As far as we know it’s the first one-bedroom resale at One Rincon Hill to officially hit the MLS and they’re asking $719,000 for the 725 square foot condo on the 18th floor. At the same time, and for a thousand dollars less, a resale on the 33rd floor is one of a handful of one-bedrooms that has been unofficially listed on Craigslist for quite some time.
I have a unit which I put a deposit down back in Aug. of 06. I paid 728,000 for the unit and am willing to take a 10k hit. I need someone to take over my contract.
According to earlier posts the deposit was $25,000 so you might have some room to negotiate the size of that “hit.” Then again, if values are up since 2006 it seems rather strange that you should be able to negotiate a “hit” at all.
∙ Listing: 425 1st St #1805 (1/1) – $719,000 [MLS]
∙ $718000 Rincon Hill 33rd Floor [Craigslist]
I don’t understand… real estate in SF only goes up. This is one of the premier buildings in the city. EVERYONE wants to live here (if only they could afford it). Yet sellers are cutting prices?! Perhaps fluj can explain this conundrum for us??
A ‘re-sale’?? And the building isn’t even done being BUILT yet! How is this possible?? Weird.
These are gonna be fun to rent in a few months…
$1,000/sq.ft for what looks like an Extended stay hotel (but with views). Thanks, but I’ll pass.
@ Jimmy,
Longtime fluj readers will know of my skepticism of the condo market. There is simply an abundance of shiny new condos. And I think the SF luxury high rise is where we have seen the most speculators, clearly.
For starters, this owner should hire an agent that has the good sense to get some professional photos done and not these terrible homegrown shots. They do the unit no favors.
Fun to rent? Not on your life. Assuming the rent was reasonable, I imagine it would be a horrible situation. First, a landlord who does not want to be a landlord or understands the role. Hello, insane deposit. Hello, deferred repairs.
Second, there will be no stability. If the landlord figures out a way to afford the place again, you are moving out. If the landlord can sell the place, you are moving out. If the place is foreclosed (most likely), you are moving out. Joy. Nothing to make the apartment feel like a true home then wonder if every month is your last month there. And wondering if you will ever get your deposit back. . .
Still, I’m sure this guy will find a bigger fool to buy or rent. Not going to be me. I’m happy with my boring 60-year old apartment, in the boring Sunset, with the boring person who has been a landlord for 20 years. Sure, it is not cool like ORH, but at least it’s stable.
It should be clear why the second tower was “delayed”: they are going to be offering lower prices on tower two and they need to close everyone on the “suckers tower” before they make that fact known.
Will they admit this before they close everyone? Of course not.
What SF needs is more properties which people can raise families (have kids) in.
I don’t understand why anyone would BUY 1BR units. Singles normally change jobs frequently, and move frequentyly. Buying 1bd unit is essentially buying a rental unit, even if you live there for a couple of years first.
That’s the big problem with the SF condo market (especially ORH). Too many 1BR’s, not enough 2BR/3BR units.
We have someone in our office who is interested in renting this. What would be a realistic price? I thought maybe $3200 a month?
$3200/month? Most definitely not. Look around at other places in the area. You can rent similar units at the Met, 199 New Montgomery, and Avalon for $2,600 to $2,800 per month depending on amenities. And you will most likely get your own parking spot. The Met is the best comp, IMO. Directly across the street from ORH and with full amenities.
http://sfbay.craigslist.org/sfc/apa/647634164.html
Thanks, I have owned in the city since 1991, so I am not familiar with the rental market. The Met is a nice building and I will pass this on to her.
Raising families (having kids) in the city?!?
As long as the Diversity Index and other types of desegregation solutions make it so your kids can’t automatically go to the school that is nearest your residence, there is little chance of enticing families to stay in The City.
Add in the fact that the activists don’t want you to have a car and you will continue to see a shrinking child population in The City.
@ anony – disregard my last comment about the Met – she can rent something in this building for $2,500/month:
http://sfbay.craigslist.org/sfc/apa/649983738.html
John, Regarding your statement about 1 BR’s– believe it or not there are a lot of people that would rather have a dog than a kid.
@BRCGranny:
Fair enough. I didn’t consider the possibility of foreclosure. Guess I should just stay in my boring (rent-controlled) apartment too! 🙂
This website helps put things in perspective (rent and foreclosure are the two key topics): http://www.angryrenter.com/
Let’s see.
The lucky new owner will have to pay the following:
Downpayment 20% = $143800
Lost oportunity cost: 5% * 143800 = $600/month
Mortgage at 7%: $3825 / month
HOA: $685 / month
Property taxes : 1.3% of 719000 / 12 month = $778
Tax savings: 500 – 900? Say the property taxes are paid by it.
This means you can like in your wonderful 1BR 18th floor for a mere $5000 provided you have enough downpayment around. Pocket change, really.
And if this unit doesn’t sell, the current owner will lose 1500-2500 / month plus maintenance and rental income taxes.
Darn, this is a no brainer! Where’s my phone!
Tipster,
I see, all owners of ORH I are “suckers”. Given that the building is over 95% sold, I guess that means there are over 400+ “suckers” who bought in the building who somehow lack your great wisdom. So, do you have personal contact with the developer in terms of Tower II pricing? Or, are you simply talking out of your a*s, as is typically the case?
