San Francisco Sales Activity In January: Down Again (-27.1% YOY)

No it isn’t. Not the DQ News link I clicked on.
[Editor’s Note: Read the entire report. County specific data is provided at the end (which is what we chart).]

uh oh, fluj. Check the table in the DQ News article at the bottom. I’m beginning to reconsider my offer to look you up to be my realtor when it’s time for me to buy my trophy home here…..

why would mix support the median price? according to dataquick, purchases driven by jumbo loans are down 63% since august. mix should be driving the median price down, not supporting the price.
[Editor’s Note: Specific to San Francisco, more transaction have been lost in the lower cost districts (think ten) than the higher (think seven).]

I agree that the “mix” should be exerting more negative pressure on median prices at this point. This is exactly what is happening nationally. Afterall, if the “mix” propped up prices for so long- as many on this blog argue- then once the jumbo loan financing fell off the table shouldn’t the mix be pushing the median down in S.F.?
On the other hand, the median price in S.F. is down about 11% from its peak (835K to 744K). Also, unless I’m reading the chart wrong it looks like the current median price is about exactly what it was three years ago in Jan/Feb. 2005. With inflation factored in, median prices have fallen about 10% since Jan. 2005.
If the median price ends 2008 at 700K, then that will represent approximately 40% aggregate (nominal) appreciation over a six year period (with all gains from 2002-2005 and flat prices from 2005-2008), which doesn’t really seem far off the historical average.
Why can’t we say that, on average, prices have not risen in S.F. in three years.

This is so funny that people are arguing what the median trends really are.
In a typical city (not SF) in which there are multiple small Realty companies, none of which has the power to influence what gets sold, the median is indicative, to a degree, of what people are spending on houses, not the house prices themselves.
But in SF, it isn’t even indicative of that because a very few Realty companies control the bulk of the market, and those companies can decide what they want the median to be, within limits, and then just list a mix of homes that will cause the median to hit that level.
Median down? That’s no problemo at all. The realtors can just slow up the process that brings lower price homes to the market place while rushing to market higher priced homes. That will serve to keep the medians high.
If you have 6 sellers of homes at 600K, 6 sellers at 700K, 3 sellers at 800K and 2 sellers at 900. That would cause the median to be 700K. Let’s assume there are at least two buyers at each of those levels, you just list 2 of each of the homes at 900K and 800K, but only 1 each of the homes at 600K and 700K. You tell the remaining sellers that there are too many homes like theirs on the market, so they need to wait.
Now, when the tallies are done, you have sold prices of 900K, 900K, 800K, 800K, 700K and 600K. Viola: a median of 800K. You’ve just raised the median by 100K. Hooray: our town is so special.
For awhile, you can pretty much just pick a median and hit that target every time! If I were doing it, just for good measure, if someone came at me with a wildly overpriced property at 700K, I’d take that listing right away, just to hide what I was doing, confident it wouldn’t sell and pull down the median.
You are motivated to keep the medians high when those medians will hit your bottom line. When median’s fall dramatically, only the bottom feeders show up and knock the price down on every transaction. You lose money. So you’ll keep them up if you can. In SF, you can!
So a very few large players in a declining market can keep medians aloft for months, maybe longer. What they can’t keep aloft are sales volumes. Those are a much more telling indicator of the “market”.
Volumes of 560 at the January peak to 293 today tells me everything I need to know. The median? That just tells me how well the big 3 Realtor companies are tuning the market, but tells me nothing about the market because it’s so easy to manipulate.

SFHawkguy – you’re thinking of S&P Case/Shiller data, which splits into tiers.
So sales volumes are at record lows. Meanwhile, MLS inventory has increased to 1,268 today compared to 1,085 when SocketSite reported it at the beginning of the month, so a 17% increase in 2 weeks. Movoto picks up a lot of “pocket listings” and is showing inventory of 1,338. The CII showed potential inventory of 3,170 including new condos coming to market.
Any bets on whether there’s a “spring bounce” this year? Because if the CII number is correct, we’re looking at nearly 11 months of inventory in the city based on January sales.

This may be off topic but anyone else noticing anecdotal trends in SF that I’m seeing?
1) A huge increase in the number of day laborers seeking work near Cesar Chavez street.
2) A decrease in the amount of visible residential remodeling? I think Satchel characterizes it as the port-o-potty index?

A side comment involving “the mix” and jumbo loans. I know someone looking in the sub $1 million market and the financing they were looking at (with 20% down) was a conforming plus a second. Thus, you can have a mix skewed towards the high end homes (supporting the median), while also having fewer jumbos. Don’t know how common this is in the current market.

My other thought was that as the Case-Shiller includes (if I am not mistaken) data for SF, Alameda, Contra Costa, Marin and San Mateo, the county of SF only represents 14% of the sales.
I know that the proportion of the top third tier will be significantly higher than this, but still I doubt whether it would be high enough to make even the top tier Case Shiller index very useful as an indicator to the SF market.

Thanks happy renter!
I don’t see the mix changing significantly though: district 10 for example had 21% of the total sales in 06, 20% in 07 and 20% for 08…..

