From Inman News (free until midnight):

With the “perfect vision of hindsight,” [Nicolas] Retsinas [director of Harvard University’s Joint Center for Housing Studies] said it is clear that the slowing began late in 2005. “Everyone knew you couldn’t sustain double-digit appreciation,” he said.

Well, either perfect vision or you’ve been “plugged in” to SocketSite. And yes, we’ve only called “the slowing” once (November 2005).
2006: Year of market correction [Inman News- $]
Top O’ The Market To You! [SocketSite]

28 thoughts on “Hindsight For Some (Foresight For Others?)”
  1. The latest DQ Numbers and they are just calling it a ‘dip’.
    “Indicators of market distress are still at a moderate level. Financing with adjustable-rate mortgages is flat. Foreclosure activity is rising but is still within the normal range. Down payment sizes are stable, as are flipping rates and non-owner occupied buying activity, DataQuick reported.”
    of course last month I believe foreclosure activity was below the normal range and not ‘within’ it … but I could be wrong

  2. “Financing with adjustable-rate mortgages is flat.”
    So still at 70% of all loans?
    But it doesn’t matter. There will be no slowdown because there was nothing unsustainable about the increases. It’s a new paradigm. Soon hovels in the Tenderloin will be at $5,000/sq. ft. San Francisco is different.
    Most importantly, the guy at the real estate seminar told me that I deserve to be rich.

  3. BREAKING NEWS! You mean we couldn’t sustain double-digit appreciation forever? lol. The end of the world is near, as my house is only up 5% in 2006 vs. 15% in 2005! Still better than losing 100% every month in rent.

  4. I was just told that they aren’t making anymore land and you know what? its true!
    I looked it up on the internet and apperently they built SF on the tip of a pennisula which means for the last 100+ years it has occupied the same plot of land and they haven’t made any more land since the city was built.
    Oh and you know what else? “Everyone” want’s to live here! It’s true! I read it on the internet.
    Thank god for the internet or I never would have known that “Everyone” wants to live and that SF is surronded by water on three sides.
    Now that I know they aren’t making any more land in SF I have been increasing my price 10-20% every year.
    Thank god “Everyone”‘s salary has been increasing the same amount and he now makes 250k a year and is really desperate to buy my sweet TIC studio in the tenderloin because he wants to live here so badly.

  5. “my house is only up 5% in 2006 vs. 15% in 2005! Still better than losing 100% every month in rent.”
    Wow. You should teach investment classes.
    Option A: buy something today and pay $5k/month in mortgage for an asset that’s appreciating at 2-3%/year. I can recover my Realtor’s commission and fees in just 2 years to break even on that. In the meantime, I enjoy a slimming diet of Ramen Noodles.
    Option B: rent same condo for $2k/month and invest the difference in ANYTHING. High yield savings accounts are paying around 5% today.
    Face it, folks: without that double digit appreciation, it makes no sense to buy anything in today’s market unless you plan to sit on it for 5+ years and can afford an onerous monthly payment.

  6. Dude nailed by sentiments exactly. While I would LOVE to own a place and remain hopelessly active in the market, I can’t justify a $5k mortgage for a place I can rent for $2000+/-. It just doesn’t add up.
    Assuming an 850k mortgage ($5k/mo) or a $2k rent, once you include taxes, maintenance, and the like, the house would need to appreciate at 7% just to make up the difference over 5 or so years. So without double digit appreciation, you just can’t financially jusftify buying a place over socking a net $4-5k away every month (by renting v. buying).
    Am I missing something here?

  7. Just don’t move. I just rented a nice 2 bedroom in good area, with parking for $3,500. If it was a TIC, would sell for about $800,000-850K. PITI with an interest only assuming no down payment would be around $5,300. After tax deduction assuming you had high income to reduce with interest and property taxes, would feel like $3,445. In this case, would be pretty even. Am I missing something? There is still something in the psyche of americans that need to own where they live.

  8. I think an unfortunate consequence of the real-estate/financing boom is that many would-be homeowners (younger people!) haven’t witnessed the more traditional path to home ownership. It’s about saving a little, starting small, and working your way over many years to attain the home you really want. By SF standards, I’m not a high-earner, but by not overextending myself (and being patient) as I’ve gone from purchase to purchase, I’ve been able to afford a nice home in a nice neighborhood. Even in SF’s high-priced market, I can’t imagine embarking on homeownership with the idea that an $850k loan would be necessary.

  9. “Even in SF’s high-priced market, I can’t imagine embarking on homeownership with the idea that an $850k loan would be necessary.”
    Christopher, this is exactly the case today because of loose credit and speculation/flipping. I fully agree with your notion. But now a big correction is necessary.
    I’m stealing this example, but nobody buys a Ferrari as their first car. People start with entry-level cars like a Honda Civic. Well, imagine if the base model Civic cost $75,000 instead of $12,000. That’s exactly the situation we have with housing in SF today.

