June S&P/Case-Shiller: San Francisco MSA Continues Decline

I had a question I was going to ask, but then researched it myself and thought I’d post the answer..
My question was:
Does Case Shiller data include foreclosure sales?
The answer
-It does NOT count the sale when the lender repossess the property at the initiation of the foreclosure proceeding. (considered a non-arms length transaction)
-it DOES count the subsequent sale of the foreclosure property from the lender to another party. (considered an arms-length transaction)
===
I believe this is important. A lot of the areas that are hardest hit (by the numbers) in RE are areas where foreclosures are a significant part of the market. As example: 1/3rd of all existing home sales were foreclosures. That’s a lot of price points.
In SF proper, foreclosures are not prevalent at this point in time.
but it highlights why places like Sacramento/SD/OC are getting hammered, while SF proper is doing well. but even in SF we’ve seen what happens to property values when foreclosures start popping up (a few threads back).
on a side note: the losses in RE nationwide are not slowing.

The May/June month on month declines (-1.8%) for the SF MSA are the second worst decline of the 20 cities tracked separately. Only Phoenix is worse (or better, depending on your perspective) at -2.6%.
I’ve seen a lot of bubbles unwind. This is going to unravel all the way back to 2000 prices IMO. I think diemos and surveykid are just about right. Index level 115-125. It should be pretty magnificent to watch, as long as one observes safely from a rented perch.

“The three graphs just crossed!!!”
I never understood that line of thinking. My model would be that when the lines crossed we would be back to non-bubble price differentials between the city and the outlying areas. There would be an overshoot where the pattern reversed. Then outlying properties would begin to look like good value compared to SF properties and buyers would be enticed away from SF proper leading to the beginning of significant price declines in the city.
“This is going to unravel all the way back to 2000 prices IMO.”
That always seemed like a safe prediction to me since in 2000 we were already pretty bubbly from dotcom money.

“(to be clear: by inflation I mean only commodity inflation — price tags — since there’s clearly no wage or credit inflation going on and the whole concept of “core” is fantasy)”
Commodity inflation reduces an owners ability to service a mortgage. It’s only wage inflation that increases an owners ability to afford a house. So I don’t see using CPI to predict changes in house values as valid. I prefer price/income and price/rent ratios.

I’m betting that the SF CSI index will go back to that nice, comforting flat line that was there between 1993 and 1996 or so… somewhere around 75-80. Isn’t this index adjusted for inflation anyway? Why would the decline stop at 115?
Did anyone notice on the first chart – the y-o-y rate of decline is now more than 4x what it was during the last real estate “crash” (which looks like barely a blip compared to this one. A few years of this, and things could get really bad for people who rely on appreciation to make money.

NVJ: “Conventional Wisdom is now that Real Estate is a terrible investment”
I will dispute that. Not true… not in San Francisco. Not even close. I think capitulation has to happen. Interest in sites like Socketsite will fade… (Sorry Socketsite 🙂 I love the site) And, with apologies to another regulat contributor ex-SFer, it really will become like watching “a painting of green grass grow” before you can make that claim.

Hmm, hadn’t looked at last years numbers before I posted. Yes, we will have to wait and see.
The other important piece is obviously not in place for a bottom: a pool of well capitalized buyers or banks willing to lend. Though I have noticed that the amount of money sitting in CDs and money market funds is at an all time high. All that money is not going to sit there forever, where will it go? Probably not into investment properties, people still remember the “last” (current?) bubble.

chuckie:
apologies accepted. 🙂
I agree with you, there is no way we’re anywhere near the capitulation phase in SF. Very few people on the street in SF believe that for SF itself.
Sure, a lot of people in SF realize that RE is a poor investment somewhere ELSE (like the midwest, SoCal, Florida, etc), but very few people on the street in SF believe that for SF itself.
they usually still bring up the “SF is special” argument or the “in the long run I’ll do ok” (thinking that “long run” is like 5 years!)
which brings me to the next part of my argument:
most people don’t really care when “the bottom” in RE is. They care when the rebound happens.
I doubt many people would be content paying current SF prices if they felt that there would be NO appreciation for 10+ years. they want to know/believe that they will avert any further losses and that they have a reasonable chance at future medium term (5-15 years) appreciation as well.
so just reaching bottom is an important step, but not enough to get us clear

Can anyone tell me if indices are available at a lower level (county?). I had always thought they were not, but am sure I read somewhere they were – but at a price.
I think SFs representation in these numbers is around 8% (condos are not included) which is pretty small (arguably close to insignificant.

REpornaddict – I don’t believe that there is any finer grained breakdown by county available. Actually that’s the reason that the 3 tier chart has appeared : it is considered the next best thing since the good parts of SF are generally thought to fall into the upper tier. That’s not entirely true since the tiers are based on purchase price and $1M houses that were purchased in the 90s might fall into the lower tier. But still it is a better approximation for what is going in in the better SF neighborhoods.

“who rent and what not”
Had to smile (in a friendly way) at the “and what not”.
Unfortunately, the conventional beliefs of the marginally interested often influence reality. I wish there were some sort of consumer attitudes toward real estate sentiment index to compare to CSI.

