolis will tend to increase in value, hopefully this is not something I have to prove, though the uber-bears on Socketsite often seem to think that up is down and visa versa. Note their premature celebration that they have been *proven* right in their claims that SF real estate is going to drop 50% in value in the next year or two.
Was SF less special in 1998? Nope. Was SF less a metropolis at that time? Nope. was unemployment at 10%? Nope. But houses in your nabe often sold for 1/2 Mil and not ~$1M+ like today. The difference with today? Bubble money. This blip will iron out over the long term but to do that it needs to correct.
Somehow a CS graph showing a clear uptick in regional home prices is seized upon as further evidence of their point of view, making me wonder if they have finally and truly taken leave of their senses.
It took a year for the bulls to admit prices were down. Now 2 month of back to back increases are it’s all “bears are in denial”? Puhleaze…
There are people here who with only a very passing understanding of economics, who really have no clue why the US has experienced inflation in the past, think that that US is going to enter a prolonged deflationary period. I think that the political and economic forces that prefer inflation will easily rule the day. Remember these same deflation proponents told us back in September that the American banking system was sure to collapse, that it was time to load up on gold and ammo and run for the hills and that the cities would run red with blood by now.
I never subscribed to these apocalyptic predictions. Simply that’s it was the biggest RE-based bubble in history and that its popping had to be massive, otherwise the next bubble would be even more massive and who knows what’s next.
Take the dot-com popping. Not much job loss, a bit of wealth destroyed, but no big collapse. We solved the problem by lowering all standards even more and moving on to the next bubble. Now it seems as if we have dodged another one (not so sure we’re done yet), markets are coming right up because they know another bubble will come and that the Feds will encourage it. And they know too that when the next correction inevitably comes the Feds will bail their a$$es just like 2003 and 2009.
All these speculations on stats are very interesting and as valid as most bears’ speculations. If I had a lot of skin in the game I’d be probably in the “containment team”. But I don’t, and I can just say what I think. Ultimately we have to do a reality check. Who was claiming prices wouldn’t go down last year? Who is claiming prices have stopped going down for good today? Same people. Same motives.

“But that gives the result people want to see, so it gets done here of course. All the time.
A very fluj-esque comment. Why hang out on SS if you don’t like the company? I suppose you are fighting the good fight against all the negativity, right? If everything could be that easy, comic-book-easy with good guys and bad guys…”
where did I say I didn’t enjoy the company? I think theres lots of interesting opinions on here.
I just often interpret the data differently to the majority here, that’s all.
I think its a very herd like mentality to only ‘hang out’ where everyone has the same opinion as yourself.
Its that what then creates the comic-book-easy good guy/bad guy black and white world that you accuse me of living in.

It took a year for the bulls to admit prices were down
Actually, most of the bulls on this website pretty much agreed that it happened pretty quickly for SF, last September.

A very fluj-esque comment. Why hang out on SS if you don’t like the company
Can you not name drop/flame, and instead stick to the paraphrasing you so enjoy?

“…8 guys in India making ~$100K collectively…”
more like 8 guys/gals making ~180-250K collectively. The US/IN multiplier stands at about 4-5 these days. GWA is creating boomtowns in the developing markets.

Here is good one re: rent vs buy
http://www.redfin.com/CA/San-Francisco/70-22nd-Ave-94121/home/991286
http://sfbay.craigslist.org/sfc/apa/1343763638.html
how to justify buying? don’t get it. I plugged in the following numbers: 20% down, 4% appreciation, 2% rent control, 5% return of investments, mortagage rate 6.5%, property tax 1.25%.

. . . as the average high tech salary is now $144k.
That’s one guy making $144K managing 8 guys in India making ~$100K collectively, instead of 9 guys making $500K like it was back in the mid-90s.
Either way, a $144k earner (or even a dual-income family with the earners making $144k each) can’t even come close to affording the average tiny piece of crap that still gets listed for $1M in Noe. Unless the idea is that the spread is big and there are just a ton of tech workers pulling $400k/year, which seems dubious.

Shza,
Why can’t a couple making $288K afford a $5k/month mortgage?

That’s a lot of foregoing with what left of a nice size paycheck, don’t you think?

Not going to waste my time on the tally, but I bet those costs still leave a few K a month discretionary.

sparky-b:
Student loan debt and having kids can add up quickly:
In our case, we pay more than $4500 per month for two items alone: student loan repayments and child care for our one child.

Well,
NJ I will gladly have my wife watch your child for $4000 a month. That should help you out.

Of course the average salary isn’t 144K for tech, at least in the sense that people mean here — first that figure is from 2006, the 2008 data is 132K, but there is some region mismatch in the report and the press release. I don’t have the equivalent of the 144 figure for 2007 on hand.
Next, “wages” counts total compensation, including employer health care contributions, FICA matches, 401K matches, disability payments, etc. That’s not something you can use to justify a purchase price, so that 132K figure is closer to 110K or so, depending on your employer’s contributions.
Next those are average, not median wages. Roughly, the data is from the amount that employers in each industry report as spending on labor, together with aggregate tax data, and you divide by the number of people in the same industry. So you have the Bill Gates effect there as well. Median tech salaries are well short of 110K.
But more importantly, that figure also includes stock option sales, which gooses the data. So in the crash from 2000 to 2001, “wages” fell by 15%, although that was not coming from employees being called into the head office and having their salaries reduced, it was from the previous stock sales goosings dissappearing. It’s a big mistake to assume that income from windfalls is part of a trend, certainly if you are signing up for a 30 year mortgage. Times change and those fantastic profit rates may turn out to be ephemeral.
That’s why the 2008 data showed a 1.5% fall from 2007, but this is very preliminary data. The stock market crash in late ’08 will be reflected in the 2009 income data, which will show a bigger drop.
Moreover, if you read the BLS report, it shows substantial employment declines in the 2001-2008 period. In other words, tech still hasn’t recovered to the employment levels of the last peak, on a peak-to-peak basis, and again, the 2009 data will show an increasing contraction.
About the general bear-baiting rant, NVJ, you seem to think that employer health-care contributions are suppressing median incomes, which is a bit like saying that my salary would be higher if I don’t spend so much on clothes. That’s just on example, no need to get into the confusion about inflation, wages, and ignorance of the fact that markets are discounting mechanisms. It must be a magical dream-like world you envision, with both elevated inflation and elevated asset prices, high nominal wage growth in a period of historically low bond yields, and appreciating house prices in an environment where price to income multiples are double the historical norm. All flowing from the magical “city center” that is Noe Valley, a warm glowing orb that can turn math on its head, and every contrary fact can be knocked down with the ease of a strawman.