OK so to get a better idea of the alleged changing mix, is there available a split of the 402 (01/07) and 293 (01/08) by district?
Yes (or at least a fair proxy), but you’ll you have to wait until tomorrow. In the meantime, consider the common refrain, “but the good stuff continues to fly off the shelves.”

I pulled out the calculator for D7:
Condos: 2007: 290 out of 2336 (total)= 12.4%
2008 11 out of 90 = 12.2%
SFH: 2007: 102 out of 2305 = 4.4%
2008: 10 out of 120 = 8.33%
total 2007: 392 / 4641 = 8.4%
total 2008: 21 / 210 = 10%
I’ll let people draw their own conclusions as to whether they think the numbers really make any difference but it looks like sales volume in D7 is keeping pace with last year while everywhere else is way down. D4 is off as much as D10.

So I played around with the BlackStone data HappyRenter posted to see what happened during the last downturn (’90 to ’97).
SFR prices fell 17.0% on average, and the peak to trough cycle lasted 4 years. District 10 had the biggest drop, 22.2%, which took 6 years to run. The smallest drop was in district 5, where prices only fell 9.6% over 3 years.
Condo prices fell 14.9% on average, and the cycle lasted 3 years. District 8 had the biggest drop, 22.2%, which lasted 3 years, while District 6 condos fell only 5.6% over 4 years.
Of course historical data is no precursor of what this downturn will bring. But it illustrates the point that prices in San Francisco have fallen materially before, albeit over the course of several years. Coincidentally, the last downturn did not have volume declines as large as what we’re seeing today, either.

fluj, what are your thoughts as to why volumes are down so much? To repeat Trip’s question, can prices realistically hold at these levels if inventory keeps rising and volumes don’t pick up?

I think that a lot of buyers are out of the mix because of credit restrictions, first and foremost. I think secondarily that that has created a bit of a downswell which in turn is giving even qualified buyers pause. People are being cautious these days. I think that’s it in a nutshell: caution. Those who need to buy are still out there. But they are proceeding with caution.
And by the way, is 293 really scary? This is not hypothetical. If any realtors with 20 years experience or more read this, maybe they can answer that. Going back on the MLS it looks like it’s similar to ’01 type volume. I remember that being thought of as a good year for real estate.

“Those who need to buy are still out there.”
This is the crux of the problem that the REIC never seems to get. No one NEEDS to buy. Everyone is living somewhere. Anyone who is transferred or moves in can rent if he or she chooses to. The perceived “need” to buy is driven by just that: perception.
Before, it was the perception that someone would be priced out if he or she didn’t jump on the housing “ladder”. That was always a foolish fear. Also, there was the perception that real estate is a “good investment” (it can be I think, but only if you buy at a sensible price). These perceptions are washing out now. Coming soon, I think, will be the perception that buying is a “sucker’s game” and people who bought in 2003-07 will start to hide that fact. I am guessing that there will be a sea change in the way people talk about their real estate. They will say things like, “Yes, I bought my place”, but then hurriedly interject, “but it was a long time ago” before finally saying, “anyone could have seen that buying in the last few years was a bad move….I feel sorry for them….” You’ll also hear, “I rent my place”, more often and more proudly – and without the need to explain why. BTW, if you were in NYC in the early 90s, as I was when I was just starting out professionally, these are EXACTLY the sorts of things you heard.
So, IMO there is never really a NEED to buy. But there is always someone who NEEDS to sell. Just look at the foreclosures and preforeclosures. 🙂

yeah Satchel you are happy renting and good on ya. Want, need, whatever. Some people prefer to buy. Plain and simple. Stop projecting your view onto others, my man.
And Cooper, 30 to 40 huh? 50 even? In San Francisco? Ohhhhkaaaay …. I just sold a house today. Am I a realtor in your estimation?
The b.s. some of you guys spout, man. Too much. Even Tipster would be red faced

Satchel, I think your comments are always well reasoned and I agree with the trend you are forecasting. BUT I very much disagree with the amplitude.
Do you really think GOOG will be $150, or that SFH in desirable parts of SF would decline by more than 30% over the next few years?
Nobody needs to buy, but saying that renting is comparable is just silly. The rental stock in the city is pretty shitty, especially for SFH. There are always exceptions, but if you just moved into the area or living in a condo and need more space, your chances of getting a nice rental are very low. As you said yourself, you got your rental earlier this decade which was probably the best time for renters in the past 12 years (since I moved the bay area).
There is a lot of things you can’t do to a rental, including hanging pictures on the wall in some extreme cases.
Clearly some people don’t care about these difference, but many people with money actually care. There are plenty of people who accumulated enough money to retire but still continue to work (myself included), so it’s only sensible they SPEND (CONSUME) on housing. After all that’s where they spend most of their free time.
People are justifiably sitting on the sideliness, and yeah some people must sell, but not a lot. Sales volume decline but also inventory. Many properties are withdrawn, which can be considered a bearish sign, but still does people afford not to sell, AKA they don’t NEED to sell.
A major recession and job loss is a totally different ball game. But under that scenario many people will be hurt, homeowner or renters.
Satchel, you mention that you live in the western side of the city. I got the impression you weren’t referring to Pac Hts, Presidio Hts, Lake, Jordan park or Sea Cliff. No one NEEDS to live in these hoods (I don’t), but the discussion here is about desirable parts of the city.
Try renting a renovated SFH in a nice neighborhood (or even a condo outside of the south eastern wasteland), and you’d be greatly surprised what happened in the rental market.