So, I’m curious if our ‘resident genius’ [you] owns any property, and if so where? I’m sure all 400+ of us would love to see what makes you so ‘gifted’.
Recent ORH buyer,
Just one question: did you purchase in order to (1) live in it, (2) live in it 2 years then sell at a profit, (3) sell it as soon as the resale freeze period is over (4) rent it out?
Now, we would be interested to know what the other buyers for these “95%” units sold were planning to do and WHY THERE ARE SO MANY FOR RENT ON CRAIG’S LIST?
http://sfbay.craigslist.org/search/apa/sfc?query=one%20rincon%20hill
From a few months ago, I hadn’t seen so many under 3000/month. But I might be wrong.
Renting a 750000 unit under 6000 does not make sense economically.
I’ve been a landlord for 12 years. The numbers don’t lie. This is overpriced.
although I disagree with the term “suckers” I would agree with Tipster’s overall point.
the second tower is very important to tower 1 buyers (some of whom are very dear to me)
if it is not built, then you have half of the “promised” structure. that’s not a great thing
if it is built but there isn’t demand for it, then property values of tower 1 will get hit as well
if it is built and there is demand for it, then Tower 1 buyers will do much better.
but it definitely hinges on tower 2’s success.
my feeling is that Tower 2 wasn’t delayed as some sort of “Screw Tower 1” plan. Instead, it was delayed likely due to financing (the lenders likely wanted to see that Tower 1 was selling/closing before committing to Tower II),
and also due to possible structural changes to Tower II. (perhaps they may change the % of 1br/2br/3brs and so on?)
and also the desire to close and get money from Tower I to help with costs associated with Tower II construction.
this is also why one often gets a better “deal” if one puts in a contract early on… you’re buying a concept, not a physical structure.
a lot can go wrong (and right) between contract signing and completion.
Addendum:
The resale is also offered as a rental. Same pics as the MLS:
http://sfbay.craigslist.org/sfc/apa/644028272.html
If you want to rent this unit it is going for 2795 a month. I went to the open house yesterday and it is for rent or for sale.
San Fronzi,
We bought to live in our unit. However, buying our lower floor 2/2 at $725 per sq/ft [including upgrades] where we have daily sunrises reflecting off the water and partial sunsets, we feel very comfortable about a positive price point if our family were to grow and we were [literally] forced to move. But for that eventuality, we would much prefer to stay where we are, as we love it.
The developer did have a large number of 1 bedrooms, which sadly has attracted a number of ‘investors’, hence the number of rentals. It’s not a game I would play but others have opted to do so. These ‘investors’ definitely have to cover a monthly spread, although I’m not sure it’s quite as extreme as the numbers used here. However, I do wish there were less of these.
Tipster,
Over 400,000 people like me bought pets.com stock in the days before it tanked. Just how many shares of it did you buy, Mr. resident genius? Did you even buy ANY dot com stocks near or after the peak?
None? Ha. I thought so! That makes you an idiot! Ha. Ha, ha. Ha, ha, ha! Those of us who bought dot com stocks at the peak knew the market better than you did, so the fact that you wisely stayed out of it while we all participated proves you know NOTHING about that market, Mr. resident genius!
And the fact that there were lots of people buying pets.com stock at or near the peak makes it inherently a smart proposition. Same thing with people who bought Japan real estate at or near the peak. When lots of people do something, it’s ALWAYS right. Got it, you arrogant jerk?
Oh, wait a minute, I guess my question as to whether you own any property makes no logical sense: anyone who thinks the market for luxury condos will go down, wisely got out of them ages ago.
Hmmm, let me try another tactic at discrediting you. My next try will make total logical sense, unlike this try, which makes no sense at all. Just you wait…
That’s strange (and very telling)…
A post by “tipster” that is addressed to “tipster”?! Did the shill forget to change their display name this time?
Damn, there are alot of haters. If the past is any indication of the future, people who own r.e. over the long term will do well. If you can afford to buy in a down market, and hold on for 7 years, do it. Facts: real estate tends to go in 7 year cycles, they aren’t making anymore land, US populations are supposed to increase. Barring any random anomalies (earthquake, aliens landing, etc) you’ll do well over 7 years. The smart money is buying now.
Recent ORH buyer,
725/sf is not too bad.
The flipping game
What numbers in my calculation are wrong? Anything I missed?
“The smart money is buying now”
Outstanding. Which seminar did you hear that at? Was it in the latest NAR newsletter?
Because if your 7-year cycle theory is correct, wouldn’t it make more sense to wait until the down cycle had bottomed instead of buying literally right after the peak?
Or maybe the implication is that, after a 5+ year real estate boom (the largest in history), the down cycle will last only 15 minutes and then we’re back to double digit appreciation next week. With perpetual unaffordability and unsustainable income multiples as the new baseline.
In any case, I’m skeptical. Maybe I’ll wait until the even smarter money starts buying.
7 years cycles? I’d say more in the range of 15 years. The 2001 downturn was an anomaly. The last trough happened around 94-98 and we are just entering a new one.