Spoken like a true realtor. “Yeah, sure, you can easily afford it. Trust me. I don’t need to provide you with any actual numbers. I can just say ‘blah, blah, blah’ to anyone who says it’s too expensive for you.”
So. Mr. accountable-for-the-stuff-one-writes, give us your hypothetical budget illustrating how “easily” this can be done. Assume 1 child, 1 car, both parents work and earn 288k gross between them. Let’s see who is relying on “pretzel logic.”
See? You’re so full of it. Everyone has mega-bucks student loans. Everyone spends a thousand plus on two cars. Everyone has crazy child care expenses. Everyone can’t do diddly squat with 7K a month left over.
These things you don’t object to. No, you object to me objecting to them. And you go “Typical realtor this” on me.
Please. I’ve asked you before. This forum could probably stand another actual opinion occasionally. What you deliver is rote anonymous hate, and it’s precisely nothing.

anonn,
288K is a nice income and allows you a decent life. But let’s do a bit of math here.
288K will leave you with ~ 170K after tax/SS deuctions and such and 16K 401(k) contribution. Deduct 60K for mortgage, 20K for property taxes and maintenance. That’s ~90K/Y left or around 7500/month.
Kids? 1500 each for daycare or school averaged over 18 years.
1000/month for 2 cars is pretty cheap.
Food for 4 = 1200/month.
You’re left with something in the range of 3K/month. That’s enough to have a vacation, some entertainment and stuff. But that’s not the grand life this salary used to buy before the RE bubble. Furthermore, you still have to save for college and making up for the 401(k) minuscule limit in retirement planning.
Now the biggest thing you can act on is this overbloated mortgage payment. 80% is going to the bank hogs in interest. $4K that produce nothing when you already put 200K in hard earned savings.
Buying a 500K house instead of a 1M one will save you a bundle: 1/2 the property taxes (500/month), you’ll borrow 300K instead of 800K (assuming same 200K down). That’s at least 2500 in interest saved.
Basically, you’re adding 3K to your discretionary income.

OK Fronzi,
First off, this one: “Kids? 1500 each for daycare or school averaged over 18 years.”
I can’t say. I have friends who pay a fraction of that, and some who probably pay twice it.
I myself pay about 300 per month for my car, and it is a nice enough car IMO.
Food for 4 1200? OK.
So my off the cuff evaluation creates 400 more per month for auto, and I’ll say 600 more per month for kids. THat’s an extra grand. So by your metric that leaves 4K a month discretionary.
I never said anything about “living the grand life.” I said “easily affords.”
And “anon” jumped on my neck. Why?
Say something, “anon.” Just once or twice every now and then. Too scared? Some of us were being cynical on the Internet when it first started. It’s pretty easy to do.

It looked so nice and chart-like on the HTML “Try it Yourself” tutorial. Ugh.

Oops, my math is wrong. 401(k) contribution would be 32K and not 16K for 2 wage earners. That’s 1333 less for discretionary spending.
I guess they just have to refi the house to unlock equity.

Yeah well what you said was not what I said. I said 4K left over after 401K, two nice enough cars, student loans that aren’t astronomical. I also pointed out that we live in California, and the UC system is not as costly as many other areas — this affects both student loans and college tuition saving.
Your conclusion is your own and you are welcome to it. But “In other words, Shza had it exactly right” ?
Nope. The answer is actually “different strokes for different strokes” not “pedantic paraphrase exactitude.”

Pretzel logic. You claim that I “discount” the “risk” that someone can lose a job for a period of time?
Why? Why when the perameters given were 144K X 2?
I also discounted the risk that a Bernal Heights coyote could eat one of the children, and therefore actually decrease child care costs.
This is an exercise, buddy. Stop reaching so much in order to criticize me. You are really showing your true colors when you do that. And from here they look like orange shorts with red socks and bright white shoes with blue stripes. Perhaps a white Ronald Reagan t-shirt, as you stroll along Fisherman’s Wharf. Not a good look.
How about how nearly every bear on here discounts THE FACT that many who buy homes in SF have some amount of non-income based capital? Factor it in to every aspect of the expense model. It’s real.

Nope. Not what I said. I said this was a hypothetical exercise with given figures. Yet somehow you decided to subtract the income of one of those hypothetical figures. Hey, no arguing with that!
I made a joke to make light of your arbitrary tinkering with a hypothetical. Sorry you didn’t get it. Again, I see your true colors.
But let’s back up to the 288K gross 170K net thing first, “anon” guy. Explain that. I think those folks are in the 33%, and netting more than 170K. So explain why they are not, OK?
So again, rotely arguing with me is not doing you any favors. How about you figure out what you are agreeing with first?

Anonn, you’re now arguing with me over an assumption that Fronzi posted? Well, let’s see what he wrote: “288K will leave you with ~ 170K after tax/SS deductions and such and 16K 401(k) contribution.”
Let’s assume your 33% and a 5% state tax.
So 288k less 2(16k) for 401(k) less $17k for OASDI/Medicare leaves $239k. Less 38% taxes = $148k. But then add back in the interest deduction and, voila, you’re right back at ~$170K! Maybe a bit more, maybe a bit less. Of course, there are lots of other significant life expenses nobody has even mentioned. Health insurance and other medical costs being a big one. Life and disability insurance. I suppose you could just skip all that and hope everything works out.
And note that ALL these estimates presume that someone simply gave the buyer the $200,000 down payment.
Fronzi is pretty smart, you know. And I’m no slouch. Rotely arguing with him, or me for that matter, is not doing you any favor.

Oh, so we’re taking out 32K a year in 401K contributions? And somehow that’s equivalent to “no planning for the future/college/retirement/savings” ?

