According to the June 2008 S&P/Case-Shiller Home Price Index (pdf), single-family home prices in the San Francisco MSA fell 1.8% from May ’08 to June ’08 and are down 23.7% year-over-year (a new record low).
For the broader 10-City composite (CSXR), year-over-year price growth is down 17.0% (having fallen only 0.6% from May).
Prices fell across all three price tiers for the San Francisco MSA with the upper tier falling 1.4% from May to June and erasing the 0.9% gain from April to May.
The bottom third (under $446,755 at the time of acquisition) fell 2.8% from May to June (down 39.6% YOY); the middle third fell 0.6% from May to June (down 25.8% YOY); and the top third (over $706,704 at the time of acquisition) fell 1.4% from May to June (down 10.2% YOY).
And according to the Index, home values for the bottom third of the market in the San Francisco MSA have returned to June 2002 levels, the middle third to December 2003 levels, and the top third continues to hold at March 2005 levels.
The standard SocketSite S&P/Case-Shiller footnote: The HPI only tracks single-family homes (not condominiums which represent half the transactions in San Francisco), is imperfect in factoring out changes in property values due to improvements versus actual market appreciation (although they try their best), and includes San Francisco, San Mateo, Marin, Contra Costa, and Alameda in the “San Francisco” index (i.e., the greater MSA).
∙ National Trend of Home Price Declines Continued [S&P]
∙ May S&P/Case-Shiller: San Francisco MSA Declines (But Rate Slows) [SocketSite]
![](https://f82d63.p3cdn1.secureserver.net/wp-content/uploads/2008/08/SandP-Case-Shiller-Change-6-08.jpg?time=1714219687)
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 three graphs just crossed!!!
Buy! Buy!
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.
Note that Case-Shiller reports a 3-month moving average, so it is not exactly right to say prices fell 1.8% from May to June. That accurately reflects the downward trend but using a moving average smooths noise in the data.
No slowing yet. I wouldn’t be surprised if we see price declines in the top tier now start to outpace those in the lower tiers until it catches up with historical patterns. Just as the lower tiers rose much faster and thus crashed first and farther, lots of trends now hitting higher priced places harder (tighter lending standards and higher rates for jumbo loans, alt-A recasts, etc.)
“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.
Given how high inflation has been the last five years, rolling back to 2000 prices sounds awfully bold. That’s got to be the real-world equivalent of going all the way back to 1997.
I’d say 2002 prices are in the bag and we’ll see them in 2010. But 2000? You’re more pessimistic or optimistic than me Satchel. Of course, I do hope you’re right!
(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)
“(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.
on a side note: the losses in RE nationwide are not slowing.
The second derivative of home prices is increasing. In other words, the drop is not as steep this month as it was last month. So while prices are still going down, they are not dropping as fast as they were, nationwide. This is true in SF metro area, as well.
https://socketsite.com/archives/2008/06/april_spcaseshiller_san_francisco_msa_continues_decline.html
In April, home prices dropped 2.3%, while they dropped only 0.6% this month, for the median 1/3. Is this just a statistical fluke, or the beginning of the end? We won’t know for a few more months, but given the fact that Conventional Wisdom is now that Real Estate is a terrible investment, one of the most important pieces for a bottom is in place.
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.
“Why would the decline stop at 115?”
I predicted that Case-Schiller would be below 110 by 2011. I never said that would be the bottom.
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.
NVJ:
I agree with your calculations. I’m not sure I agree with your conclusions.
Due to the seasonality of housing, I’m not sure one can determine deceleration/acceleration of housing based on month to month data, or from YOY data from different months.
it is true that the fall in house values of June 2008 was less than that of April 2008, but it is also true that the fall of house values YOY of June 2008 is worse than June 2007, and April 2008 worse than April 2007 (nationwide).
so is the deceleration we’ve seen since April due to seasonality, or improved underlying housing factors? I’m assuming you believe the latter, I believe the former.
There is no easy resolution to this problem. unfortunately my math skills are not enough to well-elucidate my argument, or to come to an acceptable resolution
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.
Isn’t this index adjusted for inflation anyway?