Pretty impressive the median is only down 0.8% in SF in Jan when jumbo loans are down 60%+ and we’ve got the worst credit crunch in history. You’d think the Median would be down more like 10-15% given the mix of less higher end homes. I guess with the conforming limit going to $729K come mid-March, more mid-higher end homes will sell again.
Still waiting for inventory to come online (besides the $1,000-$1,600/sqft places at The Greenwich and other expensive places in SOMA). The Firestation house for $2.3 mil as the cheapest house in District 7 is not cutting it. Where have all the $1.5 mil SFH houses gone?
The big question is: do people actually spend their 2007 bonuses this year, or save it? I’m inclined to believe in the latter.
Prime Time

Au contraire,
In very limited situations – almost inconceivable in the SF market these days, and considering the amount of income required to comfortably afford something nice – there are tax advantages to buying versus renting. As I said, at THESE prices and in THIS market there is usually no advantage. Typically, in most markets and at most times, the USG confers a real benefit on homewoners, but it’s less than most people commonly believe.
Tax advantages are likely to accrue at the lower ends of the market, where rents are higher (relative to purchase cost) and where prices are well within the $1MM acquisition debt limits. Also, we would typically be talking about salaries and income in the $125-200K range where there are likely to be significant benefits. Above that, phaseouts atart to become an issue. Additionally, relative tax benefits are more likely for singles than marrieds, and no children versus children (kids have “built-in” tax benefits that are not dependent upon whether they live in a rented home or a mortgaged one). If you feel like it (it’s just an anonymous blog), post your details – income, marital status, dependents, W-2 earner?, current rent, projected purchase price, etc., and I’ll run a very rough numbers scenario.
But, this is the key. Tell your planner and your CPA that you expect your home value to go down by 20-25% over the next few years, and stay down for a decade. Ask their opinion then. If they look at you like you are crazy, ask whether they gave the same advice in 1989 in SF (this time will be worse). Last, ask them whether they have assigned any risk adjustment in their straight calculation of cash outlay in both the purchase and the rent scenarios. You will find that most planners and accountants are very unsophisticated in their analyses (most, not all).

HistoryBuff, I actually worked in the tech industry will before and after the crash and have a LOT of context. If you feel that GOOG is another WebVan/Kosmo/Pet.com or even YHOO more power to you. GOOG is now $525, you could short and make a killing. Good luck.
Satchel, I see that we adjusted our gloomy forecast, not it’s 20%-25%? Is it adjusted for inflation or in nominal terms?
Au contraire, Satchel is right, please fire your CPA, he is a moron. Doing something just to get a tax break still means you spend 60% of YOUR money.
The buy .vs. rent calculation is already taking tax deduction into account and if renting feels the same to you like owning (as Satchel suggest), you don’t NEED to buy.

The tax advantage is limited if the price declines, particularly when he sales price is a high multiple to your current income. On google, that dang thing is not a pets.com or webvan or whatever. The business will only grow particularly if they don’t pick up any licenses out of this new auction, I’d buy more. As for my forecast on prices–6 monhts ago on this board I said 15-30, right now my # even with all this talk of government intervention (buying loans from banks), I’d say it’s 30-40% decline in prices over 3 years from the peak. And from what I can tell at least 1/3rd of that has already occured. With volumes super low- realtors are not advising their clients well trying to get them to hold on. I’d rather take a 10-15% price decline now then carry a property for 6 more months so I can get a 30% decline. People who need to sell should sell now and price it to move before it continues to get much much worse.

Cooper, I find it hard to find any evidence that at least 1/3rd (represnting a 10-13% fall) has already happened.
Medians were reported as fairly constant yesterday, and after looking at a breakdown of sales by district I couldnt find nay real evidence the mix of district sales was supporting this figure.
True volumes have plummeted and this may well lead to drops in the future – but if we really are 1/3rd into this I dont think its going to be at all bad. I did note as well from the graph above that there were material drops in volumes this time of year in 05, 06 and 07. While I appreciate the drop is bigger this year, I do believe its not until say March that the picture will really clear.

someone,
About my forecast, I actually have a range, and I don’t think I’ve really changed it much. I think SF on average will get a 30% decline (peak to trough). By “average” I mean that if you were to throw a large number of darts at a map at time T1 (the peak – meaning on average the end of 2006 is my best guess; again, an average – some neighborhoods peaked earlier, some later), and revisit those properties identified by the darts at time T2 (24-36 months from now), the average of the declines in aggregate will be 30%. Some neighborhoods will do comparatively much better – parts of Marina, say, or maybe Pac Heights, who knows? will see lower falls. Some nieghborhoods will see 50+% declines (parts of Bayview, parts of Sunnyside, parts of Bernal Heights going down the hill towards Alemany, etc.). There may well be 70-80% declines in some spots. Most places where people who are not super wealthy but who desire a stable reasonably nice place to raise a family will see declines of 20-30% IMO.
I think mostly in real terms, but I am not forecasting a lot of inflation, and the bond markets seem to agree with me, so I think most of the adjustment wil be in nominal terms. There is a nontrivial chance of outright mild deflation (as in Japan), which would lead to even greater nominal price drops.