Wow, this is getting kind of silly.
Anonn, I hope that a couple who makes $288K is fully investing in their 401K (or putting aside money pre-tax in some other way). And state tax rate in CA at that income is 9.3%, plus AMT.
Anon, I’d hope DINKS with that income could save up the down payment over time (perhaps by paying cheap rent). But of course it helps to have had a windfall–– a bonus, a parental gift, stock options, or perhaps the profit from selling a previous home.
Anyhow, several people have made it clear that with their monthly expenses, a $288K salary wouldn’t support buying a $1M house. For me, it’s more the expectation that housing prices will continue to decline, and the worry that our hh income will stagnate or decline in the next few years.
It just doesn’t make sense to stretch to buy a house right now. The houses that are selling for $1M right now are not worth $1M to me.

You’d have more if you were a renter!

Anonn, let me explain something to you about tax deductions using your numbers. If you are able to deduct $55,000 in mortgage interest, that does not mean you pay $55,000 less in taxes. You have to apply the amount deducted to your marginal tax rate. Hence the $20,000 figure. You’re confusing tax deduction with tax credit.

“After 100K earnings the number the marginal tax rate is factored in. However each earner is only 44K over that 100K. It’s more than 22K, and then factor in the — very standard — other deductions I submitted.”
Brilliant clarity there!

[Editor’s Note: While seven percent might not be an unreasonable expectation for long-term real estate gains in San Francisco, history and analysis suggests it’s been closer to four. And as such, six might not be so cautious.]
Is this real or nominal 4.2%? I am guessing that this must be real. 1.042^57 = 10.4, so by if was a nominal number, then homes today would about 10X what they cost in 1949. And they are much more than that. Add in inflation of 2.5 percent and you get 7.7 percent, which is about what I stated. 6 percent nominal is pretty conservative.
. All flowing from the magical “city center” that is Noe Valley, a warm glowing orb that can turn math on its head, and every contrary fact can be knocked down with the ease of a strawman.
Talk about your straw men!

Brilliant clarity there
Look it up. Then come back and talk. Or just go away and don’t come back until you have a point of your own. For once.

401(k) is savings, I never denied that. But they are necessary savings as the SSA will probably croak on us in our lifetime. Anyone who’s not maxing out his 401(k) up to whatever he can will maybe suffer the consequences one day, just like someone overpaying for RE is bound to pay the price sooner or later.
Again, 32K for 288K of income is not enough savings for retirement. That’s the point.
As for deductions, I omitted some on both sides of the equation. I also omitted a lot of other payroll deductions like unemployment, health, blah blah blah. I also omitted utility payments on a house, and garbage, and so on.
If I had the time and if, a big IF I thought this was worth it I would kindly do it, but obviously I would only do it for you, therefore, not worth the time.
I already gave you too much attention for today.

You omitted huge deductions, you called it 22K, and you gloated, saying “I rest my case.” Gee. Sorry that begged more than a few questions! (The deductions in this test case are probably twice that, easily.) But I’m tired of this one too.

22K?
Again, you are mistaking me with anon.

Don’t believe the boogiemen who claim that SS is going to croak on us. It is in very good shape, probably will not even require any adjustments in its present form whatsoever. Anyone with financial acumen who took a serious look at the various CBO reports would know that. In the very worst scenario, benefits would have to drop 15% from projected benefits, which are already expected to grow with income, not inflation (about a percent higher). So even in the worst case, retirees in 50 years can expect an inflation adjusted payout larger than what today’s retirees get.
With even a modest adjustment, say to economic growth rates equal to the nations post-war rates, SS will not have to adjust benefits down or push out retirement rates.
The real problem is soaring medical costs, which is going to bust medicare if nothing is done about it. That is why Obamacare is so important, it will help reign in costs. Admittedly, it is an insufficient step by itself, but the insurance companies are the biggest parasites in the system and need to be curbed first. We will have to find a way to slow soaring drug and hospital costs as well.
So if you want gold-plated medical care in your retirement, you will need to save away. Normal people can save 16k/yr for life and have plenty.
16k saved for 40 years at a 8% yearly nominal gain equals $6.9M nominal or $2M real. You should be able to spend 4% of your retirement amount down with no real risk of outliving your money, so that is $80k in income per person. $160k (in 2009 dollars) for a retired couple with their house paid off is quite a good life, much better than the one trying to live on $288k/yr with a mortgage and two kids.

148? Where? You are mixing 2 different people.

Oh, OK. 160. You said it @ 1:29 p.m. Same difference.

SFS, I agree on the tripling part, that is why I expect prices to increase at less than trend for a while, probably a long while in SF.

National values are up 270% in the same time, or 2.0% a year.
This contradicts the Shiller graph of national home prices I’ve been carrying around in my wallet for the past couple of years. At best, homes are an inflationary hedge with very slight real gains (much less than 1%). As they say, a picture is worth a thousand words. Where’s Robert? Maybe he can tell us why Shiller and the US Census Bureau got such different results.

EBGuy,
Robert again gives us much to think about. My humble 2-cents:
In 1940 SF still had mucho land left to develop and there was a lot of value to create. The Sunset for instance. The $10 Carville “homes” were replaced with the mass individual housing that we now see.
Another comment:
If you look at NVJ’s link it starts in 1940. Looking at CS’s graph you’ll notice 1940 was in the range of the post-depression lows. Basically 1940-2000 looks a bit like comparing a trough to a peak but over a very long term. Overall the differences do iron out and the yearly increases are end up swinging around a trend. I haven’t done the math but overall the change in reference (1800s vs 1940) can change the math by a fraction of one percent.
One last comment: building out of nowhere doesn’t always work. Think California City, this former LA wannabe created out of dust and rock 40+ years ago. It got some sort of froth during the housing bubble (entry point was pretty low), but now it’s back into the cr@pper with non-foreclosure houses starting from 50K or less than building cost. Which means land has gone negative!