I don’t think so. Does anyone know the answer to this? I am too lazy too look it up myself this morning.
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
no the index, as pusblished by S&P is not adjusted for inflation. However, inflation adjusted versions are put out by others. You can usually google for them.
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.
That’s not true ex-SFer. The average San Franciscan on the street is not in the market, and is not a homeowner. Talking to those folks at parties and to my friends who rent and what not made me realize something. The conventional wisdom of the marginally interested comes from newspapers and national media. It has people thinking that values are in the toilet. The people I’ve spoken think that the market is absolutely terrible, and that though still prohibitively expensive, things are much, much cheaper than they were a year ago. For the vast majority of the city, and indeed the areas these folks live because I only have one friend who lives in Bayview, this is not true.
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.
fluj – so you’re saying that those in the market to buy have a more optimistic outlook on the future of appreciation ? Isn’t that selection bias ?
“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.
Milkshake,
Selection bias? Fluj isn’t making his own chart or anything, he’s making a response that seemed accurated.
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
We won’t truly see the bottom until the agents and RE “profesionals” abdicate their bull position.
I think Fluj is saying this is something more like asking people at the Indians game how the Cubs are doing.
And it’s the Cubs fans who actually buy tickets and will affect ticket prices. Ask buyers who are really in the market looking to buy a decent SF place what the market is like. I think we’ll get a different picture than indicated by these macro generalities.
True fans always root for their team, despite what the standings say.
I’d like to remind a few bears around here that dropping prices is nothing to cheer about. You might have expected it from an economic standpoint.
And darn those 2003-2006 years were long and painful to watch as the train was going up and up towards the cliff with all the bulls cheering like it was 1999.
But now that we’re starting to be proven right, let’s not forget that foreclosures are destroying families, as house wealth was a lifesaver in times of stagnating income and rising health care costs. For the ones at the bottom it will be harder than ever.
For those who were looking for it, here is the Case Shiller Composite Index both nominal and real (inflation adjusted) via calculated risk blog.
@SFS: I think everyone on SS feels for all the families who unknowingly became involved in this terrible situation. However, I suspect that there is some debate over the volume of those families, as opposed to the ones who knowingly pushed all their chips in.
“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.
The average person skims articles. They read headlines. They don’t drill down to the caveat at the bottom of most Chronicle articles, the one about SF proper. The average person looks at this chart if it is in USA Today. They don’t stop to figure out what “MSA” means.
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 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.
“Conventional Wisdom is now that Real Estate is a terrible investment”
I don’t think we are quite there yet. Certainly, it is conventional wisdom on socketsite, but i don’t think we are there with the general public, and SF specifically.
I would argue that most people still think RE is a good investment if you hold for 4-5 yrs. Especially in SF, most people i know point to the fact that SF hasn’t dropped much to date and that means it is a safe haven.
My guess is that 50% of the public still thinks RE is a good investment if you hold for 5 years.
I would say that number needs to be down to about 20% before we are at bottom. Once everyone thinks RE is a bad investment, then we can move up.
regarding the 5 yr horizon. If someone buys at holds in SF at average asking price, they will most likely lose out if they only hold for 5 yrs, whether it is through price decrease or stabilization.
I think you need at least an 8 yr horizon to come out ahead.
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.”
Fronzi, I can’t agree with that description. That assumes that the two parts were part of the same boat to begin with.
It seems very much so that the popular ‘hoods in SF will continue to hold value even as the less popular ‘hoods sink.
So maybe it is more like a little armada of boats, where the crappy dinghies and tied-together rafts are getting overwhelmed by the bad weather, while the nice 40’ yachts are holding up just fine. (But nobody really wants to buy a boat in the middle of a typhoon.)
“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?
Definitely things are not as dire as the Titanic. Yet…. Patience, friends, patience.
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.
For those in the sub $1million market who work in FiDi and wish to live in SF, but want to have kids too, at what point does it make more sense to commute from another attractive area where prices are down 30-40% from peak?