Satchel, sorry, just to clarify, the HHI number I mentioned is our taxable income *after* 401k deductions.

@someone
How about Cisco, Intel, Microsoft? Is GOOG comparable to them?
With all of the above their products make it hard for the installed base to switch to the next new hot company with cool products. Because switching costs money and real infrastructure. Yet being leaders in the market their stock took a beating and never really came back to the dot com days.
With Google one only needs to type a different URL or change the default search engine to another one. A couple of missed quarters and GOOG will take a huge beating.

PacHeights Renter,
“why worry about it since when you can rent for thousands less every month it is not a big deal to pay a little for patching and painting to make the landlord happy when you move out.”
Truer words have NEVER been spoken! Think about it, people. In ONE month, you often save enough $$ to cover the ENTIRE security deposit, when you are talking about renting a $1.5MM place for $3.5K versus “owning” it. (btw, almost EXACTLY the ratio I encounter: $3.1K for an SFH that would sell for $1.3-1.5MM, but in a somewhat less desirable neighborhood than Pac Heights).
The “equities” of the situation favor the renter, here. Do what you want to the property – who cares? – you’ll lose the equivalent of TWELVE security deposits in the first year if you buy! (assuming no appreciation). Not to be too blunt, but someone here once talked about a landlord who was “hassling” the tenant about showing the house, etc. Gently remind him that you are in possession of his bubble asset. Point out that tubs, for instance, have a nasty habit of overflowing and destroying nice wooden floors, and causing all sorts of sheetrock damage. He’ll get the message… 🙂

From the Chronicle’s SF Gate today: Head: Home Sales Through the Floor
Lede: Transactions hit 20-year low and prices in some local counties slide over 20%. But not S.F. and Marin
Scroll down, and :
“San Francisco resale home transactions declined 32.1 percent year-over-year to 152, another 20-year low, while the median price increased by 5.8 percent to $820,000. When new homes and condos are included, the median price fell 0.8 percent to $744,000. The median means that half the homes sold for more than that amount and half for less. ”
Quite a difference in presentation, I’d say

SFpornaddict, you really meant to say “SFREpornaddict”, right? 🙂
Bears would use whichever number seems worse market. Bulls would use whichever number seems better market.

‘I’m surprised that resales can turn a 5.8% gain into a 0.8% loss though’
should read ‘surprised that new sales….’
of course!

tipster – Oh man, you’re disappointing me. Usually your posts make a lot of sense. But the big 3 RE firms colluding to manipulate inventory ? I don’t think so.
I can see it now. The heads of the big RE concerns meet at the boardroom of Dr. Evil’s underground lair carved into the rock beneath Alcatraz. “OK it is decided then. We’ll sideline this batch of properties to force the median up and then we will reap One Million Dollars!”
If I were a self-interested owner of a large RE firm, I would be making sure that every one of my listings was getting the right exposure and had the highest likelihood of selling. That means marketing it properly whether that be via a pocket listing, MLS, web, or whatever. That also means convincing sellers to accept a contract price that a buyer is willing to offer. The name of the game is to get inventory off of the shelves and increase transactions. After all it is the transaction that creates the commission. Manipulating the market makes no sense.
That doesn’t mean however that RE firms don’t manipulate the stats other ways. The DOM figure for example is almost meaningless here in SF. The “over asking” statements are also highly suspect.
Satchel – Agreed that no-one really needs to buy. However many have a strong desire to buy and that is effectively the same as a need. The only variable is the buyer’s patience.
I want to buy and most likely will when the numbers come into alignment. I believe they will some time in the next few years and I can wait. I made my last two purchases near the end of a several year slump in the market and just before periods if high appreciation. The first by chance and the second absolutely intentional. In fact it was the slump in the market that woke me up and got me out on the streets looking. Otherwise I probably would not have bought.

Satchel, given your elaborate explanation we only mildly disagree. I think SF will fair a bit better on average, but your numbers are in the right ball park IMO.
Au Contraire,
My rule of thumb of buy .vs. rent is 22 years, i.e. if the house sells for a lot more than 22 years of rent forget it. (using 7.5% for intreset+prop tax and 40% marginal tax rate (state+fed)). In your case the marginal tax rate is lower and you probably don’t have enough of a down payment to get a cheap loan, so I’d go with 8% and 35%, which leads you to around 18 years multiplier.
I know nothing about the rental market in district 4. Your 700K budget seems sensible given your income, and it’s probably equivalent to $3250 rent.
The only way to really make the decision is personally face the facts. Go look at rental/for sale stock in those neighborhoods you can afford. My hunch is that a $3,250 rental would be in a better condition than a 700K house.
Rent for couple of more years and buy those homes for 550K

Oh MY! Don’t look now, but if those Craigslist listings are for real, San Francisco rents are looking almost cheaper than Chicago! I work in Chicago about 40% of the time and am VERY familiar with what it costs to rent condos or homes in similar neighborhoods. I hear some people say that rentals in San Francisco are dumps, but have you ever looked at used homes that are not fluffed and staged lately that are for sale? These rentals are really quite a good value.
I bought wayyyyyyyy back in 1990, so my situation is different, but I had no idea what a good value some of the non-glamorous neighborhood rental homes are right now. If I were younger and moving to San Francisco, there would be no choice but to only rent right now.