OK, maybe “selection bias” is the wrong term. But it sounds like fluj is saying something like “Everyone in the country thinks that the Cubs are the worst, probably from what they hear on ESPN. But guess what ? They’re not the ones filling Wrigley Field. Ask those Cubs fans whose the best and you’ll get a different answer”.
BTW – I’m a Cubs fan

I think Fluj is saying this is something more like asking people at the Indians game how the Cubs are doing.

True fans always root for their team, despite what the standings say.

For those who were looking for it, here is the Case Shiller Composite Index both nominal and real (inflation adjusted) via calculated risk blog.

“fluj – so you’re saying that those in the market to buy have a more optimistic outlook on the future of appreciation ”
I said something about depreciation having already occurred being the CW. As far as appreciation is concerned, I think the average person if asked would probably say that r.e. is a good longterm hold.

Last one. The average person does not look up tax records to find out what a property actually sold for. He or she may happen by an open house while out and about. They see the high price, think “no way” and forget about it.

The way one of my friends defined RE in SF:
It’s 1911 and we’re on board of the Titanic. The ship just broke in 2 and the first half is sinking hard.
The second half had a close call as it started being pulled down before the 2 separated. But it is still afloat somehow.
And everyone’s relieved that it didn’t sink as well, hoping the ship’s designer planned for the ship to break in two.

The Titanic? Not sure if things are that dire.
I like the roller coaster analogy I first heard about a year ago. SF was the last car going up the big hill. On the way up, we said, “well, we’re going up just as far, only not as quickly as the front car.” Then when the front car started the descent, we said, “look at them going down while we’re still going up.” A little later, we said, “well, now we’re at the top and look how far down that front car has gone.” Now we’re saying, “we’re going down, but not as far or as fast as those guys up there.”

“The way one of my friends defined RE in SF:
It’s 1911 and we’re on board of the Titanic. The ship just broke in 2 and the first half is sinking hard.
The second half had a close call as it started being pulled down before the 2 separated. But it is still afloat somehow.
And everyone’s relieved that it didn’t sink as well, hoping the ship’s designer planned for the ship to break in two.”
Yeah. It’s kind of like on the one hand, celery is totally gross. Then it’s like, dude, celery tastes totally good with chicken wings and blue cheese. You know?

Those lines pretty much track “funds available for people in that price range”, so demand is still strong: it’s only limited by the supply of funds available. I see little fear in those graphs, just limits on loans. I think fluj has it exactly right: in 4 more months, when the super-conforming limits drop back down, you’ll see another drop in the upper end prices, mostly reflecting the drop of the loan limits.
At some point, the fear of further declines may start to be reflected in those graphs, but right now, the east bay and other areas look cheap compared to where they’ve been, and so the sideliners are back in the market, buying. This is likely to be why you see the second derivative increasing. When those sideliners are out of the market, prices will trend down again if nothing else changes (a big if in an election year), but I assume it isn’t ever going to be just straight down. Nothing ever is. Pets.com didn’t go straight down. Even Bear Sterns bounced up.
And be prepared for medians, though not prices, to start heading UP, as we run out of subprime loans on which to foreclose, but alt A foreclosures start in earnest. Those loans are for higher amounts, and so when the trouble starts and the number of sales heads up, the overall medians will head higher, though C-S indices will continue to head down.
I do have to hand it to the congress and the fed: they know there will be hell to pay if they let prices fall by 30% in one year, so they are doing everything they can to deflate this, gently. The populace will accept 3 years of 10-20% down. No way they would have accepted it all at once.
But their desire to protect the upper end is waning, as evidenced by the lower super-conforming limits going forward.

What’s with all the cheerleading for the real estate crash? Forgetting the meanspiritedness of it, do people REALLY think that if the RE sector collapses, it’ll be a general good? Of course, there’s money to be made if you’re sitting on the sidelines with a pot of money, but what gives with the giddiness? (Yes, I’m talking to you, Satchel)

not giddyness. We feel psychic dissonance when irrational exuberance is the CW. To enjoy ourselves we need to feel harmony in the rent v. buy equation and the avg. income v. avg. house price equation. California-style of course.

The way one of my friends defined RE in SF:
It’s 1911 and we’re on board of the Titanic. The ship just broke in 2 and the first half is sinking hard.
The second half had a close call as it started being pulled down before the 2 separated. But it is still afloat somehow.
And everyone’s relieved that it didn’t sink as well, hoping the ship’s designer planned for the ship to break in two.

Oops. Sorry for the multiple posts. Browser/Internal error problems…

fundy mental –
Count me as in the same boat. Your story sounds very much like my own. If I bought here I would be very house poor. I’m very hesitant to put my little in SF public schools. Add in family pressure to move and I don’t know how long I justify living in SF.
anon – yes, market corrections are “a general good.”

How is this meanspiritedness? Just because a few fools played with cheap money, a whole generation of first time buyers were priced out of the market.
If it we’re “a few fools” we wouldn’t be in this mess. It was ALOT of people, some fools, some just wanting a place to live. And does anyone think that, for the most part, the people who caused this are going to be the ones to suffer? I don’t think so. Like J. Paul Getty said, if I owe the bank $100, it’s my problem; if I owe the bank $100 million, it’s the banks problem.”
The market correction isn’t going to leave anyone unscathed, even the “smart ones” who never participated in this. We’re all going to have to pay.