Kensington, albany, piedmont, lafayette, walnut creek — hell, novato or even sonoma or petaluma if you can telework. It would sadden me to leave SF, but if i can buy a nice sfr in a place with a walkable downtown, keep the commute to SF under 45min., have good public schools & tolerate the waspyness, it becomes almost unavoidable. How can I justify paying SF prices?
I think there are more like me. At what point does the “friction” between these areas and SF bring down SF?
Perhaps the answer is there’s plenty of 20-something tech workers, wealthy singles, retirees, etc. who are not in my boat and who will keep the SF market from feeling that friction.
Thus, I’m priced out. My wife and I are a two-lawyer household and I’m priced out. It makes me very sad.
If I can’t live in SF, I have to question whether living in the greater bay area is worth it. Can I find a job I like and live right in downtown San Diego? That sounds better than the ‘burbs.
Can I buy a huge brand new house in Sac. and have enough left over to commute to SF by helicopter — or buy a yacht and float down the river into the bay, drop anchor and take my dingy to work?
. . . sigh
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)
PS: the bay area sfr rental stock sux
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.
fundy mental, if prices were actually off by 30-40% in Albany, Kensington or Piedmont then leaving the city might make sense, but prices in those areas are not off by that much. I would move to Albany if prices came down there but so far almost everything there is still very high.
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.
Fundy mental, no doubt about it that once you get kids and schools into the mix, from a purely financial standpoint you are way better off buying outside of SF in a town with good public schools. The money you would save on not having to pay private school tuition for a couple of kids will buy you an extremely nice house in a lot of neighboring communities with good schools (Catholic schools are somewhat lower-priced). That is the main reason SF has such a small population of school-age kids (I believe it is the smallest of any U.S. city). There are lots of very good reasons to stay in SF, but the public schools stink. I’d rather slit my wrists than have to hop in the car to run to the supermarket, so we’re in SF for the long run (unless we open a Paris office and I can get transferred there) — living in a smaller place and paying tuition for a very good school. But I’m crossing my fingers that my kids get into Lowell when the time comes.
Oops. Sorry for the multiple posts. Browser/Internal error problems…
“Forgetting the meanspiritedness of it, do people REALLY think that if the RE sector collapses, it’ll be 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. Let things come down where they were before the bubble. This will do an awful lot of good for the general public.
Meanwhile enjoy (watching) the ride down 🙂
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.”
Market corrections are not a general good, just like market exuberance is not a general bad.
In up markets, people cash out (good) while others get priced out (bad)
In down markets, people priced out can afford again (good) while others lose their shirt (bad)
I’d say bull markets are better than bear markets for many reasons, for once simply for the fact that we wouldn’t build houses without them.
Overall, it’s all market action and fluctuations around an average or a trend. Recognizing the trend is what matters in the end. But short-medium term market action can be either very fun or painful depending on where you stand.
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.
I am an economics neophyte, but my understanding is that market corrections are good for the long-term health of the overall economy. That is not to say that market corrections are painless.
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.
Anyone has, or know of, any analysis on what the end of the FHA Down Payment Assitance (DPA) programs will likely have on housing prices?
The programs are due to expire in a few weeks and will impact some 20% of first time buyers nationally.
I would guess that we won’t see the full impact until Spring ’09 on prices, which is why they are probably being ended now so that the RE industry can adjust before Spring ’09.
How significant are DPA’s in the SF market?
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.
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.
Then you haven’t been on the interwebs for the last 2 or 3 years. There are well-trafficked and commented blogs from 3 years ago all about the housing bubble. Some people were plenty angry then about getting priced out, etc.
My point is that anyone thinking they’ve made it through the bubble bursting without a scratch is delusional. We’ll be paying for this cleanup (with higher taxes, crime, and god knows what else) for years.
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.
“Conventional Wisdom is now that Real Estate is a terrible investment”
I don’t think we are quite there yet. Certainly, it is conventional wisdom on socketsite, but i don’t think we are there with the general public, and SF specifically.
I would argue that most people still think RE is a good investment if you hold for 4-5 yrs. Especially in SF, most people i know point to the fact that SF hasn’t dropped much to date and that means it is a safe haven.
My guess is that 50% of the public still thinks RE is a good investment if you hold for 5 years.