Au contraire,
As promised, I ran a very rough numbers scenario on your circumstances. You should compare these numbers with the ones your accountant is telling you, and obviously make any adjustments to the assumptions that would result in a more accurate scenario analysis, and of course NEVER rely on what random anonymous bloggers are telling you!
Bottom line, IMO you are MUCH better off renting for now, so long as you are not expecting significant appreciation of Sunset or Parkside properties. If you are expecting depreciation (as I am), buying an SFH there now will be a VERY bad move.
Under reasonable assumptions, if you buy a $725K SFH, you can expect that your actual real cash after tax housing expense will increase from your current $2700 to $4100. Although my numbers are rough, they should be within 5% of your “true” cost, and if anything my estimate is likely to be on the low side. So, so long as you are not forecasting appreciation – and leaving aside the noneconomic benefits of owning – you should be indifferent as to buying a $725K SFH or renting one for approximately $4.1K per month. Go rent yourself a nice 2300 square foot house in Monterey Heights, Westwood Highlands or West Portal (all much nicer areas than Sunset or Parkside IMO) for $2.5-3.5K and enjoy your life! (That rented house will be significantly nicer and/or in a significantly better neighborhood that just about any $725K SFH in Sunset.)
Here are the numbers and assumptions.
Salary after 401(k) deduction: 185K
Married, joint filer, (2 dependent children – soon! Congratulations! I’m a parent too)
House cost: $725K, 90% financed @ 7% (perhaps a slight bit high, but maybe not)
Property tax: $8.3K
Annual insurance (including earthquake): $4.8K (based on CA insurance website survey averages for Sunset properties at this price)
Nondeductible PMI: $3K (annual, you could wrap into loan and make it deductible but then it would be a little higher and never goes away until refi)
Annual maintenance/improvement: $3.6K (this is LOW of course, at only 0.5% of purchase price – remember, one roofing job will eat through 4-8 YEARS’ worth of this estimate)
So, under those assumptions above, with NO house, you should be paying approximately #33,989 in Federal tax, and $11,386 in CA tax, for a total tax burden to fund the ravenous maw of government and to subsidize all the foolishness that the USG and CA do (they do some good things too, but very few) of $45,375.
NOTE THAT THESE ARE ALL 2007 NUMBERS. Your burden should be LESS in 2008 because of bracket inflation (I added the 2nd child in there, though, so it shouldn’t be directly comparable to what your accountant is preparing now.)
Once you purchase the house for $725K, under the rest of the assumptions above, your new tax burden will be $20,356 Federal, $7,023 CA, for a total of $27,379.
The difference between owning and renting from a tax perspective is therefore $17,996, or $1,500 per month tax savings. NOTE that if you have other deductions (you almost certainly do), this relative tax benefit goes DOWN. NOTE also that you do not encounter any AMT issues under either scenario, but that you are already into the “phaseouts” where your income starts to reduce the value of your mortgage/property tax deduction (the realtors never tell you about this – most in my experience don’t even understand basic tax, leaving it mindlessly to their “tax guy”, ASTOUNDING when you consider that they are advising on $1MM+ properties….).
So, here’s how we get to the monthly rental equivalent number. Deductible expenses of $3.8K mortgage interest + $690 prop 13 tax. Nondeductible monthly expense of $250 PMI, $400 insurance and $300 average maintenace costs. Add $160 for the after tax return (invested in the safest CA munis – this is a LOW estimate) that you would have earned on the $72.5K that you just plunked down as a down payment, and it all adds up to cash expense (or foregone investment return) of $5.6K per month. Netting out the $1.5K tax benefit, and you get to the $4.1K figure.
Last, just as an OT aside. Save your money. Your kids are your true wealth. Don’t trust them to the psychotics running the SF public school system (unless you happen to win the lottery and they get into Clarendon or West Portal School – even then, it’s iffy. The kids of the principal of the West Portal school themselves go to Catholic school out here!!). There are also some reasonably normal private schools, and excellent (though pricey) Jewish schools. It really is a wonderful and normal family life out here. Lots of stay-at-home moms (and even a few dads!)organizing playdates and gatherings at local parks. Good nanny network for those who have to work. Standing room only at Mass at St. Cecilia’s. A few neighbors on my street have each other keys in case of emergencies or to feed the cats/fish, etc. For SF, it’s almost like the “land that time forgot”.
I hope the above numbers are helpful. Again, CONSULT YOUR OWN TAX ADVISOR, and DON’T TRUST RANDOM BLOGGERS, but those numbers should be a good starting off point for thinking.

@ sanfrantim- thank you, I could not have said it better myself. Excellent advice.