But if you buy now, inflation will have caught up with the prices eventually as it always does. That doesn’t say it was a better investment than CDs or stocks or gold.
since the late 1800s, inflation-corrected real estate prices have performed at less than 2% annually. People who bought in the late 20s had to wait until the 50s before seeing their property values go up. That was a very long cycle.
Then again, each period is unique.
RE in the past 10 years has been more fluid than ever before. Faster flips, faster booms, faster busts.
RE as an quick money scheme is dead for a few years. It will come back.
And the idea that they “don’t make land anymore” does not fly. Only in Japan can say that they’re running out of room. And it didn’t prevent a RE crash, did it?
Land is not scarce overall. It is in some urban areas, but the US has lots of room to expand. The question is resources to use this land.
Checking the MLS, there are a couple 2 bed/2 bath units at the Met selling for 799k on the lower floors. There are several on the teens for less than a million.
The Bridgeview has a 2 bed unit on the 12th floor for 895k. Watermark has a one on the 14th floor for 959k.
I see these as reasonable comps to One Rincon. So One Rincon is selling a ONE bedroom at 720k??
Is it me or are there way better deals out there, especially the 2 bedroom units at the Met for 799k?
Of course there are differences like views and direction, but it looks like prices all over South Beach and Rincon Hill are in a decline. Good luck to those One Rincon sellers trying to get top dollar in a terrible market…
@urban_angst,
Go back and read recent ORH buyer’s post at 11:09, and then my post at 11:48 and you’ll see why I did it the way I did. It wasn’t a mistake and it was my post.
I was parroting recent ORH buyer’s post to show how silly and illogical its argument was.
Wow…$900 plus per square foot for a rinky dink little place. I’m selling mine at $675 per sq ft in a more desirable location (Mission Bay) and a place that is almost twice the size.
ORH is a little full of themselves. I guess that views are worth a lot more than I thought. Everyone has their own tastes though.
For those asking about renting, people who rent in my building are paying about $3500 per month for approximately 1350 in sq ft.
Ever since I saw this ORH tower go up, I always tried to figure someone wanted to build a Florida Condo tower right in SOMA?
Now I get it. It’s the same twisted “flippin’out” economics behind. Without the weather.
I guess tipster’s tirade, addressed to himself, answers my question about whether county asylums have internet access. Nothing further needed.
Ex-Sfer – I think you have a balanced analysis that fairly represents the scenario for the ORH towers. Good post.
San Fronzi – I know we pay between $5500 and $6000 for our mortgage, condo fees and property taxes. This does not account for any tax benefits for interest/property tax deductions. Previously we were renting a comparable [albeit 200 sq ft smaller] place at the Metropolitan for $4K.
On that basis [although admittedly I haven’t crunched all the numbers] I’m included to believe that $5000 for this 1 br property may be on the high side. However, I don’t disagree that there will be a spread that the ‘investor’ has to cover.
inclined to believe … sorry
I’ve never been a landlord, so I was wondering if someone could educate me. Do you get the same tax write-offs/benefits if the property is not your primary residence?
You get to expense interests, property amortization, a lot of the costs, plus you can get a “passive activity loss” expense when you cannot rent.
Amortization is nice, but watch out, the Tax man will not miss you if you sell at a profit as your property theoretically lost value (amortized) and you’re selling at a profit.
Hire a tax accountant. That’s my best advise. Create an LLC to protect yourself against devastating lawsuits.
And maybe hire a property management company. They’ll help you stay up to speed with the law.
urban_angst – I don’t know of any activists who don’t want you to have a car. However I do know of those who don’t want to pay for the car centered lifestyles of others.
A car-centric lifestyle consumes a lot of capital only a fraction of which you pay to the DMV, your insurer, and your gas station.
Activists may want you to pay the market rate for using a car and to limit congestion. No-one is trying to take your car away.
(Sorry about the discussion diversion)
And what’s up with picking on tipster ? I thought though worded with a few barbs his argument was valid. The official story from the 1RH developers sounds fishier as time goes on. Tipster’s guess as to what is happening makes a lot of sense.
… nothing like a good 1RH fire to warm up a cold day.
Won’t you lose the “passive activity loss” for rental property if your income exceeds a certain value (about $150,000)?
See
http://turbotax.intuit.com/tax-tools/faq_on_taxes_and_rental_property/article
Recent ORH buyer,
Very insightful numbers. Part of the math, you have to include the opportunity cost. Say you buy a place for 1M and you put 800K down.
The fact that in that case the mortgage is 1200 means nothing. Your 800K could have been invested in bonds, stocks and gotten you a theoretical 5-8% which is quite a chunk of change.
When prices go up, we tend to brush this aside as a detail, as your money is nicely leveraged and you’re getting way more than your 5% back.
When buying rental properties (1994-2002), I always multiplied the estimated costs by 2. I was proven wrong, the costs were always higher than I expected.
Thanks to appreciation I came ahead when I sold (2004-2006). These are different times but the good deals are slowly coming back. We now see 1BR rental units for sale for less than 250K instead of 300+ 2 years ago. At less than 150K, I’ll start buying again.
The Milkshake of Despair,
You are very right. Car-centric life costs a lot more than the price of the car and gas.
You forgot to mention Roads. Look at the shape of SF’s roads and imagine the same roads with only pedestrians and bicycles. They would last virtually forever. Of course we cannot decide to remove all cars. But only those who have to or for who it makes economical sense (where a car is part of the work).