Market “corrections” are of course a general good. The key word is “correction”. That implies that something was out of balance – WAY out of balance to the extent that an asset class crashes, which is what is beginning for housing.
Bubbles create distorions and destroy wealth. That’s how it works – sorry if that isn’t obvious to everyone.
The faster the correction, the better from an economic viewpoint. Remember, for every fool who is wiped out by an asset price decline, another can benefit from the lower price. In many ways, it IS a zero sum game. When you slow it down, you trap more people in it, and absolve some of the participants who created the bubble from the consequences of their foolishness.
When you are talking about housing in the SF area generally, a little bit of a “moral” issue comes into play. At all times during this latest bubble (2000 – present) it was MUCH cheaper to rent a place than to buy it, unless one used incredibly funny financing schemes. So, it was never a question of necessity, only of desire.
Each purchaser I’ve ever spoken with secretly is a fraudster. He or she believes that he/she will repay the loan with inflated dollars. In essence, the creditor will take the hit. Boy, that lender must have been a real fool, huh? He’s going to get repaid with inflated dollars while I will enjoy the gains in real terms associated with the “investment”. Can’t really blame people – the Fed played this game for 20 years (at least), and everyone fell for it.
You can’t cheat an honest man. Now, for many a very expensive lesson is being delivered. Sorry if that sounds mean spirited or giddy! The time for thinking people to have gotten mad was when the bubble was INFLATING. I didn’t catch too much “concern” back then from people.

Satchel, well let me be the first purchaser you’ve spoken to who is not secretly a fraudster. The future value of the dollar had 0% weight in my home purchase. I did not think of the bank and how my payments related to them for 1 second.

There isn’t any reason houses should increase 20%/year is there? Other than pure speculation?
It should increase with inflation, better regional economy, desireability, pop. growth, more lux amenities & sq.ft.
The general pop. doesn’t know how to value a house. Even when the prices are unmoored from fundymentals they pay prevailing prices when they can afford the monthly payment.
This can’t continue in perpetuity. They HAD TO/HAVE TO come down. More please.

“Satchel, well let me be the first purchaser you’ve spoken to who is not secretly a fraudster.”
Maybe “double secretly a fraudster”? LOL, I’m sure you and I would get along in real life, sparky.
I don’t know your details, but let’s take a plausible scenario for people like you (and me, up to a few months ago) living out west of TP.
Say your house is “worth” $1.5M, and you’re paying a mortgage rate of about 7% (average over the life of the loan, after reset, or average of a variable). You’re also paying taxes of approximately $18K, more or less. That means that your all in cost – after tax – is about $9-10K per month, more or less of course.
In 30 years, because you don’t expect any inflation, you sell the house for $1.5M. But, of course, you paid $3.6M over the life of the house, of which almost $2.1M was interest.
Today, you can rent a similar place out there for no more than $5K per month, and you know that’s right!
So, why would you spend more than $4-5K “extra” per month on that house, even BEFORE you get to maintenance issues, etc.? Remember, if you’re not expecting inflation, you can’t say that you want to “lock in” your housing cost, because without inflation there is no reason to expect rents to rise (well, at least not significantly).
That’s the *secret* fraudster in all of us who trade with leverage. I’m really not trying to make a value judgment (although it DOES sound like that!), but rather trying to show how we are ALL complicit in this game the Fed (and Central Banks generally) are playing.

Bought for less and did the work myself, so the taxes is off. Also, 5.5% and already “reset”. My place isn’t worth $1.5M either.
But to my point, My thought at the time was; great place for the family, close to school, I can afford it. Verrrry limited rental market, that you might get kicked out of as it would be a SFH.

Another fine post by Satchel. He said, “You can’t cheat an honest man.” In other words, investors who never aspired to be real estate pigs don’t get slaughtered.
A preceding comment, “My wife and I are a two-lawyer household and I’m priced out. It makes me very sad,” makes me sad, too. If you ever needed evidence that the San Francisco market was an obscene bubble, and continues to be one to a certain extent, and was fully created by California airheads who thought they could get wealthy by doing no work, there you go. Never mind the real estate agents who tell you, even to your face, that it’s different here. The laws of economics work the same in San Francisco, too.
MSA stands for Metropolitan Statistical Area, a Census Bureau construct which pretty much means the city and its surrounding suburbs. A CMSA, another Census bureau term, is a little bigger, including more outer suburbs.
But it’s all going to hell. The Governor wants to pay minimum wage, the State is broke, and San Francisco has way more than its share of government workers.
See you on the steps of City Hall, big shots!