Satchel,
Althought I agree with your conclusion (rent is better), your numbers are inflated to justify your point. The mortgage rate is nowhere that high right now. He can get 6% with decent credit.
Nobody pays the earthquake insurance. It is better to use the money (your 0.5% maintainance cost) to earthquake-proof the property. If you are really worried about earthquake, don’t buy. Even most condo’s insurance doesn’t cover earthquake, and it costs an arm and a leg to get it.
The insurance on a $700K house (no earthquake insurance) is about $50/month.
So, just by eyeballing it, his monthly after-tax cost on buying is about 3200.
Also, remember, the principal portion of the mortgage payment is NOT an expense. It is transfering money from one kind to another. If you consider that, his real expense is about $2800/month, maybe up to $2900, but not much higher.
My problem with his number is that he should try other ways first to reduce taxes. Since there is no W-2. He can take self-employment 401K or SEP IRE, and put 20% of his income into retirement. That will reduce his income to $155K to 160K. That’s below the AMT phase-out level for the couple, and reduces the tax deduction benefit, and thus changes the calculation above.
Still, we are looking at marginal higher cost. If he makes $240K or higher, I would say that’s a definite buy (since he is solidly in the phase-out level even after the solo 401K). Right now, it is a judgement call.

John,
Thanks for the agreement with my conclusion. The numbers may be inflated a bit, but I assure you not to try to make my point look better! I just don’t know the exact parameters here (I do in Greenwich, CT, BTW).
About insurance costs, this is a 90% financed property. I do not think the lender will allow them not to have full insurance, including earthquake. Correct me if I am wrong about this.
About mortgage interest, I was only deducting interest. Of course I understand the difference between pricipal and interest deductibility. But in the first years, principal payoffs are very small, so I basically ignored it. About 6%? We are talking a jumbo here. Even with good credit, I don’t think you are getting 6% (with no points) but I stand ready to be corrected! Calculated Risk had a good piece this morning about what is going on with jumbos right now. Bottom line, they are going to be separated and they will carry higher rates and fees than old conformings.
About W-2, they are salary employees (they clarified it) so no free tax cheese for them!
Just a note. What is the insurance cost for a $700K house in Sunset? I just used the average from the CA gov website survey (I actually went low on the average). I also estimated PMI low. And I think I estimated maintenance low (remember we are talking an average of 0.5% over a reasonably foreseeable investment horizon – most people suggest 1%, and I even think that you yourself suggested that condo maintenance fees are roughly comparable to SFH maintenance costs, and I don’t think those condo HOAs are less than 0.5% annualized, but maybe I am wrong?).

You are taking a large risk when you are buying a house. You’re taking a very large chunk of your liquid cash and tying it up in a highly illiquid asset. You are willingly paying large transaction costs when you buy and larger costs when you sell. Why? I saw immediate monthly cash flow savings over renting when I bought my house in 1996. It’s very clear from reading this thread that today you have to pay extra each month for the privilege of “owning”? I don’t see why anyone will choose the risks and uncertainties of buying over the freedom of renting while saving each month. Oh yeah, “House Lust”!

By the way, put 20% down and save that $200/month PMI. His monthly cost will be damn close to renting.
If you don’t have 20% down, and enough saving to last four or five years, you shouldn’t buy anyway. See, I am actually quite conservative.

Au contraire, my calculations on 700K property:
At 6% mortgage rate, 20% down, your interest portion for the mortgage is $2800/month. Property tax $665/month.
Your marginal tax rate (if below the phaseout level)is 26% + 9% = 35%. Tax deduction from the mortgage interest is $980.
Your insurance cost is about $50/month. Maintainance cost $300.
Oppotunity cost on the down payment $400/month after tax.
Your total cost/month. $2800 + $665 – $980 + $50 + $300 + $400 = $3232.
Now, if your income is above the phaseout level, your marginal tax rate would be 42% instead of 35%. Your real cost will be another $200 lower – at $3036/month.
For 725K SFH, it is $3347/month (if income below AMT phaseout level) or $3144/month (if above AMT phaseout level).
However, since you said “no W2”, you should talk to a tax advisor about setting up a solo 401K or SEP IRA first. SEP is quite easy to do at Schwab.
And personally, I wouldn’t buy unless the buying cost is lower than renting. You still save $300 to $500/month by renting. However, some people like owning, even if it costs a little more. It is up to you to decide whether it is worth the additional cost to own.

Hey John,
Thanks for pointing out that I didn’t include the principal. You’re right! It is about $500 per month. But, of course, you’re wrong about that omissions “inflating” the true cost of buying. It actually deflates it, as the principal is not deductible.
You’re tax analysis, though, is all wrong. I’ll rerun the numbers as soon as I have a chance. For some examples, “phaseouts” don’t really have to do with AMT. Also, you can’t deflate deductible expenses by the marginal rate. This was already pointed out to you in another thread, so you should know better.
About insurance, I am surprised about that $50 per month figure. But I’ll go with it. Are you sure that is comprehensive, and that it covers things like liability (important when you own a property as you know – you can be a target for suit – and putting the house in a revocable trust ain’t going to help you with that one)?
6%? No points? Again, doesn’t sound right, and my brother actually sells title insurance so I know something about this, but well – what the heck – I’ll go with that as well.
20% down? Au contraire mentioned a resource constraint, saying they could only put down 10-15%. $140K+ is a lot of cold hard cash for most young families. I went with 10% because of my predisposition to not get too much $$ caught up in a mispriced asset. I’ll stick with 10% because that is what Au contraire posited.
SF schools good? I take it you do not have any children. You know less about that than I do about CA insurance!!
I’ll post some numbers tomorrow for those who care. The comparison (even with the too low 6% interest rate and the seemingly low $50/month insurance cost) is going to be WORSE, I’m about 95% certain.

evan,
I should point out that my only information about 835 Foerster is based on publicly available information – Propertyshark and the SF property tax website (https://services.sfgov.org/ptx/PropertyDetail.asp?ID=VECPOVYTFPXJIZBDBLCEPRLPFNDMOJFKOFOQRBNTFXDOEHROPJ)
Still, though, I’m glad for you that you didn’t put in an offer. Real anecdotes like this house and the 414 Foerster foreclosure down the street from it (sold for $770K in 2006 BEFORE renovation, and now in foreclosure and sitting there unsold at $642K) really make you question whether the “true” market ahsn’t already started its decline out here….