London’s initiative is genius. Last time I went to London, I noticed my collars were not black after 2 hours like they used to be before the Congestion tax. OK, it means only the rich can drive, but places that have tried voluntary cutback have failed, cities that imposed alternate license plate-based driving failed. We need a solution and London people are not dumber than the rest, are they?
And the money from this Congestion Tax would go straight to public transportation building/subsidies.
@San Fronzi,
I think you may be on to something here. While we’re at it, why don’t we try doing the same thing for other public utilities, like schools, hospitals, libraries, etc.? 😉
San Fronzi,
While I see your point about opportunity cost, I don’t really agree with your analysis for a couple of reasons. First, although 5-8% may be a reasonable estimated return of a balanced portfolio over time, I’m not sure one can assume that 5-8% as a reasonable ongoing rate of return. As we have seen thus far in 2008, the equity markets can deviate from historical norms.
The other reason is let’s assume you put $100K into an S&P 500 index provider and 100K into real estate. After 60 months let’s assume that the S&P was up 60k but the real estate investment was up 90k. Using your opportunity cost analysis, although you made 60K on your stock, you could have made and extra $30K on your real estate.
Accordingly, using your math, you actually ‘lost’ $500 every month [in opportunity costs … that’s $30K divided by 60 months] by being in stock versus real estate. Yes, one could look at your investment as a relative loss, but that really seems silly. Each is a seperate investment to be judged on its own merits.
The smart money is buying. The people who are waiting for property to “bottom out” are not savvy enough to realize a value when they see it. CA property ‘can’ cash flow now (not at $900/sq.ft in SOMA). Why not pick up an REO in Sacramento for $220K, it will rent for $1400. Who cares if you are at the “bottom” or not if your tenant is paying your mortgage and expenses. Rents are on the rise, blue collar folks are now tenants. In 7 years if you don’t sell it for $330K or more, you bought the wrong property. Smart money is buying now…trust me. The people who are bashing real estate now can wait for the “bottom” and in the meantime, I’ll have 4 cash flow positive properties that my tenants are paying mortgages and expenses on. It’s a simple formula, what’s difficult is to have the huevos to take the risk. So keep standing on the sidelines waiting for your bottom. It makes my job of finding value easier.
San Francisco traffic is no where near that of European capital cities or New York for that matter. Why is the conversation about traffic even being brought up as it pertains to SF? And it’s not like MUNI is any real alternative. I don’t drive myself, but don’t get all of this anti-car sentiment. If you don’t like to drive, DONT’, but don’t try and make this a social issue when its nothing other than something to bitch about.
Easy there, [SourGrapes]. You’re talking about Sacramento. I’m talking about Soma condos. Different animal.
As you point out, it makes no sense buying in Soma at current prices. Sacramento is indeed becoming attractive, especially with median prices now down ~36% off the peak there (and still falling).
viewlover – What anti-car sentiment are you talking about ? All I said was that motorist should start paying their fair share of what it costs to drive. Right now public monies are taken from taxpayers and used to prop up a car-centric lifestyle. And yes, redistributing wealth *is* a social issue. Certainly transit is also subsidized, but nowhere near the extent that driving a car is.
Recent ORH buyer,
“After 60 months let’s assume that the S&P was up 60k but the real estate investment was up 90k”
-> Not anytime soon, I think. 90K after 5 years will maybe be your remaining CAPITAL, not your gain! Think Japan.
RE appreciation is historically around 2% when corrected for inflation. We had a few excellent years, but they are an anomaly and I believe not the norm (then again, I could be wrong).
I think we have eaten up at least a good 15 years of appreciation overall. Maybe not locally, but for instance Florida will have a very painful early century.
The stock market is volatile, I agree. But it usually beats inflation (again, over the long run). Which is why many flocked to the RE market looking for a safe haven.
I jumped on the RE bandwaggon in 94 and then went full throttle between 98 and 2002 when everyone in the Valley was pumping the “New Economy”. My dotcom salary was buying RE. I was trying to include friends into my deals, but RE was not cool. It was old stuff. Dead money. For retirees, like gold investment at the time.
Then many got burned in 2001-2002. And suddenly I had friends looking at my rates of return (rent/investment) asking me how to do it. Some followed, some didn’t. That’s when I stopped buying. The rate of return on rentals didn’t make sense anymore at the 2002 prices. And I thought: the places are paying themselves. Cool. This is a supplemental income when they’re paid off.
Then in 2004, I saw the craziness that was going on. Real Estate was cool. 20-30% a years were a given. everything I saw in my dot-com in 1998-2000 was happening again.
I seriously didn’t think it would last that long. Good for me. It gave me time to vacate the places and sell them to people who believed in Santa Claus.
@ View Lover,
On the contrary, European cities tend to have large “ring”s encircling them. From the rings, suburbians and exurbians park and access the cities via trains. The cities themselves usually have trams or trains too, and the true interiors of the cities really aren’t made for casrs. San Francisco is like a European city without a ring. I’d say it has worse traffic than a typical Continental city. And as for NYC, well, Robert Moses was a dumbass.
while I agree you can’t ignore the opportunity cost of the downpayment, IF (and it is a big IF), you are planning on buying in the not too distant future (read 1-5 years), then you need to adjust downward your expected return on the downpayment, held as an investment, for that time period.