Fundy. Try Alameda. It’s not down 30%, but has good schools, a walkable downtown, easy commute (ferry) to financial district, no crime and plenty of nice houses in the $600-$800K range.
Some houses in Montclair are also down significantly (yes, 30%ish) from the peak. Not as walkable, but great schools and a little downtown area. Get a spot near the transbay bus stop, commute is around 30 minutes.
Albany and Kensington and Piedmont are overpriced and overrated. Commuting from there sucks (I-80 is a nightmare, and BART doesn’t really go there and the busses have to go on I-80, unless you’re in Piedmont, where there are no sub $1M houses).
If you want low crime, a somewhat walkable ‘hood (but not as excellent shopping experience as Alameda or Berkeley) but much much cheaper housing, try the Broadmoor/Estudillo Estate area of San Leandro. Nice houses for

So I guess there may be enough people with enough money to keep SF market at extremely high prices? If they want it and they can afford the premium, why not?
It has been surprisingly insulated here and the market doesn’t lie. In my heart of hearts I don’t think it will come down much — maybe flatish ’til 2011 — which lets inflation take care of some bubbly.
Hearken ex-SFer posts from ago when he speaks of the changing demographic and what that does to the city’s character.

Well, sparky, maybe YOU are the one who is not a fraudster, secret or otherwise!
Actually, if your house is “worth” less than $1.5M AND you were able to do the upgrades yourself wholesale AND you have a 5.5% mortgage AND you can see yourself spending 10 years or more in that house, raising your kids, well, then it sounds like you’ll be fine. I now have “met” a purchaser who isn’t a fraudster!
(PS – if you want to live in a “$1.5M” house, just come up to Tiburon! We had friends/neighbors over yesterday and they looked around the place and said that the house would go for $1.5M. I said no way – not a chance – but they were pretty insistent. (I don’t know this market too well yet, but I think it’s worth about $1.1-1.3M, perhaps higher if someone really falls in love with the spectacular view.) Their place is smaller, not as nice view, a little nicer in renovation, but all in all the same, and right across the street. They paid $1.3M a few years ago, and THEN spent lots of $$ fixing it up. I thought they’d faint when we answered their question as to our rent: $2800. Something’s gotta give in these markets….)

Whoa…we’re still disecting Case-Shiller data? Hasn’t anyone seen through this farce yet? This data is total shit. “SF” MSA my ass. They take Stockton and relabel it as SF. Total bullshit.
Please people, don’t look at this data as it will make you go blind. If you can afford a house and the payments are equivalent to renting a similar place with an extra premium for wealth-building and other home-ownership intangibles, then buy. Otherwise rent.
And those who argue they can rent and invest the rest and come out ahead, I say: Show me your brokerage statements for the last couple of years and tell me that you’ll achieve your goals.
Please, I bought on the peninsula in ’07 and I’m flat on my value which is a lot more than I can say for the stock market. Thank god I pulled money out of stocks to put into real estate!

BDB: “How significant are DPA’s in the SF market?”
I would doubt there are many in the SF market because up until Congress created the superconforming category, the program would not have worked for most SF properties (DPA has to be tied to an FHA loan, and FHA loan limits were well below SF median prices).

All Case Shiller is good for at the SF city/level is some indication to where prices might go if you believe the domino theory, and don’t believe the fortress theory.
As a guide to what has happened to prices in SF itself, its utterly useless.
as I said, SFs representation in the dataset is around 8%, and we know its performed better than the other 92%, and way way way better than say 75% (Alameda and CoCo).

I don’t even know if there is 10% on comparable properties, true apple-to-apple.
If you look at these index, yes, there is more than 10%.

Well, sleepiguy, as soon as renting and owning are in-line in terms of monthly cost (which can occur in two ways — rents up or prices down), then many of the people on this message board will happily move up from the ranks of renters to the ranks of debtors.

Just FYI, there hasn’t been a 10% drop in SFRs in Pac Heights actually. I can name three apples to apples houses that sold within the last three months that showed annual appreciation ranging from 6 to 10%. Two were bought in 05 and one in 07.

A preceding comment, “My wife and I are a two-lawyer household and I’m priced out. It makes me very sad,” makes me sad, too. If you ever needed evidence that the San Francisco market was an obscene bubble, and continues to be one to a certain extent,
This might be accurate if the first statement was true, but it is not of course. Do you honestly think that a two lawyer household cannot buy any house in San Francisco at all? The median priced home last month was $968k, they can probably afford that. It is one thing to say “that home is not a good value to me” or even “that home is not sufficiently large or nice enough for my station in life” but it is simply not true that this guy cannot afford any home.
And you can always rent.

“Just FYI, there hasn’t been a 10% drop in SFRs in Pac Heights actually. I can name three apples to apples houses that sold within the last three months that showed annual appreciation ranging from 6 to 10%. Two were bought in 05 and one in 07.”
If you take the CS numbers, in ’05, stuff was going up 20%. In ’06, up 15%. A $1M condo went to $1.2M and then to $1.38M. If it dropped by 10%, that’s $1.24M. In contrast, at 6%, 1.0M for 4 years (1*1.06*1.06*1.06*1.06) is 1.26M. I’m sure not every property has dropped by the same amount, but the numbers you are seeing sleepiguy could match those of a 10% drop.
I’m not seeing that everywhere, I would have guessed a 6-8% drop. But don’t forget that now you also get an inspection contingency and can get a financing contingency on most properties that you had to forgo in 2005. The value of those is not zero either. So some of the price drop is not reflected in the price.