  10. I sold almost one year ago and am now renting a 2 bedroom on Green Street between Pierce and Steiner in Cow Hollow. I pay 2050 a month which includes parking in my own garage. (The unit I rent is owned by a family trust in L.A.) The condo above my unit sold for over 950,000 two years ago. Explain to me what I am doing wrong by renting instead of owning this unit?

  11. Dude: I understand what you’re saying. But sometimes I get the impression that frequent posters to this site are fixated on new developments or high-profile properties while complaining of feeling shut out of SF’s real-estate market. But, there are lower-end properties out that that are more affordable and would present a better first-time buying opportunity. However, they may be older or less “brag-worthy”. My first SF purchase was a studio at the Hamilton on O’Farrell. It wasn’t a glamorous start, but it began the progression toward a very nice place 15 years later, and I had some pretty cute places along the way, too. And (more for the post following yours), there’s much more to judging the value of a property (and reason for buying it) than what it would fetch as a rental. Anyway, Dude, hang in there. I hope at least an Acura-caliber property is on the horizon for you!

  12. This acrimony is a bit silly, so cut it out.
    Of course a good case can be made for renting. The idea that home ownership is the only path to prosperity is absurd.
    But a good case can certainly be made for buying. Not everyone who owns a home in San Francisco is a speculative twit/flipper suffering under the burden of their mortgage.
    Some renters have self-interest fueled Schadenfreude, where a massive market correction is both vindication and opportunity.
    Some homeowners think that they bought Treasury Bills, and that they’re entitled to double-digit gains unto perpetuity.
    Fortunately for the rest of us, they’re both wrong. Prices will correct. This is healthy. The degree is unclear. But collapse is not imminent. There will not be a magical moment where buying SF suddenly becomes affordable, in the traditional sense.
    Like it or not, SF has become a market where the table stakes are high. From a global perspective, it’s not even a particularly expensive market (Zurich, London, Tokyo, Shanghai…). There is no such thing as a “Honda Civic” here any longer, outside of BMR units. You can buy in Rockridge, and step up to SF from there.

  13. I haven’t seen any 800K tics renting for 3500. 2200 maybe. And the whole honda argument is a nontarter. Homes at all segments cost far more to buy than to rent, so if I want to live in a honda-quality home, I can pay a lot less rent to do so than it will cost to own. And quoting an interest only payment means at the end of the loan, I have no equity. Just stuffing in the matress the $1000 per month I can save by renting means at the end of 5 years I end up with *something*. And when the water heater breaks, I make a phone call and I’m out of pocket $0.
    If I take out an interest only loan, I end up with nothing, and if I want to move in 5 years and the market is flat, I get the luxury of paying $50K in transaction costs to do so. Instead of being priced out, I’m priced *in*.
    I tend to stay away from “investments” when idiots are investing in the same thing, because the idiots tend to overpay. I don’t want to compete against them. When the I/O no docs with low credit scores leave the market, call me. By then, prices will have fallen another 20%

  14. If property values continue to climb, I think it will be difficult for some renters to convert to owning, especially to a unit that is equal to what they are renting today.
    I bought my first place in 1999 in Emeryville for 270k (I can rent it for around 2500 which more than covers my mortgage). I just moved up to a place that cost 850k in the city. If I did not buy back then, I would never be able to afford a place for 850k. I am not banking on SF climbing as quickly as Emeryville has in the past five years but I also plan on living in my new place for at least 5 years.
    If I was only planning on living in SF for a year or two, I would probably rent. If I was planning on staying longer I would buy.

  15. You mean they are _asking_ $3200. Personally, I would be somewhat surprised if they actually managed to rent a one-bedroom unit for that price in The Beacon.
    In my experience, the cost to rent versus the after-tax cost to own is still pretty significant when you add up interest, taxes, maintenance or hoa, and insurance.

  16. Are HOA dues at the beacon free? Whoops, I guess you forgot to include that in your interest only analysis. And 3200 for a 1 bd is going to be a stretch. People can ask anything. What they get is something else.
    From yesterday’s WSJ:
    In much of the country, renting remains a bargain compared with owning, according to an analysis prepared for The Wall Street Journal by Torto Wheaton Research, a unit of CB Richard Ellis Group Inc. In markets such as Las Vegas, San Diego and Washington, the monthly cost of renting the average apartment is roughly half what it would cost to own the median-price home in the third quarter. “Renting is only marginally less of a bargain” even with the latest decreases in home prices, says Torto Wheaton senior economist Gleb Nechayev.