If you have a 1-5 year investing horizon, the money that will be used as the downpayment would need to be invested in a ‘safe-haven’ investment such as a short term bond fund, CD, or monye market. It is fair to use 3-5% as the expected growth of these funds. 5% or higher is a fair estimate of LONG TERM investment returns, but putting downpayment money into long term investments can also yield major downside overt he short to intermediate term and thus it is not an appropriate measure of the opportunity cost.
Now, on the other hand, if you are NEVER planning on buying a property (or not planning to do so for 20-30 years), it is fair to use the S&P 500, or other equity/bond blend return as the expected ROI, and I would use a 6%-9% estimated opportunity cost. It continues to bother me, though, when people do this comparison incorrectly. Someone actively looking to buy a property cannot (or should not) be putting their potential downpayment funds into higher risk entities such as equities. With a lower risk investment comes likely lower returns.
In a falling real estate market, this still represents a substantial lost source of income, in a flat one, less so, and in a rising one, the leveraged nature of the downpayment quickly overtakes the riskless asset class.
Am I being redirected to a different thread? European rings, trams, car traffic!? I thought this was about people trying to get out of 1RH contracts?
Public monies are always going to subsidize all sorts of things that many of us don’t agree with yet we all pay for it. If anything, roads and its infrastructure were traditionally things that have always been paid by public funds, way before other social programs.
And while your comments were not sharp, there are others that post where there is clearly animosity towards people that drive.
I guess I just don’t get why cars are an issue to be considered along with other social issues. Specially since traffic is not really a problem here.
I agree there are “green” issues, but that’s a much broader problem and not specific to SF.
That’s all.
view lover, agree with you. traffic is not a big problem here.
why don’t we focus on the city’s biggest problems…the homeless and substance abuse problems.
fluj,
You are correct about European cities except for one detail.
Traffic inside central Paris, Rome, Madrid is pretty awful and they all have decent public transportation. Parking is worse than awful. Most of the parking is street parking and people can go around the block for 30 minutes.
SF city is nowhere close to that. Apart from a few central Nabes, things are smooth. Stop signs and traffic lights are the things slowing you down, not so much traffic density. I’m talking about in general. Of course, if you’re at 5:30PM on Portola you’ll think differently. If population density increases in Downtown/Soma, things have to be seriously rethought.
London is much better than it used to be, but that’s thanks to the Congestion Charge. I think they’re on to something there.
correct anonconfused, we’ve gone off track and I am part of the blame. I just dislike it whenever someone asserts that owning and using a car is an entitlement that should be defended by all despite the public cost.
Back to the real topic of this post, a question for those who believe that the 1RH development is in financial jeopardy but trying their best to conceal their position : How long do you think the 1RH developers can keep this cat in the bag ? Forever ? Or is that cat already out ?
I don’t feel like Madrid, London or Paris are very apt comparisons to SF at all. To NYC, sure. They all have nice public transportation AND traffic issues. The typical mid-size European regional capital, or capital city, would be a better comparision.
From the San Francisco Business Times on 4/11/2008, it looks like the second tower is happening (http://sanfrancisco.bizjournals.com/sanfrancisco/stories/2008/04/14/story7.html)…
“One Rincon Hill developer Mike Kriozere has obtained construction financing for the 319-unit second tower of One Rincon Hill and plans to start excavation work in May, the builder said.”
[Editor’s Note: One Rincon Secures Financing For Tower Two (But Still Seeks Builder).]
Well, SF is a bit odd as the center of a megalopole. It shares few borders with its neighbors and there is the giant Silicon Valley that deflects a lot of the potential traffic.
Street traffic is OK, but freeway traffic can be very dense due to inside/outside commuters.
Developers and city planners better think twice before adding 10s of 1000s new people into SOMA like at ORH (see, we’re not out of topic!). If each new denizen has a car and too many commute to the East Bay or the Valley, the freeways will saturate some more.
“After 60 months let’s assume that the S&P was up 60k but the real estate investment was up 90k”
-> Not anytime soon, I think. 90K after 5 years will maybe be your remaining CAPITAL, not your gain! Think Japan.
San Fronzi,
The posting that you mentioned was not intended to make any projections about either the real estate market or the stock market. It was just intended as a hypothetical example to show why I didn’t concur with your analysis of opportunity cost.
Enonymous – I think your posting is a more balanced way of looking at opportunity cost. It has validity as money managers do look at Sharpe ratios which compare their rates of return with the risk free rates of return, as a component of the formula. However, I’m not sure that most investors that [say] made 8% in the equity markets [when the risk free rate was, say, 3%] look at their investment as having ‘earned’ a 5% differential, but actually pay more attention to the 8% number as their rate of return.
I think one should look at real estate investing the same way. However, if one wants to factor in opportunity cost, your parameters are a reasonable way of doing so.
SF traffic is horrible compared to like-sized European cities – absolutely horrible. Paris? WTF? The density of Paris is four times that of SF! Four times!
Transit in SF will not reach the level of Paris, it simply can’t. Paris is big and dense, SF is not. To get good transit here, we need to give up some of the SURFACE level streets to transit.