I would say that number needs to be down to about 20% before we are at bottom. Once everyone thinks RE is a bad investment, then we can move up.
regarding the 5 yr horizon. If someone buys at holds in SF at average asking price, they will most likely lose out if they only hold for 5 yrs, whether it is through price decrease or stabilization.
I think you need at least an 8-10 yr horizon to come out ahead.
“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.
But house prices in S.F. haven’t gone up 20% per year. CS index is about 60% higher than in January 2000. That roughly a 7% per year gain. Obviously the gain was parabolic and not steady but is the current price level really that out of whack with historical norms in S.F.?
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.
oops, I meant to write 10-20%, which may also be high for SF proper. but I think current price level is out of whack with historical norms in SF, depending on how you measure that. I think median SF housing prices as a multiple of median SF income is currently way above norm. (SF norm) Anyone else know that to be true?
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!
Comparing median house prices with median income in SF is kinda irrelevant though. The median income household in SF does not buy a house.
I think, in this extent at least,SF is different.
The thread a few weeks ago proved this, with comments such as you need household income of $x (250k-500k were mentioned) to feel affluent.
It needs to be compared to say the median top quartile salary say, or at the very least the median top half.
I am sure this figure has increased by more than the SF median – although admittedly still not by as much as SF house prices.
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
erg. lost part of my message.
…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.
Thanks David, will get on Craigslist and check it out lickety split
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….)
Wow, you kids are having fun.
Is today’s index that different from last months? The low-end continue to drop, but mid and higher thirds are essentially flat, and most of SF properties are in the top third.
So, what’s the point of having another 200 posts about the same data?
Well, I know…we will continue to do this for XXXX month (or forever).
I was a big bear and I was predicting the crash since 2003….and I am pretty sure most people on SS were the same.
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.
“NewBuyer”‘s purchase (in a thread a couple of weeks ago) was an example. Buying costs about the same as renting for him.
So, the question is not “there may be enough people with enough money to keep SF market at extremely high prices?” The real question is “why are the rent so high in SF?”
And 2011? forget it. When Obama enters the office, the tax rate will get a big hike, and it will instantly cut 2% to 3% from the real cost of buying. Remember CA may also increase the state income tax.
The only question (for me) is how the lines will work out between now and end of 2009. If someone is sharp enough and has enough cash, he can time the market to get in at the absolute bottom. The problem is the cash requirement is getting higher and higher, you need 25% down now.
BTW, buy and hold for 5 years? Average SF home owners stay for 10 years.
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!
^^^^Now there’s an epiphany. Thanks for reminding us that real estate and long equities are the only investments known to man.
Coincidentally, my CDs have been my worst-performing investment this year, and even they’re up 3.5% nominally.
Regarding Stockton, central valley home prices have fallen so much that even the CAR has stopped reporting them. But I’d wager they’re ahead of Sacramento, about 40% down and still falling. I don’t think Shiller has an index, but here are the CAR numbers from last month:
http://www.car.org/newsstand/newsreleases/july08salesandpricereport/?view=Standard
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).
Dude,
Two comments on your posting:
1. If your CD is your worst performing investment, what are some of your better performing ones? My rollover account, which is mostly in 5 star mutual funds (in Europe, emerging mkt, asia and us), lost $40K this year, or 12%. And i thought I was better than the general market.
2. You need to be very careful when reading these index. Are you really seeing a 20% drop in Pac Height properties, or maybe in Russian Hill, or maybe in Noe?? Where do you really have these huge price drop??
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).
REpornaddict is partially correct. SF has a far higher proportion of condo sales then the MSA generally, and condos have been hit much harder than SFRs here and everywhere else. So CSI likely understates the full impact of the real estate downturn in SF. 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.
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%.
A friend asked me to look on craigslist for a 2 Bedroom Pac Heights rental under 3k, and there are only two.. and I’m not even sure one is north of California.
If you are looking in Cow Hollow or the Marina, there are maybe 4, 3 of which are on Van Ness – so that really doesn’t count.
I’ve owned rental property in the area for several years and I’ve never seen so few places for rent here at such insane prices.
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.