“The MEDIAN price for a 2x bedroom Pac Heights rental (out of 75 available on craigslist) is 4500, while the average is a bit over 5100 per month. Sadly, pretty much all the sub 4000k units are either owned by Trinity or Citiapartments.”
this is only the median price listed on CL. from my experience and that of friends, these rentals are generally listed for much higher than they actually rent for. THe rental stock in Pac Heights might be low, but in general you can get a very nice 2bd 2ba apt in almost any part of the city for $3500 or less.
the rental price is still less than half the equivalent mortgage in most instances. unless you find an amazing RE deal (steal), rentals are still way cheaper.
IMHO, anyone buying right now planning to hold for 8yrs or less is smoking the really good stuff. that is unless they are filthy rich and can bathe in their own money.

A two teacher household just bought half a two story building as a TIC on my block about a year ago. It is a 2/1, probably 1000 sq ft and included parking. I bet you could swing something like that.
One of the big differences between the city and the suburbs is that land is scarce, so “no shared walls” is kind of tough to come by, especially with your other requirements.
Have you looked at Westwood Park? Your best bet is probably there or elsewhere in District 4 if you want a detached home.
Schools in San Francisco are actually pretty good, in spite of all the hype. 1/3 of the public schools scored over 800 on the API, which is actually a very good score. It is a mixed bag though, and many find getting into the right one an exhausting experience.
Good luck on your shopping and as you hear endlessly on this blog, it is probably not a bad time to take your time about it, either.

Well, now I understand why it makes sense to buy to some people. When your income reaches certain level, the marginal tax rate is so high, that you will end up paying less with buying than renting.
what is that certain level? My househould is around $350k/year and despite that it’s still cheaper for us to rent vs buy in SF even with my marginal tax bracket. Even in SF there aren’t many people who make more than my household salary (maybe 5% or so… 10% max).
The difference is that at my income level many people think they’re “too good” to rent, or they don’t mind throwing away money on a home, so they buy.
I’ll give you an example: I might buy a house (not in SF) in the next few weeks for my mother. But it’s cheaper than what a lot of SFers spend on cars so I can easily absorb the loss. I will lose money on it for sure… there are very complex emotional issues for buying her the house. (I have no interest in buying it… but I might do it for her)
Likewise, all of my recent friends who have bought or are looking right now in SF will significantly increase their monthly costs. however they justify it as an “investment” and think it’ll work out in the end when they sell (in other words, they still have expectation of RE appreciation in the city). This is why I disagree with fluj’s assertion that “everybody thinks RE is a bad investment”.
I think SFers think that RE is a bad investment ELSEWHERE, but that SF is “different”.
“NewBuyer”‘s purchase (in a thread a couple of weeks ago) was an example. Buying costs about the same as renting for him.
I don’t remember the full thread, but I feel like there were caveats to New Buyer’s story that changed the math. was it bad math? or was it that it only penciled out if he had a roommate or something? or maybe it was a huge downpayment??? I just can’t remember and couldn’t find the thread.

“I agree that Pac Heights SFRs have not seen 20% declines in the past year. Probably about half that, but since you’re starting from a larger denominator the drop in real dollars is maybe even larger than in other market segments.
”
Where do you get this information? “Pac Heights only has lost about 10 %” ? Not newspapers. Not indices when they come out. Not even this site. But you are definitely the CW.

John,
Why would a tax increase cause home prices to rise? A tax increase is like an income reduction for owners and a bigger income reduction for renters.* More likely it would cause rents to fall – that is how the buy/rent equation would get back into equilibrium (not that’s it there right now…buying is still clearly too pricey).
*Unless you are a “real business cycle” type of economist (which is sadly a much larger fraction of macroeconomists than you’d think), in which case you believe in Ricardian equivalence and tax cuts/raises are of no consequence because people are currently saving lots of extra money to pay for the future tax increases that will be necessary to cover this administration’s deficit spending. When taxes are increased they will reduce saving accordingly. Obviously I don’t believe that because I live in, you know, the real world.

Yes, I agree that the only reasonable “opportunity cost” calculation is short-mid term CDs or T-Bills.
All these people who use the best performing stock in the S&P500 aren’t really thinking about risk.
And while it is true that a down payment has much more risk than a T-Bill, if you making a rent vs. buy decision in earnest, you probably have your future down payment in something liquid, which means either a bank account, a money market fund, or short term treasuries of some sort.
Don’t forget to tax your 5% gain though.

ex-sfer,
My anecdotal evidence is that most owners think the market is terrible and will continue so for at least another year or two. The dispute is whether a long-term investment (8 years or more) will pan out in SF. That depends largely on the economic engines of the region, and the fact that there’s a lot of supply coming online, particularly in SOMA. IMO a risky bet.

Higher marginal tax rates would give renters way more reason to buy. By obtaining a mortgage, you effectively escape the highest marginal rates. Renting does not have this benefit. One can basically say that a renter is paying their rents with their most highly taxed dollars. And that burden increases when taxes go up.
This is the end result.