REpornaddict, plenty of smart people in actuariat.
I was in a very profitable French company (Abeille Vie/AFER) in Paris bought by CU and merged with Epargne De France in 96-97.
AV/AFER made a bundle even during the early 90s downturn, but Epargne was massively into REITs right into the French RE collapse of 1992-1997. The “fun” fact with Epargne de France product is that they were distributing an annuity whatever the price of the share (no risk as RE always goes up!!!). I think the clients received a minimum of 6 or 7% of the initial invested money which was pretty common at the time. I don’t recall the exact numbers, but that’s the order of magnitude. Any other profit over 7% was pure gravy and the late-80s model was around 10% appreciation + 3% property management proceeds. Say you invest 100EUR, EdF will give you 7EUR whether the share is worth 120EUR or 80EUR.
Now came the RE collapse of Paris (50% local drops). This annuity model had a compounding effect during the downturn. Shares were losing 20, 30, 40% and annuities were still sucking out the 7EUR year after year. It went Kaboom in 1996-1997 and many investors lost most of their nesteggs. There were a lot of moms and pops investors, that was really sad.
EdF was merged with AV/AFER mostly because of its great balance sheet and the fact that AFER was the gold standard in French annuity life insurance investment. Big volumes, big profits and a major player. Their losses + our profits made things balance out OK and helped CU’s French section cruise through the crisis.
I took off to greener pastures in 97 (banking software). During my 5 years there I learned a few good lessons:
1 – Do not look in the rear view mirror to see what will happen. Things always surprise you.
2 – If your plan is designed to work even during reasonable downturns then you have found true value.
3 – Stick to fundamentals. Things that are too complex often have many parameters out of your control.
High leverage, low PE, funky financing, expected appreciation: high chance it will fail due to too many unknowns.

And neighborhoods, let’s not forget those. NVJ, I hope you don’t live near the defaulting doctor at 111 Hoffman. He got suckered into buying August of 2005 for $2.1 million. Never fear, though, he managed to refi for $1.98 million (thank you WaMu) in 2007. I guess City living wasn’t all that it’s cracked up to be. Scheduled to hit the auction block Sept.16 with an unpaid balance of $2,122,952. Kudos to the doc for making the best of a bad situation…

The Hoffman properti is on the auction block for more than the initial purchase price? That’s odd.

Foreclosures on the block surely couldn’t be good for comps.

Well, regardless if the loan type, he could simply have not made any payment and interest has thus accrued. Zero down and cash-out refis were commonplace. PropertyShark is filled with NTSs that show more owed on the outstanding loan than the purchase price.

That’s odd.
I know, it’s very strange as no one in SF took out I/O or Option ARMs. Especially not doctors…
FWIW, they also can add in late fees, penalty fees, foreclosure fees, and attorney’s fees to the unpaid balance amount.
Sure man. Whatever you say. Foreclosure auctions for more than the price paid means the neighborhood is imploding.
Ted Kennedy? Try Glenn Beck. He’s catching a little heat right now so he needs to lay low.

“Not good for comps” — why?
Very good point. Foreclosures are in no way a sign of weakness. Just a one-off event that has no meaning whatsoever.
Plus, it’s the asking price, not the final. Just like this Alvarado property.
We’ll have to see if it sells for more or less than asking. 2 weeks. I can’t wait! Maybe the bank will cut the asking before the auction to attract more action (like the 23rd street property). Maybe there will be a bidding war and it will sell for close to 3M? Who knows…
fwiw, I used to live on that block…

More than 2005?
Asking price.
There were many properties presented at auction these past 3 years that were priced at the loan balance amount > last sale. Most went back straight to the bank. LOL.

And I’m quite sure you kept quite abreast of them all, Fronzi.

You’ve never been to a foreclosure auction, have you Fronzi? Why the pathological need to speak outside of your knowledge base? Still laughing about yesterday’s 160K for two homeowners making 144K each nonsense.

“LMRiM – Ted Kennedy”
Hee hee.
Remember when Chris Daly was posting on here under a pseudonym a few weeks back defending . . . Chris Daly? Unlike that moron, at least Ted had the smarts and wit to create a whole new, convincing persona as LMRiM (LMRiHyannis Port?). Man, he had me going. RIP, buddy, and don’t forget to post from The Great Beyond once in a while so I don’t have to go through total withdrawal.

32k a year invested for 40 years at a 5% real rate of return yields $4M
32K*(1.05)^40 = 225K real dollars 40 years from now.
But you’re not going to get a 5% real return for 40 years — not reliably, and 40 years is a long enough time to be caught in a few crashes. Warren Buffet had some very sharp and prescient words for pension funds that were assuming high yields.
Now that the recession is/soon will be over, it might be useful to look at bond yields. The long bond is yielding 4.5%, which should indicate what the financial markets think about future inflation and growth rates, at least for the next 30 years 🙂

Sorry, I had not looked at CA GO Munis in a while, and it looks like they are back down to a bit over 5%. It looks like the great deals are now over.
General inflation expectations are way down as well. TIPS yields are priced so that they beat treasuries if inflation is greater than 1.78% over the next ten years. This seems like a good buy to me as well, but I have so far avoided TIPS.

The U.S. economy has done well, NVJ, but numbers matter here, and 5% real return is too high, IMO.
Perhaps the difference is in our definitions of what is a reasonable rate of return that the average investor can expect.
My definition is that I don’t need to outsmart anyone else. In other words, I don’t need to worry about being in a minority or seeing things that others don’t. Of course, each of us thinks that we can do better than this, and that’s fine, but we all can’t, and so I take the maximum return I expect an average person to get to be the potential real GDP growth rate. It’s sort of like saying that we can’t all be above average — That’s why I think 5% is too high a real rate of return, under pretty much any assumption about inflation or GDP growth.
And this potential, as estimated by the commerce department, has been falling, reliably, over the last 60 years. It is now hovering below 2.5% — the lowest rate of potential 10 year forward GDP growth ever estimated. This is why I am forecasting stagnant growth, and low inflation — that is the consensus of both the administration and the bond markets.
Apart from smart trading, you cannot expect to get real returns greater than real potential output. For this reason, pension funds are going broke, because they are assuming nominal returns of 8% when there is no way that that could happen. That is 2% too high, even assuming 6% potential output. Those funds are the market and by trading against each other, they cannot assume that they will each get an above average slice of output — and neither should some random investor.

“As is it’s a positive apple.”
The one thing you can definitively conclude from a foreclosure is that no one is willing to pay more for it than what is owed. How much less someone is willing to pay will only be determined once the bank sells it.

“I feel like the last cheap-o in San Francisco.”
When I arrived in SF for my first real job in 99 I said to myself, “Ok, I’m going to be working for 30 years and retired for 30 years so I’ll need to spend half of what I take home and save the other half.”
It’s amazing how much money you need to save to retire if you don’t count on the miracle of compound interest to save you. On the other hand I do have ten years of living expenses lying around in various accounts.