  17. Folks, this is an academic exercise. Anyone can build an excel spreadsheet which calculates your cost of renting vs. owning the same property here in the city, and throw in EVERY variable, including HOA fees, tax benefit of deducting mortgage interest, time you plan to own it, etc.
    What you need to calculate is the rate of expected appreciation on that property that makes it worthwhile – if the property appreciates more than that, you’re better off buying. Guess what? You need some pretty strong future appreciation to make it worthwhile, otherwise you’re better off renting these days. And we’re appreciating at what, like 0.7% now?
    Please note I’m talking about market conditions RIGHT NOW, not about real estate in general. I’m sure everyone who bought pre-bubble disagrees because they’ve made gazillions in equity in the last 3 years. But for us “bitter renters,” we’re much better off financially waiting for prices to fall. Even if they stay flat, we’re better off renting until incomes catch up and appreciation begins again. Simple mathematics.

  18. Dude (or anyone else who would like to comment): What would be your analysis of this scenario? Total housing costs (mortgage, taxes, HOA fees) are $3700/month. Tax incentive on mortgage credit equals roughly $700/month. Comparable units in the same development rent for $2500/month. Expected duration of ownership 5-7 years. Property is in a neighborhood with a history higher-than-above- average stability and appreciation for SF. Better to rent or own?

  19. “But for us “bitter renters,” we’re much better off financially waiting for prices to fall. Even if they stay flat, we’re better off renting until incomes catch up and appreciation begins again. Simple mathematics.”
    If prices go up or even stay stable renters would have to bank on increased income to buy a unit equal to what they are renting. This would not be the case for a number of renters or buyers.
    If you can afford it and plan on living in SF for a while I would personally buy. It seems that a number of arguement for renting are banking on values dropping.

  20. One thing that has not come up are the inflationary pressures. As the dollar looses value, the burden of debt will decrease. A couple % points per year adds up on a million $ loan. Every year the million $ loan is less burdensome to the borrower. And the owner should be making more as time goes on and wage pressure/experience come into play.
    Rent controlled apartments in SF are allowed to raise the rent every year by like 1.7% based on a portion of CPI. This was a small bone thrown to the landlords when the law passed (although implementation is highly flawed). We all know CPI is artificially low and the true cost of living are going up way faster than the CPI rate. This is why you have renters not leaving apts, landlords are subsidizing their rents. But, RE is one way the average joe can hedge inflation by getting a hard asset. Inflation benefits all non currency assets

  21. Christopher-
    There are many rent vs. own calculators online you can use to see if this makes sense to you (but be careful to read the assumptions they use, especially for appreciation).
    But back of the envelope and with limited information, I’d guess you’d need to get over $85 – 90K in appreciation in those 5 years to make this worthwhile. If this doesn’t seem likely, you’re probably better off investing the $1200 monthly differential in a CD at 6%.

  22. “If you can afford it and plan on living in SF for a while I would personally buy. It seems that a number of arguement for renting are banking on values dropping.”
    Uh, I think a big argument for renting over buying is pure affordability – if you have enough income to cover a 500-750K loan, then sure, buy away. But the fact is that this is the main problem with the SF RE market, that so few people can afford to move from renting to buying.
    Personally, I’m waiting for the zombie attacks to start bringing prices down.

  23. Thanks for the response, Dude. Over a 7-year period with zero appreciation for two years, 2% for two years, and 3% for the three remaining years, my appreciation would be roughly $85,000. Also, I would benefit from the mortgage credit and property tax deductions. In the end, I would probably end up in roughly the same place as I would by renting. Although, I guess there’s something to be said for a forced savings plan and the other benefits of ownership, although they are somewhat intangible and subjective.

  24. So many real estate “moguls” today who don’t even understand the basics of a rent vs. buy analysis. People would be better served taking some finance classes at a local college instead of reading Rich Dad, Poor Dad books.
    You either rent the dwelling or you rent the money to buy the dwelling. Either way you’re renting. You need to analyze both cash flow streams over your investment horizon, apples to apples, to determine which is a better return. In many cases it makes sense to rent.

  25. The renting vs. buying discussion must include many factors and potential variables. To some degree, the bottom line is this: Regardless of market conditions, the advantages of home ownership come from having the discipline to save and be willing to sacrifice immediate gratification for longterm payoff. These conditions exclude those who must rely on 100% financing or exotic loans–people who had a brief and somewhat artificial entry into the market from the boom. Most discussions on this board don’t consider that a person may not be a first-time buyer but rather be selling a property and have healthy proceeds for a nice down payment on the next purchase. In this case, a well negotiated and thought-through purchase still makes sense. And, although the mathematical formulas may suggest that renting could be a better investment if the monthly savings over buying is wisely invested, how many people have the discipline to actually take that money and save it? Some do. But many don’t. Unfortunately, most of my friends who bemoan the obstacles to buying have thrown up their hands and are pacifying their disappointment by purchasing new cars and pampering themselves–not buckling down and saving for a change in the market that might allow them a second opportunity to buy.

  26. Christopher – all very good points. I totally agree with you on the delayed gratification/savings point (it sounds like we have similar friends).

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