I’m actually moving out of my unit and it’s currently for rent for an absolutely astronomical sum that’s almost 20% higher when I signed my lease last year. When I saw the new figure I thought, “Who the hell would pay THAT in rent?! But the agent has interested and apparently qualified clients stopping by pretty much every day.
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.
“So CSI likely understates the full impact of the real estate downturn in SF”
Quote of the week.
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.
hey but wait, the top tier index is down 10% YOY.
That must mean that every house in the SF MSA has lost 10% of its value in the past year – including those in Pac heights!
So goes the thinking of some, anyway….
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.
“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.”
You forgot the third way – tax up.
“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.
Oh lordy tipster, do we really need to muddy the waters by trying to include the imputed value of forgone contingencies as a drop in price? Patience. The drops will be revealed in the fullness of time. We don’t need to torture the data to try to get it to confess prematurely.
“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.
NVJ,
You got it, I think you understand what I mean.(you have to assume some nuance, I can’t write enough for everything to be taken literally.)
Buying a first home — no equity to parlay. Prefer not to share walls, but not a deal breaker. Kid on near horizon so schools an issue. Wife works late so crime an issue.
You’re right, I still could swing it, but I guess my standards are based on my own experience. Not that I want a 3/2 tract stucco in suburbia. I like The City’s patina & can live small.
But my parents were both teachers (not bay area) and afforded us a certain standard of living that two lawyers can’t match in The City — even assuming a fair trade between sq.ft., low crime, good pub. schools, etc. (suburbia’s good qualities) for The City’s beautiful life.
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.
fundy mental, suburb is different from the city.
Why do people want to live in the city, then complain that it costs more to live in the city? It is a free market. It takes both a seller and a buyer to make a deal.
And if the city has all the properties with “no shared walls”, it becomes suburb.
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.
as for how to compute “opportunity cost”. The way I do it for a NONINVESTOR (i’ve said so a lot) is to just take the rate on Treasuries. Treasuries are easy to invest in, and have a SET rate of return. If you plan on being in your house for 7 years as example then use the 5 year treasury rate. (you want a duration match if possible).
5 year treasury is currently at 3.375%
So if I was not an investor, but was going to buy a house with a downpayment of $100k today, I would use $3375/year as the opportunity cost of my downpayment. It’s the worst you can possibly do with $100k right now.
(because I can either use the 100k to buy a house, OR to put into Treasuries. by putting it into a house I can’t put it into treasuries)
of note: my calculation UNDERSTATES the estimation of opportunity cost because Treasuries are RISK FREE, whereas using it as a downpayment on a house is not.
I should be matching risk but I am not. you get more yield if you invest in a WAMU CD right now than a Treasury because a WAMU CD has risk of interest loss whereas the Treasury doesn’t. And likewise the opportunity cost of a house downpayment should also be HIGHER than the comparable treasury due to risk of loss on the house downpayment. but that calculation is too hard and doesn’t really matter much anyway.
another good option would be to take CD rates, which will be a bit higher than Treasuries. this helps to match for risk.
===
As for investors: they’d have to honestly assess what their market skills are and what they think they can make and decide if it’s appropriate to use that as their opportunity cost rate.
I’ve posted my trades at various times on this blog and I think most would understand that I’m up way big this year (my best year ever). But it comes in waves (as I said… I’m playing the volatility with a bent towards the short side).
at this current time (Wed morning) I have modest gains in all of my open positions save 1 that is still very much underwater-10k position in USO (oil ETF) down about 15% I think from where I purchased it. I’m holding it for now just to see, but I may take a loss on it. As I’ve said on here before, I was trading oil back and forth and back and forth using USO and DUG (double short oil ETF). I was in DUG when oil collapsed, but then sold and bought USO at 108 thinking it would bounce back up. it fell to 92 instead. i’m staying in USO for now to see what happens. I will sell it if it gets anywhere near my purchase price since I’m not sure it will spike above 110 again. you can’t win all the time.
But nonetheless, when I calculate my opportunity cost of any downpayment I will use 5% because it’s the rate of a CD from BofA that I could have gotten instead… BofA could go under, but I’m betting that they are too big to fail. so I’m using 5% for my opportunity cost calculations.