“if you can get 6% loan”
Jumbo rates are now at about 7.5% and you need a big down payment to qualify for that. John, your numbers are way off, and ex-SFer has been in lots of discussions on the rent vs. buy question to see that.

oops, penfed.org, not penfed.com

Wow, I can’t believe people remember my case from a while back.
By the way, if anyone would like to see my actual unit’s listing, and get the actual numbers that were used for driving the decision making, I’d be happy to share. I’ve grown to really appreciate the amount of financial prowess you guys have.
Just email me at: newbuyer1234 at gmail, and I will happily send URL for the unit and give more info on the actual numbers.
Not sure if I feel comfortable putting the link up for a thousand strangers to read (given that I live in this place now).

John.
I’ve done the spreadsheets 1000 times. for me to rent vs buy a comparable unit in SF it would cost me significantly more to buy.
Yes, I could easily afford the extra outlay per month if I chose, but I choose not to do this, because early retirement is essential to my mental health.
the problems:
1) I don’t do variable interest rates for a mortgage. fixed only. (looks like Penfed is 30yr fixed 6% though)
2) I calculate in my opportunity cost of my downpayment (which is substantial in SF) and add it to my cost of buying. I use 5% to be conservative because I have hordes of 5% Treasuries, and even now I can get 4.5-5% CD’s.
3) AMT.
4) I also factor in REPAIRS, because I know how much it costs me to upkeep my house. (a lot). in general, I spend 1-2% of the value of my home per year on upkeep etc. So I factor that into the cost of ownership as well. It would be cheaper in SF because I’d have a smaller place and less land, but taxes are higher and labor is much higher as well… so more like 1% which comes out to 500-1000/mo
5) a lot of this depends on what you foresee RE in SF doing over the medium (10+year) term. I don’t see it doing very much. so i do not factor in appreciation into my calculations at this point.
some of my income is capital gains, etc, but I don’t count that in the income I gave you because it’s so variable.
remember the math is hard due to marginal tax rates vs overall tax rates.
I will tell you this:
many of my friends in SF make near what I do. many have bought in the last 5 years. Most of them found that the tax savings were less than they anticipated. All of my friends who’ve bought recently increased their monthly payments for equal or sometimes less nice places, but it’s hard to judge “niceness”
===
fluj: I apologize for misquoting you. it was out of laziness. you are fully correct.
what I should have quoted was this:
“The people I’ve spoken think that the market is absolutely terrible”
my apologies

“There are some good discussions on some online forums” about people getting these bogus rates. THAT’S your support? If you’re going to assert that ridiculous rates on some website that are impossibly below market rates are nevertheless legitimate and available, you’ve got to come up with something better than that.

anon, OK, relax, you are pretty worked up on this. If you don’t believe you can get that rate, that’s fine with me. Obviously others can. That’s all.
BTW, are you an owner, renter, or a new renter (just sold?)?

11223,
No, I used to own a while ago (1998 to 2000) in east bay, then I had an oversea assignment so I sold. When I came back, I thought the price was ridiculus (and my income was lower) so I didn’t buy.
I rent in the city, and want to buy in the city. Don’t like suburb life.

Some other people also posted as “John”, so you might be thinking about someone else.

a co-worker told me yesterday that some condo units are being built on 3rd and Mission, whereas a 300 sq feet unit is going for $300K. Does anyone know the name of the project??

Sorry, the sentence beginning “Since the rental is fixed (at least in the short run)” should read “Since the stock of rental housing is fixed (at least in the short run)”

thanks PRFB

anon at 11:44 AM, i am confused. You said you owned for 8 years, and then “not ready to buy”.
If you own, I don’t see why you want to buy. Did you sell?
BTW, I am sure you will also give us an analysis that if the tax rate goes down, the rent and price will also fall, right?

“Spencer,
It has not gone unnoticed that you are now up to $3500 as the cutoff for finding two bedrooms citywide. You’ve completely changed your tune there since you began disputing rental prices”
Are you going to turn me in to the headmaster?
My tune has changed as I got more info from people on this site (thanks folks!) and did some research on the rental increased in the past 2 yrs. most of my previous assertions were based on my own ecperience and those of my friends in the past. Assumptions have to change with a changing market.
But I know personally that if i had to leave my cheap 2bd enclave, I could find a very nice 2bdr in ANY area for 2500-3000. i sure as heck wouldn’t rely solely on CL and I would negotiate as I always have. There are deals to be had on rentals. you just have to be persistent.
My $3500 2bd comments (inching up from $1500-3000 from previously) were targeted at the poster who said you have to pay $4500/mo for a 2br in Pac Heights. most of my friends live in the area, including newbies, and i don’t know anyone paying that much for a 2bdr.
You must have a been a great hall monitor as a kid.