NVJ,
Robert took the words away from my mouth as always. We are subject to short and medium term fluctuations that can affect the outcome depending on where we are in life.
Say 10 of your golden years are during a very depressed market, you’ll have to draw down cash out of a depleted nestegg for your living expenses (good dollars extracted from weak investments), compounding the problem and jeopardizing the potential recovery.
I described earlier this phenomenon when talking about the Epargne de France 1996-1997 debacle that I saw firsthand (with ruined investors demonstrating in front of our windows in Levallois).
The math was very easy. Any junior actuary with brains would have said this product was a bad idea, just like any guy with a 1/2 day training in Excel can realize SF RE is not a good rental investment. But greed is a powerful inhibitor.

On the original topic of this thread, the NYT had a story this morning discussing the real (inflation-adjusted) return on RE in various MSAs since 2001 using CSI numbers:
http://www.nytimes.com/2009/08/29/business/economy/29charts.html?_r=1&ref=business
Yay, SF beat Detroit! Unfortunately, that’s all we beat. Yes, this is the MSA, and it is not fair to start at 2001 because SF was already at the near apex of the prior bubble that other areas did not experience to the same degree. But this illustrates how RE is not always the inflation hedge we assume. RE as a home may well make sense. As an investment, the calculus is quite different. SF prices are still based on wild assumptions of future gains, which is why I see no reason to think the current 2-plus-year decline will not continue.

With an estimate accurate to the dollar, they probably had their super-computers crunching numbers all month. These guys are THAT good at estimates just like they are good at risk assessment, ROTFLMAO
Really? In light of “This bank valuation of the property is terrible for the neighborhood” ?
No. That was nothing.
Hey buddy, distrust away. But keep it to yourself unless it is something. You don’t always have to talk.

How can the value of the stock market grow faster than the overall economy?
I stated this poorly, I think I should clarify. The overall value of the stock market itself should grow more or less in proportion to the overall economy. But it does this, plus throws off a dividend, which is kind of peculiar. The value of an investment in the stock market grows faster than the overall economy. Why exactly is this?
I have other thoughts about this, but I am reduced to quoting myself right now, so I will let others post for a while and go enjoy our rare hot day.

NVJ,
When $X of dividends are paid, then on the ex-dividend date, the value of your shares is lowered by $X. It amounts to a forced sale of equity. So when you “re-invest” those $X (either in the same company, or a different asset) your portfolio didn’t increase by $X — you just re-balanced it.
So anyone who adds historical long run dividend payments to historical long run share prices is double counting! In fact, they are multiplying by 2, because both of these growth rates should measure the same thing, which is long run profit growth.
About money being directed towards capital and away from labor, you are absolutely right! But this is driving down returns, making profits scarce. This is exactly the chronic demand imbalances that I have been talking about. When bond yields are at all time lows, and dividends are at all time lows, what this means is that there is a scarcity of profits, and people are willing to pay more for the same profit stream than they did in the past. This is not a signal of high future returns, but of low future returns.

…I should clarify that by scarcity of profits, I mean relative to the amount of investment capital chasing those profits (Bernanke’s “savings glut”), not in some absolute sense.
And about global markets giving a greater return — perhaps they will give a greater return going forward, but I would be careful about extrapolating future long run GDP growth based on high growth that occurred during a development period. Particularly if your timeline is 40 years.
Investors can invest anywhere, and so capital pours into countries that are expected to grow quickly, driving down the currency-adjusted yield in the target country to match the expected returns domestically. So you cannot assume to get “free” higher returns in foreign markets over domestic returns, unless you manage to outsmart the crowd.

Wife and I have about $285K combined income. Take home is around $174K this year after deducting the customary deductions (all taxes, health insurance, less than full 401(k) contribution). We will owe maybe $3-5K in taxes in April 2010, so SanFronzi’s guess of $170K is about right if you have no house, no kids, etc, and your main itemized deduction is CA state tax. If we both made full 401(k) contributions of $32K, would definitely be lower.

So I take it from your comments that you have not read Siegel’s book. You should read it.
So anyone who adds historical long run dividend payments to historical long run share prices is double counting! In fact, they are multiplying by 2, because both of these growth rates should measure the same thing, which is long run profit growth
No, that is not what has happened. If your model of the world is correct, then share prices should steadily go down over time. They do not. In aggregate market cap values grow at the nominal rate of growth of the economy plus they surrender a dividend. Companies are profitable enough that they can do both. If your model doesn’t explain that, but it is contradicted by 200 years of historical experience, then it is probably your model that is broken, not the real world.
Your best estimate of a real return on investments should be 6.5 to 7 percent because that is what has happened historically. There is no assumption of anything free here, this is simple buy and hold investing in the US stock market. 5% is actually a conservative estimate and is taken by adding in bonds and other investments to reduce overall volatility.
I think it if funny that some of you are arguing that American’s don’t save enough while others argue that there is a glut of capital. There was a glut of liquidity in 2007 due to too much lending going on, but I don’t think that there is any kind of “excess savings” going on. Perhaps slightly, due to high Chinese savings rates, but the Chinese economy is just too small to cause the massive global imbalance attributed to them.
dividends are at all time lows
Dividends are not at all times lows, not even close to them. The lowest the S&P 500 dividend yield hit was 1.14% in 1999. Since then it has trended upward, hitting 3.11% in 2008. It is now higher than it has been at any time since 1993.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

NVJ,
If a company is worth X billion, and is sitting on 1 billion in surplus capital, and the very next day, it distributes that 1 billion to its shareholders, what is the company then worth? You are saying that it is still worth X billion, whereas I am saying that it is worth X-1 billion.
The aggregate equity value of the shareholders decreased by 1 billion, but they now have 1 billion in cash to deploy elsewhere. So they will re-invest that somewhere. At the end of the day, all that’s happening is a rebalancing, nothing more.
This is also not to say that certain dividend re-investment strategies don’t outperform. Many strategies outperform, until enough people start doing them. For example, if a lot of people starting re-investing dividends in the same company, then the shares of that company would rise, the dividend yield would fall, and this strategy would underperform.
Any dividend payments are equal to a decline in equity, which the company must make up for by earning enough cash before the next dividend payment. You are right in that if they fail to earn enough cash the next time, they will need to lower the dividend payment, and if this keeps happening, then their share price will decline over time. In the same way, if a company earns more surplus capital, then they will announce a dividend increase, and this may cause the share price to rise over time.
About the dividend yields falling, of course they have been falling, but the data is noisy. I was speaking in terms of historical trends. Here is a nice article with the graph that is I was thinking of when I said “record lows”.
About the savings glut — I posted a discussion about this some time ago, but can’t find the link now. I am referring to savings in aggregate, not to an individual person. This is defined as money not spent on consumption or taxes. When money is concentrated in the hands of the wealthy, then they will tend to invest that money rather than spend it on consumption. No need to discuss taxes! Hence a glut of savings. You have a lot of money chasing investment opportunities, and at the same time, less money chasing consumption. There are some nice articles by Paul Krugman about how this is modeled with IS-LM diagrams. In any case, this leads to a situation in which yields are driven lower and the economy suffers from chronic demand shortages. As chronic as the cough I know have — that’s all from me tonight! I enjoyed these discussions.