I wouldn’t use my investment returns as opportunity cost because my investing style currently is far more risky than house purchasing. And also because the calculation of my returns can vary by up to 5-10% in a DAY.
“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.
“(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”.
Man. I’m starting my own movement on this site. It’s a movement to not paraphrase what others say, out of context, using quotes. Too often the original sentiment is completely lost. Who’s with me?!!!!? Arrrrrrghh. Let’s get ’em boys!
That was not what I said. I said CW is that significant depreciation has occurred within the past year, in generally desirable areas. I said CW is that “the market is terrible.” (Proper use of quotations, thank you very much.) Ex-SFer, I actually went on to say that most think longterm r.e. holds are a good idea.
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.
Just to be clear, I expect that both rents and home prices would fall, as both homeowners and renters are now “poorer” after the tax increase. But rents should fall by more than home prices, since the rent vs. buy equation now adjusts slightly more in favor of buying.
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.
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.
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.
“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).”
If you have to ask, you are not ready to buy.
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.
Ex-Sfer,
You are in the 43% marginal tax bracket (AMT + state), if your income is mainly salary (instead of capital gain and passive).
Do some spreadsheets. At that tax bracket, your cost of buying a 1M house is roughly $4000/mo if you can get 6% loan. The rental for a 1M house is probably $3500/mo. Strictly speaking, it is still more expensive to buy than to rent. However, the difference is minor that I can see some buyers would ignore it…after all, if you are making 350K, 500/mo is nothing. A nice car costs more than that.
Of course, Some people will come here and add some crazy costs (like $400/mo insurance, $400/mo repair etc). To that, I will only say shop around for the best deals, otherwise you shouldn’t buy.
“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.
Do we have to go through this again?
If you don’t know how to shop for the best rates, you are not ready to buy.
Here we go away – 30yr fixed Jumbo, 6% at penfed.com.
I just don’t understand why some people like to use the worst case (the highest mortgage rate you can find, the most expensive insurance and repair etc) as the cost of buying.
oops, penfed.org, not penfed.com
Please. Go ahead and try to get the rate on penfed’s web site. It’s a joke (and even if it were not, they’d be going out of business soon). If you use B.S. assumptions, you can come out with whatever number you want.
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).
anon, obviously you have no clue about what you are talking about. Many people have gotten the rate on penfed.org, exactly as advertised. There are some good discussions on some online forums. Search and you shall find.
If you haven’t tried yourself, please don’t come here and discredit other’s information. It only weakens your argument.
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
From playing around with the penfed site, it looks like 25% down is required.
“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.
ex SF-er,
It depends on the property. Some properties will require a lot of repairs, some with very little. I owned a townhouse(new) and it costed me $40 over two years (new faucet) in repairs. However, some properties will require a lot of work.
Oppotunity cost is difficult to calculate, because again, you have to factor in the tax. CD interest is taxed as regular income, so your 4% CD only makes you 2% after-tax.
And since you already own properties, the tax saving is also more complicated, and you may not get any tax saving at all (AMT). The situation is much different for a DINK (or new parents) who are buying the first home.
And also, the principal portion of the monthly payment is not the cost. The cost of buying is the property tax, insurance, repair, and the rent for the money (interest portion of the payment). Your monthly payment may be higher, but a portion of it is one form of asset changing into another.
I said it may make sense to SOME people. I never said everyone should buy. For some, in a particular tax bracket, with a particular lifestyle, buying is no more expensive than renting.
For others, who do not shop for mortgage, do not shop for insurance, they should never never never buy.
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?)?
John,
I live in South bay but brought a couple of rental proertie in the city, and I think you did the reverse: live in the city, but bought in south bay. is that correct??
I though that rent is much higher in the city, isn’t it? what make you decide to buy in south bay?
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.
Owned our home 3BR, 3B, in San Francisco for 8 years.
Some other people also posted as “John”, so you might be thinking about someone else.
anon,
Planning to sell?
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??
John, Okay, you force me to go through the whole exercise. I will do a simple example under reasonable assumptions. Reality will diverge from these assumptions, but the qualitative result (that a tax increase is not likely to increase housing prices) will still hold.