I think enonymous is mixing the appropriateness of an investment BEFORE real estate is purchased, with the opportunity cost to be used FOR that investment.
It is true that one typically would not invest in a high risk investment if one needed the money for a downpayment in a short time horizon. But that doesn’t affect the opportunity cost calculation once you make the investment.
Once you are ready to make that investment, you would just look at the next best alternative investment for which you can use the funds, and that is your opportunity cost – and one would usually find an investment that has a similar risk.
The fact that such an investment would have been inappropriate BEFORE your investment is irrelevant: you only look forward from the date of the proposed purchase, not backwards.
Correct me if I’m wrong enonymous, but I think you are saying that, “Because an alternative investment would have been inappropriate BEFORE your investment decision (e.g. before you purchase a home), it should be excluded from your opportunity cost analysis. Because someone who would be purchasing a home soon would park the money in a low risk treasury or bond fund, and not park the money in a risky stock fund, one should use the low risk rate of return as the opportunity cost of the purchase of the home.” That is simply NOT the case, because if you are NOT going to purchase the home (the opportunity cost), one would likely park the money in a longer term investment than you would the week or year before the home purchase.
You may be thinking that if you DON’T buy a home this year, you might buy one next year, and in that case, you would again only invest in short term riskless investments, so you should use an opportunity cost that matches that. But again that is wrong: if you buy a home, the money is typically locked up for as long as you plan to own the home, and so that is the time horizon of the opportunity cost, which measures what your money could have been earning during the period your money was tied up in the home purchase.
tipster,
enonymous isn’t mixing anything up at all. Your post, on the other hand, is unintelligible. Take another look at her/his logic.
michiko:
actually, tipster is correct, and enonymous is in error.
Opportunity cost is the cost of passing up the next best choice when making a decision.
So if we are talking about a downpayment for a house, then that money is locked up as long as the house is owned. theoretically for up to 30 years, right?
the opportunity to invest that money for up to 30 years is lost to the homeowner.
therefore enonymous’ claim that one should use short term low-risk strategies is in error, and tipster is correct. (because we should use the next best possibility, not the “safe” short term possibility. few people invest in “safe” investments over a 30 year horizon as it typically will lose to inflation)
HOWEVER: I do disagree with different point. It is very difficult to calculate opportunity cost IN ADVANCE. I’m not so sure that we can assume 8-10% returns in any asset class going forward. Remember that the “average” stock returns that people throw around include the dot com BOOM/BUBBLE years and also an unprecedented wave of returns over the last 25 years.
stocks have returned very little over the last 10 years!
as example: the S&P 500 was at 1498.58 on Jan 3, 2000. Here we are over 8 years later, and I’m looking at stock futures for today: 1387.20.
One can obviously easily calculate opportunity cost AFTER the fact…
actually, as I re-read my poast, it’s hard to explain opportunity cost well, so I will try an example:
(my example is of personal opportunity cost, not “theoretical opportunity cost” if that makes any sense)
Let’s pretend I have $100k cash
I have many options.
-I can put it in a checking account earning 0%
-I can put it in savings earning 4% variable
-I can put it in CD earning 4% fixed over 10 years or 3% fixed over 2 years or 2% fixed over 6 months
-I can put it in Treasuries earning slightly less than CD’s but of course much safer than CDs
-I can put it in stocks earning variable returns
-I can put it as downpayment for a house.
Going forward, I KNOW the returns I’ll get on some of the above investments, but others are unclear.
KNOWN returns: Treasuries, CDs, Checking Acct
VARIABLE returns: Savings acct, Bonds, Stocks, House appreciation
there is also difference in risk. Treasuries have practically NO risk of principal loss. One could lose everything in stocks as example.
I can try to estimate forward variable returns based on past returns, but some of the variable return investments can be quite volatile BOTH in the short AND long term. (as example, stocks have returned almost nothing in 9 years, but there has been tremendous volatility within that time frame)
so is it better to take 4% variable? or 4.5% fixed? or do a stock that may go to the moon or become worthless? or put it in a house? in advance, it’s hard to know.
But if my decision is HOME vs INVESTMENT, then I have to calculate using DURATION, as duration will IMPACT returns. (one typically will get a different % in short term Treasury vs long term Treasury as example)
I will argue that if one is buying a HOME, then you are going to tie that downpayment money up for at least 7-10 years. If it is less than that, then you aren’t buying a home as a home, but rather as volatile investment.
The DURATION of tie-up will be at least 7-10 years minimum and I should calculate opportunity cost based on comparable duration-matched options.
Therefore:
I would NOT compare downpayment with a 3-6-12 month Treasury as enonymous suggests (due to different durations)
instead, I would compare downpayment with either 7-10 year CD, or 7-10 year Treasury, or a stock held for 7-10 years and so on.
Next, one should compare the RISK LEVEL. If I am a person who would NEVER buy a stock becasue they are “too risky”, then I wouldn’t calculate opportunity cost of the downpayment using stocks. If I would never hold a Treasury for 10 years, then I wouldn’t calculate my opportunity cost using that either. (because your money wouldn’t be put in those instruments anyway).
An example of this is that I personally would never compare the opportunity cost of my downpayment with the returns of pork bellies, because I never would have invested in pork bellies in the first place!