Pot. Kettle. Black
Dream on, son.

I have a fundamental problem with the “total return via dividend re-investment” argument, particularly as it’s modeled with long term time series.
Specifically, what these lookback approaches do, is back-out the decline in equity as a result of dividend payments. For example:
The day before the ex-dividend date, an investor owns $100 of equity in X, which yields 1% a quarter.
On the payout date, the same investor owns $99 in equity in X, and $1 in cash.
Just before the next payout date, the company earns enough profits so that the equity share climbs to $100, and it still can pay 1%. The investor now has
$100 in X and $2 in cash, etc.
So, while it’s true that if your time horizon is very short, you are talking about a specific person that did nothing with that dividend other than keep it as cash, then you have to define total return as change in share price + dividends received.
But the problem is when you try to model this to a historical time series, because any attempts to back out the cash holdings force you to assume unrealistic yield scenarios.
Here is the math that describes how the dividend adjustments are made for a historical time series:
The day before the ex-dividend date, an investor owns $100 of equity in X, which yields 1% a quarter
On the payout date, the same investor owns $101 of equity in X, which yields %1 a quarter.
Notice the flaw? Somehow the company is managing to earn 4% a year on a market cap that is also growing at 4% a year, in addition to whatever the observed market cap growth was.
This is the case if you are running this for an “average investor” — that is, for the whole market.
A dividend is surplus capital — it’s returned to the owners precisely because the company is unable to re-invest it internally and maintain the required rate of return. Over long time periods, the effect of these spreadsheet adjustments it to balloon the returns of large dividend paying firms.
The underlying assumption here is that if you keep growing market cap by the dividend yield in addition to the observed market cap growth rate, then the yield won’t fall. But if that was true, then the company wouldn’t be paying a dividend in the first place! It would just keep re-investing those profits.
In the real world, as market cap grows, the company cannot continue to outperform at the same level — growth slows and it starts to pay dividends.
This leads to the second flaw, which is that in the real world, the investor didn’t just sit on that $1 — but rolled at least some of it into other investments. In the process of doing this, the price of those assets were bid up. Therefore just looking at the actual historical price series already reflects the re-investments that were made, and correctly calculates the total returns on those investments.
So the slight declines in the stock value of X on the dividend payout date actually translates into slight increases in the stock price of Y, as money was rolled over by the real investors from X into Y. And all of these re-investment decisions are captured in the final price of the time series. No need to inflate those returns!
Perhaps you will argue that not all of the dividends were re-invested — but what makes you think that if they were, the result would be more profits, rather than bubble prices followed by a collapse?
People choose to invest for reasons — they are optimizing the returns on that investment, and you cannot theoretically assume that those yields would not go down if more money was thrown at the market, because at the end of the day, profits only grow as fast as the GDP pie grows, while equity measures how much people are willing to pay for each slice of that pie.
So the hundred year or two hundred year results are completely phony. They are nothing more than spreadsheet adjustments to returns that never happened, resulting in errors that compound over time.
The actual returns, including the full effect of all the re-investments that were made are what the un-adulterated time series tell us, and those are always constrained by GDP growth, at least over the long run — 5.7% for the DOW from 1900 to 2000, while GDP grew by 6.3% in the same period.
Those are nominal returns, so the real returns are closer to 2.7%. And you can calculate “what if” type returns that assume unbounded repurchase of shares with zero increase in purchase cost-basis until you are blue in the face, and it wont change the experience of actual investors — and it wont make the pension funds solvent, either.

NVJ,
I think I agree with you for the most point on this topic (I don’t buy Robert’s double counting argument for long term analysis because the evaluation of long term index trends are not taking into account dividends whether or not they are reinvested, but his logic is perfectly correct for short-term analysis). However when looking at indexes over 100 years as you are here you have to keep in mind there is a selectivity bias to the index such that the bad companies are removed and better companies replace them which skews the numbers over time.

Sure, this is called “survivorship bias” which is why if you wanted to do this, you would have to trade stocks as they were dropped and added from the index. Or these days, you could just buy an ETF which would do it for you.
Tom is probably right too, in that the real rate of return in the first half of the 19th century is 5.7%, not 7.0%. The records are simply too thin from that era to make a definitive statement, imho, which is why I originally talked about the period from 1871. 5.7% is more than 5% in any case, and much larger than 2.7%.

You just stated that an investor received 5.6% CAGR without including dividends. They also got a dividend check which they could have done anything they wanted to, including reinvest. Their total gain is therefore 5.6% plus the dividend rate, which is about 4%. I don’t know the exact amount, but their total gain is 9-10% or an overall real gain of 6-7%.
Do you agree?
Somehow the company is managing to earn 4% a year on a market cap that is also growing at 4% a year, in addition to whatever the observed market cap growth was.
There is no flaw here. Your example company grew at 4%/yr plus it throws off a dividend of 4%/yr which grows itself at 4%/yr. This would be a boring kind of company, like a utility, but I can’t point to a bunch of them that are exactly like this.

Do you agree?
No, that’s my post. If you are going to disagree with my post, then you should read it first, at least enough to know why I disagree. At that point, you can point out an error or flaw, rather than just restating the original assumption that I objected to.