Assume rental and purchase housing stock is fixed in the short run. Suppose:
Income is $100,000/year
Buying costs are $20,000/year before tax, $16,000/year after tax (20% effective tax rate)
Renting costs are $16,000/year.
The buyer/renter is indifferent between buying and renting after taxes. We are in equilibrium.
The tax rate increases across the board by 2% (from 20% to 22%). For renters, after tax income drops from $80,000 to $78,000 (2.5% decrease). Suppose they cut back on everything in equal proportion. Since the rental is fixed (at least in the short run), rents fall by 2.5% to $15,600. Buyers are also poorer, but they are partially sheltered by the home tax deduction. At current housing prices, their after tax income falls from $84,000 to $82,400 ($78k + $4400 tax refund), or 1.9%. Thus housing prices fall from $20,000/year to $19,600/year.
But after the tax deduction (which has increased from $4000 to $4312), it now costs only $15,288/year to own. Thus owning is $312/year cheaper (2%) than renting. The market is not in equilibrium – this is where your intuition about raising housing prices comes into play.
On the margin, people start to shift from renting to owning, since owning is now cheaper (after taxes). As this happens, rents fall, and home prices rise. When rents have fallen by approximately 1% and home prices have risen by approximately 1%, then people are once again indifferent between owning vs. renting, and we are back in equilibrium.
So ultimately rents will have fallen by roughly 3.5% (-2.5% – 1%) and home prices will have fallen by roughly 1% (-1.9% + 1%). Your intuition is correct in that the relative price of homes vs rents will have increased. But on net, both housing prices and rental prices have fallen…it’s just that rents have fallen more. At the end of the day, making everyone poorer is not going to raise housing prices unless you make some pretty extreme assumptions about elasticities and relative sizes of the rental market vs. the owner-occupied market!
So yes, I agree, I am “not ready to buy” (as you say), in part because I can see that the price appreciation that you’re claiming the next administration will bring us is not supported by a thorough analysis!
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)”
11223, you’re thinking of Cubix Yerba Buena, discussed here:
https://socketsite.com/archives/2008/08/cubix_yerba_buena_766_harrison_reader_perspective_and_m.html
thanks PRFB
“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.”
Yeah, my effective fed average tax rate goes from something like 30% to 12% after the deductions. It is too funny. Thank god for the tax code.
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?
John, There are also multiple anons. I have not owned property for 8 years. I will change my name slightly to differentiate me from the other anon.
If taxes were to decrease, after tax income would go up, and I would expect that both prices and rents would rise. Rents would rise more than prices however, for the same reasons as given above. I don’t foresee any tax cuts in the near future given the budget deficit however.
More generally, I think we all benefit when we actually analyze the dynamics of the situation rather than simply throwing out glib answers like “If you have to ask, you are not ready to buy.” Especially when those glib answers are wrong!
“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.
should say (inching up from $2500-3000 from previously)
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.
John:
I agree with you.
there are assuredly some people out there where buying is lower monthly/overall costs than renting even if you exclude appreciation/depreciation arguments.
but it’s not a given that this will always happen if you hit a certain income…
the tax code is clear as mud.
we’re probably more in agreement than not.
yours,
ex SF-er.
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?
IMO:
there are different dynamics with rent versus buying
Rents in general are controlled by income, because in general one cannot borrow monty to rent. thus, rents can go up only so high as income will allow.
rent is secondly affected by supply.
So I would anticipate that rents will go DOWN as taxes go up, because it reduces the typical renter’s discretionary income.
===
on the other hand, house prices have become unhinged from income in the last 6 years, due to things such as “liars loans” and SISA/NINA loans, and 0 downpayment etc. It allowed high prices with low monthly payments.
SO housing prices were more related to monthly payments, and not so much underlying income.
(e.g. some people making $80k were buying $1M homes due to suicide financing.)
due to this, in the RECENT PAST tax changes that changed discretionary income may or may not impact the actual house prices, since house prices were unhinged from income anyway.
now that we’re seeing a “re-hinging” of house prices to income (based on tighter lending requirements) one would expect to see that the tax changes will change housing prices more.
but the tightening of credit will be far more important than any credit change IMO.