I keep hearing that CL is too high, but from my own experience, I ended up getting higher rents than what I listed on CL.
With my TIC, I listed at $2750, but tenants pay all utility. They offered to pay $2800, but wanted me to pick up water. So that is the final deal.
With the condo in RH, again, I listed at $3050. Three couple were competing for it, and I ended up getting $3150.

ex SF-er,
We are probably saying the same thing, just different ways….saying “it doesn’t make sense for some people to buy” is essentially the same as “it makes sense for some people to buy”.
My personal experience is that it gets tempting once the income reaches certain level, plus the addition to the family (and wife nagging).
anon, Your point is that tax will decrease spending due to lower net income. Do you really believe the landlord will give you a decrease in rent when the tax goes up?

Your point is that tax will decrease spending due to lower net income. Do you really believe the landlord will give you a decrease in rent when the tax goes up?
Or to be more concise: the answer is that YES the landlord IN AGGREGATE will give a decrease in rent if the renter IN AGGREGATE has less money to spend on housing, for whatever reason… unless the renter is able to devote more of a % of their income toward rent.

“Any other landlords want to chime in with their experience?”
As a renter I negotiated a discount (5-10%) on all but one rental. As a landlord, I have received counteroffers about half of the time and have usually accepted.

Oh, I should add that we ONLY deal with very long term owners who pay ridiculously low levels of Prop 13 tax (one was paying $3K per year on a $1.3Mish house, the other is paying $1.5K on a $1.2Mish house). Some of these owners have ties to the neighborhood, and in both cases they are “preserving” the asset so that they can pass it to descendants at the grandfathered low tax basis. This is MUCH more common than one might think.

Milkshake,
About the application process – on BOTH places we never filled out an application. Our current landlord did not ask for a credit report.
My brother is a landlord in the suburbs of NYC. There are a million tricks, that’s for sure….
About whether PRIVATE discrimination should be actionable, well, I go back and forth on this. On balance, I’d rather keep the government as far away from PRIVATE behavior as possible. Discrimination can work both ways, by the way. Try to rent a SFH on the far west side of SF for instance with a dog, and you’ll see what I mean…. Certain cultures and races seem to prefer “their own” and they are not friendly to dogs. That’s ok with me – to each his own. We all take the market as it comes….
(OT – I saw in another thread that you were in my old stomping grounds of the Bronx! I wrote a vignette/response, but I think it got censored or lost. What streets were you wandering around back there? I grew up in the 1970s/early 1980s, starting at Kingsbridge Road and Jerome Avenue. Boy, could I tell you some stories about what it was REALLY like back ther back then…. but they’d get censored!)

NVJ,
I think Tiburon is sort of glamorous – it’s really a beautiful place – but it seems like most people only talk about SF north of California, and Noe Valley. There are definitely no hipsters up here from what I can tell!
I do think we have a pretty good deal that we just obtained (at $2.8K). We’ve been in neighbors’ houses, and they are very similar – probably comparable all things considered. The couple across the street from us bought their place (smaller than ours) for over $1.3M a few years ago as a fixer. Their were shocked to hear how inexpensive the rents are on their block.
There are two other renting families nearby we’ve met, and they are paying in the low $3K per month range (we actually looked at one of the houses and passed on it). It seems a crazy system to me. The couple across the street who bought are in effect paying $16-18K per year in property tax so that the renters’ kids can go to the same school as their kids (BTW, it’s a great school). One of the other renters owns a place in SF, and rents it out (low tax base makes it possible) and then rented up here so their kids could go to the great school. It’s a great tax arbitrage – as the imputed taxes on the rental properties are 1/10th the full freight that the recent arrivals are paying. But everyone tells me that this is a sustainable system. What kind of trader would I be if I didn’t try to arb this?
Finding rental SFHs in my experience really requires one to understand this tax arbitrage cold. What I wrote above (long term owners granting “discounts” to certain demographics) sounds like I am talking about race, and of course there is a little of that. But let’s face it, how many traditionally “protected class” minorities are looking at the $3-4K SFH rental market? It’s really not too much of an issue IMO.
I really mean the “target demographic” for someone very long term who bought their property in the 1970s (our first rental) or inherited the property that they grew up in (our current situation). These types are overwhelmingly likely to be from straightforward, conservative, upper working class or middle class backgrounds (we’re not talking mansions here, just nice solid properties), because that is what SF was 30-50 years ago (for the most part).
If someone like this is interested in preserving their house for their children (EVERY ONE I have ever spoken to when looking talked about how they would never sell the property because they want their kids to enjoy the less than $4K taxes on the $1M+ house), you can see the advantage that a traditionally married couple (more than 10 years) would have. We’re semi-retired, don’t work, very high assets, young children and dog, don’t care about the latest “finishes” and “window treatments” (we’re from the same working class background). Why wouldn’t you offer your best discount to a family like that? For that reason, our experience may not be generalizable, but I thought I’d offer it to give some people some ideas about how to target a search for a nice SFH in the nicest areas.

Satchel – Yes, I can see how “preferred demographic” could mean different things to different people. In a perfect world only mutable characteristics like income, credit, and reputation would be considered defining a demographic for the purposes of accepting a rental application.
As for the Bronxwalk, if I recall it went something like this : Enter Bronx from Harlem over some bridge (3rd st ?) and the head up Park Ave towards an interesting old school Italian neighborhood (Belmont ?). Then cut over on some major commercial street to Grand Concourse and walked down south on GC as far as my feet would allow. The most noticable burnt out buildings were just on the north side of the bridge coming from Harlem.