Most people invest LONG TERM in either stocks or bonds. and thus, I would likely use that. But their returns are variable, making the calculation IN ADVANCE very difficult. thus we are in a bind.
so unfortunately, we’ll have to just wait until everything is done to calculate true opportunity cost.
there are many ways to estimate what forward variable rate investments will yield, but they are all frought with error.
but I disagree with using a SHORT TERM RISK FREE rate (like a Treasury) to calculate housing downpayment opportunity cost due to duration mismatch (short vs long term tie-up) and risk mismatch (treasury’s are risk free, houses are not)
and thus, enonymous was in error.
however, it is also dangerous to assume 8-10% forward stock returns either since that includes the 1982-2008 time range which really was unprecedented in stocks.
I hope that made any sort of sense.
Opportunity cost has to do with making choices between next best alternative investments and is tough to calculate because the outcome is uncertain. It is estimating in ADVANCE investment yield and isn’t the same as true or accounting cost calculated once everything’s done.
The argument e. made is that IF you assume you want to buy a house in 1-5 years, you would protect the downpayment in a short-term, low risk investment.
IF you don’t plan to buy a house in that time frame – say you think the RE market’s tanking – you would probably choose your investments differently.
So if you’re thinking about buying a house, you would consider investment choices differently in a declining, flat or rising real estate market. We all know where we are in that continuum (though the SF SFR market seems to be defying gravity.)
I agree with you that assuming 8-10% forward equity returns is very dangerous – average returns over the last 100 years are 5.3% says Buffett. Choosing is getting tougher.
Socketsite – double post again. The commenting system often says there’s an error but the post is made anyway. Is this browser specific or what variable causes it?
michiko:
the problem was the way that enonymous changed the premise.
I tried retyping this 100 times but can’t get it to sound right.
my essential argument is that when estimating forward opportunity costs, one should normalize for
-risk level
and
-duration match.
enonymous is calculating FORWARD estimations of opportunity cost based on the SAFEST RISK and SHORTEST DURATION of investments
these in general (for obvious reasons) have a low rate of return. therefore the estimate of opportunity cost will come out low.
but a downpayment for a house does not share those characteristics. a house downpayment is typically not short term, nor is it lowest risk. In fact, I argue that for a home PURCHASE most of the time it is intermediate term (7-10 years) and it is clearly more risky than a CD or Treasury.
thus I argue that one should not use 1-5 year CD/Treasury rates to compute opportunity cost.
I would not argue with 7-10 year Treasury rates or CD rates PLUS a premium (given they have lower risk and hence lower returns) OR a 7-10 year stock/bond/other investment choice MINUS an adjustment (given that they have higher risk and thus higher returns)
to use an opposite example:
returns on payday loans are often between 400 and 800% per year annualized. this is because they tend to be very short duration (often a few days or weeks) and very high risk.
so I guess I could calculate my opportunity cost of the downpayment using 500% per year, right?
answer: no. becuase the payday loans are MUCH higher risk levels than the housing downpayment, they are much different duration matches (weeks as opposed to years), and it is unlikely I’d invest in and hold a payday loan anyway…
enonymous is making IMO the same mistake when s/he calculates forward looking opportunity cost by only using short duration no-risk vehicles
ex-SFer : your explanation comes through perfectly clear to this chilled beverage. Thanks.
ex-sfer,
It seems like we’re talking past each other.
Opportunity cost is about choices made in advance and that inherently estimate risk. This is not the same as calculating cost in hindsight. Right?
So what measure do you use to estimate opportunity cost?
Probably not 8-10% that people often use, more in the 6-9% range or maybe less, say the 5.3% that Buffett produced. If your measure is Treasuries, assuming 3-5% is reasonable. Your last post doesn’t seem all that far from those estimates.
If you want to talk about payday loans, that has nothing to do with what either e. or I said.
I meant to say, 8-10% return for equities, which is unrealistic in the current environment IMO.
michiko – enonymous does indeed use “opportunity cost” incorrectly in her/his post. The opportunity cost of using a down payment to purcahse a home has nothing to do with what that down payment was used for prior to the purchase. Your ancillary arguments notwithstanding, your support for enonymous on this basis is misplaced.
According to Bankrate.com, you can get an FDIC insured 7 year Jumbo CD earning 5% these days, so 5-6% is probably pretty conservative as an opportunity cost. 8% might be pushing it, but not by much.
Publius,
I never said it had anything to do with what that downpayment was used for prior to the purchase. Where did you get that?
michiko:
yeah, talking past each other, but that’s ok!!!
to boil it all down, my only issue I have with e’s post is that s/he is using THE MOST conservative way to calculate opportunity cost(short term risk free instruments).
due to this, they will get the LOWEST opportunity cost calculation possible.
using today’s figures, you would get around 2.9% yield. (that’s a 1 year CD).
however, I argue that MOST people should be able to do better than this figure over the next 10 years.
That is not to say that I agree with the 8% calculations bandied about either. they may be too aggressive, for reasons that I elucidated above.
any estimation will unfortunately be frought with error due to the variable nature of investments. unfortunately, I don’t know exactly how I would personally do it.