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.
I agree with 11223 that craiglist is the “fair market value” of rentals. You can go to other places and you will get similar data.
Some of the SS regulars get a special “friends and family” rate, but that is not really what you will find as a renter without connections or what can expect to see from tenants that you do not give special deals from.
Any other landlords want to chime in with their experience?
“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.
I’ve only ever looked at craigslist for SFH rental, never apartments.
Both times I’ve rented, the rent we obtained was greater than 20% LESS than the advertised rent.
We never knew the landlords before – these were cold calls off craigs.
I’ve posted the details before, but once again for this discussion:
Mid-2002. 4/4 view home (w/renovated kitchen w/subzero, granite, etc. + 1000 additional square feet lower level/garage) in Monterey Heights/border St. Francis (2-3 houses from the border), 3000 square feet. Asking: $4K, obtained $3.1K. We stayed until July 2008, with no lease after 2003.
July 2008. 3/2 expanded 1950s rancher w/2-car garage in Tiburon. Nice place, a little dated kitchen, in a neighborhood of $1.25-2MM houses. Asking: $3850, obtained $2800 (1 yr lease w/option to renew for same price for an additional year).
In the course of our search in 2002, and recently in 2008, we were offered 3-4 other houses total at up to 15-20% discounts to the asking, but we passed for one reason or another.
Private parties fear discrmination claims. Therefore, it’s common sense to expect private parties to price their assets high. When a renter presents himself as a member of the demographic the owner is looking for, the owner cuts the rent (for this reason, I’ve found it doesn’t make sense to talk about the possibility of discount over the phone – much better face to face). If the renter is not a member of the target demographic, no discount is offered, and no discrimination can be proven. I’m not sure whether this dynamic plays out in the “glamour” parts of the SF Bay, however.
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.
Satchel – You’ve mentioned many times that there is a “discount for being white”. I’m sure that I’m not alone at being appalled that this unfairness is occurring. (not appalled at you for benefiting, but rather at the landlords for discriminating). I certainly hope that this unfair regressive behavior can be discouraged through the courts.
When I reviewed applications, I always applied very objective selection criteria and even kept my worksheets so that if there ever was a frivolous discrimination suit brought against me that I would be able to back my decision process and prove that there was no discrimination against protected classes. Any smart landlord, even small time SFR landlords, would be wise to do the same.
I guess the loophole lies in the “discount counteroffer after acceptance” that you refer to. There I think you’re right : very difficult to prove discrimination because there are no other applicants who even had a chance to counter to compare against and therefore demonstrate bias.
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!)
Tiburon is not a “glamour” part of the Bay Area?
As a landlord, I have received counteroffers about half of the time and have usually accepted.
How large were those discounts, on average?
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.
NoeValleyJim – The discounts were all almost exactly $100 either in cash or in kind (i.e. free landscaping vs. tenant responsibility)
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.
Ex SF-er said: “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.”
If economy is a zero-sum game, then you are correct. However, economy is way more dynamic than that.
One very simple test…if tax increase causes rent to drop, then tax decrease will cause rent to increase, right? Well, anyone remember how the rent went after Bush’s 2000 tax cut?
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.
I myself am ready for a hipster free neighborhood. I have a co-worker who lives in a townhome adjacent to Tiburon harbor and commutes to our office by ferry and loves it. They decided to have a child and could not afford SF private schools. Like Satchel, they also rent the unit for about $2400 a month, yet units in their complex sell for over $850K. (the difference of course is Satchel has done quite well finding a single family home for about the same price)
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.
In SF, rent control comes into play in tax increase scenarios.
Say a person rents a 1BR for $2,000, but the market for like apartments has since moved to $2,200. Eventhough the person’s tax incidence has gone up, the person must give second thoughts about moving, simply because they have less discretionary income.
Even if the market moves downwards 10%, there is not much gain by moving.
Perhaps that’s why rent control is often referred to rent stabilization. No dice to the renter.
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”.
^^yes, though perhaps not if the house had been placed into a trust.
“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!