Yes, this is San Francisco real estate blog. Marin, or anything else outside of San Francisco, is rarely a topic of discussion.
After Atherton, I believe that Tiburon/Ross is the most expensive real estate in the Bay Area.

Milkshake,
That Bronxwalk brings back memories. I’ve been up and down the Grand Concourse (the whole length) more times than I care to remember. You may know that it billed itself as the Champs d’Elysee of the Bronx when it was laid out and built in the 1920s (I think).
If you want to sound like a local next time, that Belmont area is (or at least was) always called “Arthur Avenue”. No Italians left there anymore I am sure (except for the store owners who live north of NYC in Mamaroneck and West Harrison) – even as early as the early 1980s it was almost completely Yugoslavian and Albanian. Blood feuds played out in those buildings regularly, and the cops looked the other way (one of my brothers is a cop now).
There was a lot of burning of buildings in the south part of the Bronx near the Willis Avenue and the other bridge that you saw, but the worst was just west of the Grand Concourse, and south of that commercial street you took from Belmont to the GC (that street was probably Tremont or Fordham – lol, they’ve probably renamed them something pc by now!). When I was in high school, I rode the #4 IRT elevated train south from Kingsbridge to Manhattan, and when you looked out, it looked like a war zone. At least a few times per month, one could see a building burning as the train chugged along. It was quite a sight!
The farthest north the burning happened that I remember was around 198th-200th Streets. I remember clear as day walking by a building totally engulfed in flames on Minerva Place (near Creston – I think that street had a different name back then) on my way to school (4th grade) when I was 8 years old. It was a pretty surreal scene. Nothing was even really cordoned off, and the firemen and cops were just sitting around laughing and watching everything, with a few little kids walking (by themselves – no parents, monitors or anything like that back then) on the other side of the street on their way to school on the Grand Concourse. I checked google maps, and it looks like the lot is still vacant 30 years later (southwest corner of Minerva and Creston).
The Bronx was a pretty wild place, and I sort of miss it.

Does the prop 13 tax basis get stepped up to current market rates upon the death of the parents (assuming the children get the inheritance)?
Or do the prop 13 benefits get passed on to the children because the property was not technically “sold”.

“Does the prop 13 tax basis get stepped up to current market rates upon the death of the parents (assuming the children get the inheritance)?”
No. Of course not. Where would the fun in THAT be?
In all seriousness, the tax basis for prop 13 does NOT get increased upon passing to children, stepchildren, sons-in-law, daughters-in-law, or adopted children (probably a few other exempted categories, as well). This was all codified in Prop 58 in 1986. This was done when the people who held property noticed the incredible jump in prices after prop 13 (1979), and they wanted to make sure that their kids (and their kids) could benefit too. Again, the idea that prop 13 was there to “protect the poor elderly” was and is a complete smokescreen.
The transfer, as far as I know, could be direct through inheritance, or consecutive partial gifting of interest under the gift tax limits, or it could occur through transfer of beneficial interest in a trust, the corpus of which is the house.
In addition to the juicy benefits that Prop 13 bestows, the donee (or child subject of the inheritance) can also enjoy all the Federal and state tax benefits associated with stepped up basis at date of death. A simple illustration should help.
Suppose someone buys a house in Tiburon in 1955 for $14,000. By 2008, the annual taxes on the place would be approximately $1,500, and the house would be “worth” $1.3M.
Now, suppose the original owner dies. The basis of the house will be immediately increased to the valuation as of the date of death, which is for sake of argument $1.3M. (Let’s assume that the decedent’s entire estate is within the estate tax exclusion – around $3M I think right now).
The children who inherit the property can rent it out, and put some green in their pocket. I’m not sure, but it might be possible to depreciate the FULL stepped up basis of $1.3M, generating some nice passive tax losses that the children would be able to use to the extent their income is lower than $150K, assuming that they actually do this correctly for tax purposes, which I don’t think anyone does.
Or, the childrem could simply SELL the house, and owe ZERO tax (Fed or state), because the basis will be $1.3M, not the $15K originally paid.
Or, the kids could simply hold it for THEIR kids (eventually) so that when the house is worth $10M (at least they all think this) in 20 years, THEIR kids will only pay $2K or so per year in property tax, while the poor schlubs buying then will be paying about $100K+ in tax (assuming that the tax rate doesn’t go any higher than the 1-1.2% today).
So, you can see how Prop 13 makes california property pretty valuable, ESPECIALLY in a place where development is limited, space is tight, and the housing stock is fairly old (meaning MANY people enjoy this tax “subsidy” and are therefore reluctant to sell and forego this benefit). And then you can understand why there is no SERIOUS attempt to ever weaken it, notwithstanding the “poor elderly who want to stay in their homes”. House values would go down if the prop 13 benefits were weakened.
(Don’t get me wrong – I HATE taxes, and think Clownifornia throws most of the cash away on foolishness anyway. However, I think this distortive subsidy system is the worst of all worlds. It would be much better if there were NO property tax than this system.)
I hope that helps!