The appeal to authority is not so effectively here, particularly as the footnote in the website you reference does not support the highlighted text, or the conclusions of the article as far as our topic is concerned.
I think NVJ, that one way that this could be cleared up, is if you try to recreate this scenario for yourself, using a spreadsheet.
Try to figure out some way that you can get a total return greater than the GDP growth rate — over long periods of time — without creating fictitious equity transactions. Then, try to understand what those fictitious transactions would do to the market price of the securities that you are “buying” in your simulation. That should be an eye-opener.
Another way to emerge from this confusion would be to realize that the dividend growth rate and the equity growth rate measure the same thing, which is the total return to the investor — assuming no cash or bond holdings. Now, of course things get more complicated with cash/bonds, and that is a factor in real world scenarios, but cash/bond holdings don’t really increase total returns.
Or, alternately, you can do what Buffet often advises, which is to image then when you buy stock, you are buying stock in the whole company — you are the “only” owner. Over time, you can choose to re-invest your dividends into increasing profits, or decide to channel those dividends elsewhere — say into buying other businesses. What you will realize if you do this, is that over time, your “total return” will be the total equity value — and nothing more. This again assumes that you are not diverting profits into a cash/bond account, but are always re-investing. Now, imagine this happening for the whole market, and ask yourself whether total returns can be greater than GDP. I would be happy to reply to specific points about any of my comments.

Here is a Stanford researcher who says the same thing:
www-siepr.stanford.edu/papers/pdf/99-16.pdf
“Third the DJIA is not a total return index because it excludes dividend distributions. Dividends account for a considerable portion of returns to shareholders in the long run. If a stock index is used to gauge the return earned by market participants over long periods of time, a total return index would be far superior to a stock price index.”
“The average dividend yield over the whole period was 4.87%. Ignoring this return leads to enormous understatements of the long run payoff to owning stocks. […] Over decades, the difference become enormous.”
I am not sure what your error in reasoning is, so I cannot correct it. Do you think that that DJIA includes dividends in its daily quote? It does not.
“Stock prices naturally fall when stocks go ex-dividend. Therefore, there are more than 100 ex-dividend days events each year and with each event the DJIA systematically understates the return of investors in the Dow stocks”

More appeals to authority! Did you actually read the paper? It is a model-building exercise that does not capture total returns, but total transactions. I am talking about real returns here that actual investors can get by buying and selling stocks.
I don’t think the Dow includes dividends, no. But no index does. An index measures prices. It measures equity. It would be wrong for any index to include dividends, as they are captured in equity valuations.
Listen, NVJ, here are two questions for you:
1. Assume you open a business, and you re-invest those profits to grow your business. At some later point you sell your business for X. Do you think your “total” return was X plus the profits you made along the way?
2. Assume you open a business, X, as above, but you don’t re-invest your profits, but instead you use your profits to buy shares of another business Y. All dividends are re-invested to buy shares of Y. Then, you sell your shares. What are your “total return”?
3. Next, assume you are talking about the all the investors as a whole. They are busy buying and selling to each other, of course, but what is the total return of the entire market? Is it greater than GDP or not? In that case, what would be the return to the “average” investor, assuming that each started out with the same capital? Would that return grow faster than GDP?
Now, agreed, you can always buy bonds instead of stocks, and you can always hold cash instead of re-investing. But as long as you are re-investing, the total average return per investor would be the market cap of equity divided by the number of investors. It is not a hard concept to understand. And that return would not grow faster than GDP.
Now, it’s true that a price weighted index is not as good as market cap weighted index, but the time series is older for DJIA than for SPX. And, as the paper shows, there is not much difference.

Well, there are a lot points in there, hipster:
1. San Francisco is no more prominent or important now than in the early part of the 20th century. At that time, it towered over Los Angeles and was the biggest city west of the Mississippi. It was the western “capital” of the U.S, and an international trade, financial, and military center. As well as a great tourist destination and the gateway to the Pacific.
2. Housing was no less desirable at that time, either.
3. Incomes have been not growing faster in San Francisco than in the U.S. as a whole historically — up until about 1997. People confuse high incomes with high income growth rates, and at least from 1930 until 1997, incomes in S.F. were absolutely flat at about 1.5 times the national average. 100% of the income outperformance really occurred in the period from 1997-2000.
That outperformance was juiced by asset prices, and I think a good deal of it will/already has unwound. We need to wait until the local data comes out, and there is a 2 year lag there. I think by 2010, we will be around 1998 levels, in terms of income as a percent of the U.S. — maybe around 160% or so. I guess this is the same problem I have with NVJ’s “total return” return scenario, in which he assumes that the “average investor” can get nominal returns of say 9%. In that case, the total value of equities held by all investors would grow by 9% — faster than GDP — and over time you would get P/E multiples of 400, etc. I mean, it only takes a little bit of thought to realize that’s not possible — not for the “average” investor. In the same way, if it was really the case that incomes in San Francisco outgrew incomes in the rest of the country by 2% a year, then in 1930 we would have to have been a poor city, with incomes of only 75% of the national level.
4. In the same way, house prices in San Francisco, although boosted by Prop 13 and the historical trend of multiple expansion due to longer loan periods, have not been appreciating at 2% more than in the U.S. historically, although they have been more volatile. From 1930-1995, prices in SF appreciated at a rate of 0.6% faster than in the U.S. as a whole. 1995 was a bottom, as was 1930. Just shifting that time period to 1930-1990 gives an appreciation of 2%. In other words, almost all of that 2% growth was erased in the 5 year period from 1990-1995. So how you pick your end-point really matters, which should tell you that what you are really measuring is volatility, not a durable trend of 2%. People are confusing volatility with long term durable growth, just as they confuse high incomes with high income growth rates — but for those signing up for a 30 year loan, these things really matter, and you can’t extrapolate the period 1997-2007 forward, while ignoring the period 1930-1997.

Absolutely, but I would first like for you to answer my questions, in the socratic dialogue 🙂

I should clarify, yes, I agree with this statement.
Moreover, if you are going where I think you are, I will complete the rationale for you:
What-if scenario #1, assuming a passive hold strategy:
——————————————
Year = 1900:
equity account: 1 share of DJIA (assumed value = $48.8)
cash account: 0
Total Value of portfolio = 48.8 (pre-liquidation)
Year = 2000
equity account: 1 share of DJIA (assumed value of $11357.51)
cash account (from distributions): $6400 (estimated)
Total value of portfolio: $17755.28 (pre-liquidation)
Total return: 6.07%
Total GDP growth over period: 6.1%
Now, perhaps you believe that if you had re-invested those you would have done better. Maybe — but explain to me how everyone can do that and not bid up the price of the shares? Note that in my scenario, no transactions occured — I was merely passively watching the historical record. As soon as you insert transactions into the historical price series, you run the risk of distorting that series if enough people were to follow your strategy.
So are you advocating a minority strategy, that can only work if few people follow it, or are you trying to measure the expected return of the “average investor”? I guarantee you that the expected returns will be the GDP growth rate, unless you are assuming long run p/e multiple expansion.
Are we agreed?