Satchel,
I was never in any danger of making an offer on this house – I don’t even have an agent yet. I was actually trying to show my mother in law what is happening here, and why I am not eager to triple my monthly payment. She was pretty impressed by the fancy kitchen in 835 Foerster although for $1M you should expect high end appliances. The agent told us that it was renovated before this guy had bought the place. Maybe he was just unlucky to be left holding the bag.
I am not interested in buying a house as an “investment” so much as a nice and cost effective place to live. When people say things like, “You have to buy now or you’ll be priced out of the market” you know that it is the wrong time to buy.
I have read many of your posts, and many of your predictions are based on a belief that the economy is in big trouble. I admit that your analysis is over my head, but I still don’t understand how our economy works when we don’t actually make anything. I would think that a country needs to make money from people in other countries to be an economic superpower. But, I’m a software developer, not a finance guy.
So, I’m going to operate under the assumption that we aren’t going to fall into a severe recession or depression. I would expect the price of houses to stabilize with respect to equivalent rents. These are the types of numbers I am trying to come up with to determine when it is time to buy. Obviously, it is not now.

And Satchel, you didn’t understand that principal payment is not an expense. Interest is. Principal payment is still your asset, just changed a format. His monthly mortgate payment may be $3300. However, only $2800 is expense.
That’s why sometimes it is easier to make comparison with an interest-only loan. Whether that’s the right loan to get is a different story, but that’s the easiest one to use for apple-to-apple comparison between rent-vs-buy.

John,
“And Satchel, you didn’t understand that principal payment is not an expense. Interest is. Principal payment is still your asset, just changed a format. ”
Now, this IS stunning. I think you really do not get it. When you make a principal payment, that money is safely in the pocket of the bank. It is NOT your asset – at least it is not you asset free and clear, as it was before you wrote the check. It is now subject to the risk that you cannot sell the home (after paying the “6%-er” and the transfer tax) for more than your remaining principal balance on the loan PLUS your principal tied up in the down payment.
You are VERY wrong in your tax analysis. I have a few minutes this morning and I will run the numbers. When you do a tax scenario analysis, you need to work through the brackets for a particular income/dependent/deduction scenario versus a base case. With tax software, this is trivial, of course. You CANNOT deflate a payment by a marginal rate. As an extreme to show you the idea. If you make only $70K per year, in theory your “marginal” tax rate (for a family) is going to be 15 or 25% at most. However, when you work through the calculation, you will find that the mortgage deduction is worth $0 because of the threshold standard deduction plus exemptions. At the OTHER extreme, if you have AGI of $2MM, your marginal rate is ~35% at the Fed and 10%+ at the CA level. Yet, because of the phaseouts of itemized deductions (which you obviously do not understand, but which are themselves being phased out slowly for 2008 and 2009, but which will “snap back” in 2010 when the 2003 revisions expire, as you seem to grasp), this $2MM AGI taxpayer will see 80% of his mortgage deduction disappear! Between those two extremes of course lie most peoples’ situations, and that is why you need to run a scenario analysis.
@evan – The realtors ALWAYS say it was “renovated before”! They NEVER want to give the impression that a house was bought to be renovated and flipped. My wife and I have heard some HYSTERICAL ones in our neighborhood at open houses. They say the craziest things, like, “Oh, this family bought the place to live in and did live there, but a ‘job change’ forced them to move out of town – there ‘might’ have been a little updating here and there…” And then we point out that we live in the neighborhood and we know for a FACT that there was a down to the studs remodel, and NO ONE WAS LIVING THERE the whole time, they just change the subject or give you that blank, silly look. A little sleuthing often shows that the “job transfer” is suspect, as the flipper all the time owned and continues to own a nice house elsewhere in the neighborhood. It must be tough to be a realtor – I actually feel for them…..

oops! There is a typo above. The “15,996” tax savings figure should be “15,596”. It DOESN’T change the analysis in any way – the monthly $1300 figure is correct.
Good thing I am not an accountant. No wonder why they call them “green-eyeshade” people!
Last point, and then I’ll shut up.
TO BRING IT BACK TO THE SUBJECT OF THIS OVERALL POST ON SF MEDIANS.
The Au contraire household is a “top of the food chain” household. With AGI of $185K, they have household income in excess of $200K, maybe $215K (depending upon whether they both work and both fully contribute to 401(k)s). They are either in the top 5 or top 10% of household earners here. That they have to STRETCH to afford a basic 3/2 in the SUNSET is stunning. While it has always been expensive to live in SF due to its amenities, the fact that retired muni drivers and carpenters can be found in the glamour neighborhoods shows how far things have gotten out of balance. It wasn’t ALWAYS so expensive to buy in SF. Making a long-term bet that is tied to a nondiversifiable asset like a house (and paying exorbitantly for the risk of doing so in view of the rent/buy situation) seems crazy to me. Unsustainable situations by definition are not sustained. I would caution people (as I have been doing for a while now) that a credit-inflating universe can hide a lot of mispricing. ALL credit inflations end. Every one in history.