I would likely do something like this: (it’s complicated)
-figure out average 10-year Treasury yields on years when we started a recession (like Jan 1980, July 1981, July 1990, and March 2001)
-calculate the stock returns for the 10 years that follow the above years (so Jan 1980-Jan 1990, July 1981-July 1991, July 1990-July 2000, and Mar 2001-present)
-calculate the difference between the stock returns and the Treasury returns. divide that by two.
then take today’s 10 year Treasury (around 3.5% I believe) and add the number above.
look at that number, and see if it makes “sense” to me.
see? a whole lot of voodoo.
Agreed, ex-sfer, those estimates may be too conservative and so lead to underestimating lost opportunity cost.
enonymous’ original post does make that error as Publius suggests.
My point is really that it’s incorrect to use 8-10% as lost opportunity cost as if you could be certain of that gain from other investments, especially in front of a recession and increasing uncertainty.
Personally, I see the signs of massive asset deflation ahead and that includes equities as well as houses.
Personally, I see the signs of massive asset deflation ahead and that includes equities as well as houses.
Really? I don’t know what is going to happen, obviously, but I see more inflationary pressures (in food, housing, stocks, commodities, etc). I’m not an economist, but it seems to me that money has pretty much lost alot of it’s currency (pun intended) in the last few years. W
Personally, I see the signs of massive asset deflation ahead and that includes equities as well as houses.
Perhaps, but a house is comprised of hard assets ie commodities (wood concrete steel copper etc). As the dollar continues to decline and returns in paper assets (equities bonds) diminish. The massive amount of liquidity (that is still being pumped into the system worldwide) is being forced to chase the only game in town, commodities! Just look at the price of oil, metals, uranium, food, etc.
As a result the cost to construct a house is rising, not falling. Margins are being squeezed on all fronts (including regulatory ie BMR’s etc) it is hard to see how over time that the supply of new housing will increase. The fact is it will not, and accordingly overtime, the price of housing will rise.
In fact, I find it very hard to make a compelling bearish argument for housing in cities such as San Francisco, in the medium to long term.
As a result the cost to construct a house is rising, not falling. Margins are being squeezed on all fronts (including regulatory ie BMR’s etc) it is hard to see how over time that the supply of new housing will increase. The fact is it will not, and accordingly overtime, the price of housing will rise.
This is not necessarily true.
First point: even with lower supply, prices can still fall if demand falls further than supply. Remember, prices are set by supply AND demand. I’ll give you a counter-example: over the last few years supply of SFHs and condos in SF have increased substantially. However, prices rose. why? because demand rose faster than supply. The opposite can happen (demand can fall further than supply)
ALSO:
it is very likely that housing going forward will be cheaper to build.
some commodities are rising, (like copper) but a lot is FALLING in price (like lumber). In addition, LAND VALUES are falling. and land values are often most of the cost of housing (specifically like in SF). Also, as recession hits, unemployment goes up, so LABOR falls.
increased commodity prices are more than made up for by decreased labor costs and decreased land costs.
As recession hits: how many more people do you know who will want/be able to afford living in the 2nd most expensive city in the nation?
In fact, I find it very hard to make a compelling bearish argument for housing in cities such as San Francisco, in the medium to long term.
My point remains uncontroverted. I agree with everything you said. Downward pressure will remain NEAR TERM. The frenzy has exhausted buyers.
Demand will increase as debt markets stabilize. International cities like SF will see support from buyers who take advantage of the weak currency. In the medium to long term (five to ten years) prices will increase.
Lumber prices are a very small input in San Francisco housing for medium to large infill projects. Energy prices and petroleum based products more than offset any savings.
Even now land prices in San Francisco have not fallen all that much (if by land prices you mean market rate units per lot). It is true, the increased BMR requirements have reduced the value of existing lots since that cost cannot be passed on. But the price per market rate unit is stable (in San Francisco) as near as I can tell.
In fact, I find it very hard to make a compelling bearish argument for housing in cities such as San Francisco, in the medium to long term.
long term (10+ years) I think that SF will recover.
short term (
wow, good info here, i love it!
i want to buy something is SOMA, rent it for 3 years, then move there myself. which one is the best bldg to get? i am thinking MET (specially with a short sale there).
any help?
thx
Tokyo is smoggy, but not 100x smoggier than SF.
“Essentially, SF today (2008) is little changed from SF in 2000. population”
Thank You! And this is where I still am confused about this whole market. Do people really believe that if prices were 30% less in the city than they are now, waves of new residents would move here from other locations? I believe the Bay Area is a VERY desirable place to live, but I am still not convinced that most people even want to live in the city. Sure we like city life, but tell that to a family in Mill Valley, Piedmont or Palo Alto. Most of my co-workers commute from the suburbs to the city, but would never EVER want to move here, even if it was cheap. The reputation of the city is not as glorious as we all keep telling eachother it is. Many people are fed up with the current conditions we have here, and are in no way envious of our being able to walk to shops and restaurants when we have to step over people and “other things”.
Another one bedroom on the mls:
http://sfarmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=Sanfrancisco&PRGNAME=MLSPropertyDetail&ARGUMENTS=-N456543948,-N221802,-N,-A,-N13504093
23rd floor, $849K, 819 square feet, $1,036/sq.