Whew! We finally got there. Thanks for skipping ahead and adding up all the dividend payments for me.
Yes, I agree that if every or even most investors reinvested their dividend payments into the stock market, that the stock market would get flooded with too much money, pushing down returns. This is the whole point of returning the excess profits to the shareholders! The companies didn’t think that they could make a decent return on the money so they gave it back.
It doesn’t really matter what shareholders decide to do with their extra money, most of it goes to taxes and consumption goods, but it counts as part of your total return.
Now it is possible, even likely, that returns in the 21st century will be somewhat depressed to the 20th century, now that more people are investing in the stock market. But I don’t think it will be as severe as you seem to.
Now I will answer your questions, but I am going to have to make some assumptions:
1) Your return is X – initial investment. I don’t think you can include your capital gains plus reinvested profits in your total return rate, no.
2) Your total return is (X – initial investment) plus Y*number of shares/total shares outstanding
3) The total return to the average investor is their capital gain plus their dividend gain. To figure this right you need to add the yearly capital gain to the yearly dividend gain. Real world investors also pay transaction costs, management fees and taxes, depressing their return by 2-3% or maybe more. My main goal as an investor is to keep these costs down. Perhaps it is these taxes and management costs that keep the market from being flooded with too much money, I don’t really know.
People who invest make more money than people who do not. If you just passively sit in your chair, your income should grow with GDP. Few people are willing to delay consumption so there is usually a general shortage of investment capital. To attract this capital, companies have to pay returns greater than those gotten by those who did nothing.
Now it is entirely possible that the skewing of incomes up has changed these dynamics, but I would like to see this through a few business cycles before making such a bold claim.

Robert, this is an interesting analysis, and an exposition that I’ve seen before. What does it mean, exactly, that the DJIA return is a bit less than GDP growth? Where is that delta going? Is it some form of friction in the system? A systematic transfer of wealth somewhere? What is it?

Your analysis of the entire economy is correct, of course, since it is based on basic principals. What is going on here is that plenty of people with capital invest in safer asset classes, like CDs, which pay much less than GDP growth. Bonds have tended to pay about GDP growth and stocks more, which they have had to because of the extra risk.
Right now the total market cap of the Wilshire 5000 is about $10T:
http://www.wilshire.com/Indexes/Broad/Wilshire5000/Characteristics.html
M2 is $9T for example:
http://research.stlouisfed.org/fred2/series/M2

So I am kind of curious here Robert, since you have convinced yourself that the stock market is a terrible investment going forward and that housing is doomed, where are you putting your savings? How are you planning for retirement?

It can’t all be a transfer from overly-conservative CD owners.
Why not? Some of it came from bond market investors as well. The aggregate bond market is much bigger than the equity markets. If you include government bonds, which you should in the identity equations, then the bond market pays a bit less than GDP growth.
More risk == more reward, this is an axiom of investing. Those that have chosen to take the safe route are subsidizing the risk takers, why is that so surprising? Plenty of people who invest in the stock market lose it all though, so you have to approach it with a healthy respect.

I think your math is off NVJ, in terms of adding percentages. SP 500, which is a market cap weighted index, has not outgrown GDP either. You do know that GDP is about 14 trillion, right?
I don’t think equities are a terrible investment — since when did thinking that claims on output GDP growth cannot grow faster than output translate into claims pn output = terrible?
I am curious as to how you think the average investor can do better than GDP, if you agree with my analysis.
In general, you should know that the historical rate of DJIA growth or sp 500 growth is the result of active management and people reinvesting. Each time someone reinvests, they bid up the price, and that is reflected on the time series. So let’s hear your secret formula for returns in excess of GDP, and let’s hear how you think the average investor can get those returns.
FYI, I made a bundle shorting the market before the crash, based on first principles, and am currently all cash except for a nibble of Nestle. I am also renting, although I am looking at
rental properties outside the bay area.
I would say that there is a lot delusion, though. This is common for overachievers, who tend to have too rosy a view of the world and so they walk into crashes. You are smart, NVJ–join the realists! The world isn’t all roses here, but there are roses, and they have the advantage of being real! 6% nominal returns are not so bad after all, and housing prices equal to 4 times long run incomes are not bad, either.

The S&P 500, which is a market cap weighted index, has grown proportionately with GDP. It has also returned to investors a yearly dividend, 3.8% in this case.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500dividend/2,3,2,2,0,0,0,0,0,1,1,0,0,0,0,0.html
“Historical Total Return
From January 1926 through March 2009 the annualized total return for the S&P 500 was 9.51% per year vs. 9.69% for December 2008. The dividend component consists of 44.00% of the return vs. 43.27% for December 2008. The annualized return consists of both capital appreciation and dividends reinvested.”
The easiest and best way for an “average” investor to capture these kinds of returns is to buy a total market ETF, like SPY and a total bond index with a low cost, like BND. The common rule of thumb is that you should buy a bond percentage equal to your age, this is probably close enough for most investors, especially those starting out.
Once a year, probably on a pre-defined date, you should buy and sell appropriately to rebalance.
And I disagree that you should try to time the market, this is where retail investors get themselves into big trouble. The actual “average” retail investor gets something like half the total market return by doing a poor job of market timing. The average retail investor buys into bubbles and sells at the bottom.
http://www.slate.com/id/2099695/
If you really pay attention to macro forces and are enough of a contrarian you might be able to beat the market consistently. If so, you should be running a fund though, not wasting your time posting on Socketsite.

For review, I pointed out 111 Hoffman earlier in this thread. The defaulting doctor bought for $2.1 million in 2005. Now it’s official; according to SFGate, JPMorgan Chase took back the property for $1,533,000 on Sept. 16. Should make for an interesting comp when it hits the market; the Coalition of the Willing continues to grow.

I didn’t realize that SF is just like the U.S. composite, except exaggerated in every way.