@ John – exactly. I could not agree with you more. 75% or more of the comments and posts on this site are the likes of a handful (if not just one) person trying to convince everyone in San Francisco why they should not buy property. It’s become pretty mundane and boring. Just read the headlines and move on – the rest is the same old stuff, over and over again.

Movingback, why attack someone personally when you can go after problems with their logic instead? If you feel Satchel’s numbers are wrong, show us. The BEST thing about Socketsite is that it allows everyone the chance to make their case, and then others can give opposing views, not personal insults.

Wow. I’m just catching up after having been away from the site over the weekend and have to say how overwhelmed I am by the thoughtful analysis here (some of which is over my head). Regardless, Satchel, thanks so much for taking the time to run the numbers and for your analysis. The posts were very provocative and raised a lot of questions for me to take to my CPA and financial advisor. Thanks again. I love Socket Site!

Thanks Satchel…nice work! It’s fascinating to see in all the dirty detail how the numbers are supposed to work and to realize how wide the disconnect really has become.

Robert, you’re correct that owning in San Francisco has always been expensive. But let’s not gloss over the point that, as a function of local incomes, it has never been this expensive. Nor have prices ever risen as quickly as they have during the past 5-6 years. Nor have lending standards ever been as loose (or non-existant) as they were during the past few years, when it was actually easier to buy than rent.
Even if/when prices in the city fall by 15 or 20% in the next few years, it will still be much more expensive here than Sacramento or Stockton, both of which are already down 30% or so. That’s not the point.
The analysis in question is, if you plan to live in a place for X years, how much appreciation would you need to justify the higher cost of buying it over renting a comparable place? And is that appreciation likely to occur during the next X years? If anyone thinks a boxy wooden bungalow in Sunset, wishing price of $725K today, will sell for $1.2 million in 2010, then you should jump right in and buy.
Coincidentally, Satchel, your favorite Sunnyside example, that black hole of curb appeal at 414 Foerster, was reduced again. Now down to $619K vs. the previous sale of $770K.
http://sfbay.craigslist.org/sfc/rfs/576783250.html

Robert, good points. However, I do not agree with your thesis that “risk aversion . . . has never been a way to make money or accumulate wealth.” Actually, risk aversion is precisely the key to making money and accumulating wealth (getting lucky on pure gambling is a rare exception, and that usually leads to disaster). Think Warren Buffett. How do Buffett or the various Masters of the Universe on Wall Street make money? By carefully and meticulously ascertaining the real value of various properties and buying those that are valued too low and selling those that are valued too high. I.e. they avoid risk by knowing exactly what they are getting into before they get into it. Recall Buffett’s “rules”: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
It is not the case that SF real estate has always been as unaffordable (compared to incomes, rents, etc.) as it is today. We are off the charts right now. We bought our house in 1998 and were ahead in the rent vs. own game from day one. I agree with you on the various non-financial advantages to owning one’s home. Fortunately, you just have to look at the extreme low sales volume we’re seeing these days to see that the “herd” has moved on. Prices are following — real estate price declines happen over a long period, and it’s actually astonishing how stark the current one is. In this market, Satchel’s observations are pretty unassailable, even if these conclusions may not have held in past years with different conditions.

Trip, I totally agree with you. I only meant the historical phenomenon of risk aversion to real estate.
Can I ask everyone – are all of your views limited to San Francisco proper – or in your view do they apply also to other expensive portions of the Bay Area. In other words, is San Francisco now out-of-whack relative to expensive properties in Ross, Tiburon, Hillsborough, Atherton, Los Altos Hills, etc., or is it only as “crazy” as those places are as well?
My feeling is that there is a recent phenomenon in San Francisco proper that makes it more out-of-whack – perhaps it is the emergence in the market of the SOMA condos that not only carry $1,000+ per square foot prices, but also carry HOA dues that in my view far outstrip the actual cost of maintaining a typical SFR. This, in turn, has mad some SFR’s in SF appear “cheap” by comparison. (i.e., if you have to pay $1.3M for a decent 1,300 square foot condo, then what would you pay for a decent 2,700 square foot house, even if it’s non-detached on a 25 foot wide lot.)
What do other people think – is this an “only in SF proper” phenomenon, or something where only SF gossips about it but prevalent in the other wealthy pockets of the Bay Area too?

Satchelfan, you missed a string of comments about a week ago in which Satchel shared. And yes, I had three degrees as well as postdoctoral training by 30, from Ivies and equally shiny West Coast places. And yes, there were plenty of nights that I only slept 6 hours! I am still far from retirement, though mainly because I am not in my job for the money — I will probably work in my field until I kick off. As long as you are enjoying the show and have plenty of popcorn, good on you.