Inventory of listed single-family homes, condos, and TICs in San Francisco fell a nominal 0.5% over the past two weeks. On average, inventory has increased 2.0% during the same two weeks over the past four years and declines sharply over the next two months on sales and withdrawn listings.
Current listed inventory is up 33% on a year-over-year basis, up 18% versus the average of the past four years, and up 26% as compared to an average of 2006 and 2007. At the same time, listed sales in September (342) were down 13% on a year-over-year basis but versus a 30% year-over-year drop in listed sales in August (362).
The inventory of single-family homes for sale in San Francisco is up 44% on a year-over-year basis to 775 while listed condo inventory is up 26% to 1,161.
37% of all active listings in San Francisco have undergone at least one price reduction and the percentage of active listings that are either already bank owned (88) or seeking a short sale (178) is 14%, down 2% on an absolute basis over the past two weeks.
The standard SocketSite Listed Inventory footnote: Keep in mind that our listed inventory count does not include listings in any stage of contract (even those which are simply contingent) nor does it include listings for multi-family properties (unless the units are individually listed).
∙ A New High For Listed San Francisco Housing Supply [SocketSite]
Personally I’m glad to see inventory on the rise and think it is a sign of a more healthy and balanced market. The lack of supply certainly is a unique characteristic of SF. I suspect that we will see some buyers to emerge and continue to find a balance in price. Buyers are very smart these days and are driving for bargains. Not a great time to be a seller; especially if you have to sell and even more so if you bought in the last 5 years.
“That can’t be true. According to redfin, in the last *7 days* there were 210 new listings. So in addition to record high inventory numbers, we’re adding inventory three times faster than it’s getting sold.
……….
It’s not very hard to see what’s going to happen next…
Posted by: tipster at September 28, 2010 9:48 PM”
Woops.
“So inventory continues to grow at a time it usually levels off.
…….
Posted by: tipster at October 7, 2010 3:22 PM”
D’oh!
R, sales volume is very low — far smaller than new listings. What tipster did not account for is the fair amount of inventory that is being withdrawn without a sale. Of course, that inventory still exists and will get re-listed at some point.
The driving factor behind these inventory records is dismal sales volume. Few buyers (substantially below an already dismal 2009) is the trend that is driving prices lower.
I posted this on the prior month’s inventory update yesterday:
Here are the September numbers:
Month | MLS Inventory | MLS Sales | Months of Inventory | Trailing 3 Months of Inventory
Sep-10 1797 341 5.3 4.8
That makes the seasonal slope look steeper than ’07 and ’09, but not as steep as the sharp increase in ’08.
Posted by: sfrenegade at October 11, 2010 1:59 PM
English, can someone please translate the sfrenagade posting into plain english?
I am sure you are making a good point,
but what is it?
..seasonal slope look steeper than ’07 and ’09, but not as steep as the sharp increase in ’08.
Inquiring minds want to know.
The translation is that months of inventory is very high for this time of year, but a little lower than it was during the worst of the financial crisis in ’08 when prices fell by a lot the next winter.
So the theory is that, although we are experiencing a spike in months of inventory, which typically precedes prices falling significantly, prices will not fall by as much as they did at the beginning of 09 after the last big spike in months of inventory because the spike is a little lower than it was last time.
we’re getting into the winter season.
as with EVERY winter, the numbers of sales will fall to a point that the interpretation of the data is not very reliable.
I will continue to look at the pretty pictures, but not make too much of data between now and after the Superbowl. as always, RE is very seasonal even in SF, and the most important time of year is Spring/Early Summer.
also: there is so much going on in the economy right now that could potentially affet housing in a big way. among them: Quantitative Easing, “foreclosuregate”, slowing world economy, possible early phases of a trade war.
2010 = 1995.
It’s a slow and unsexy market now. Inventory is higher than the past. But it is still smaller than many other counties in the bay area and beyond. I have perused the mls for my criteria- 2-12 units in central SF, and there are definitely some good deals out there. The low priced inventory is definitely getting investor interest. Also, many larger bldgs are now in the 11-13 GRM. With low interest rates, cash-flow is getting much better in SF than the last several years.
I look less at SFH, but I do notice that tics and condos in the mish have not fallen off a cliff.
If you have access to capitol, are a seasoned investor, or willing to take on a fixer, there are definitely some interesting deals out there. The foreclosures, short sales as well as the person with tons of equity in a run down bldg that just wants to get out of the market and retire on the lake/beach. Perhaps they could have sold their multi units for 20% more when the lembis were around, but some are still willing to cash out at today’s prices, if it’s a lifestyle issue.
My observation is that there are plenty of investors who are buying good deals now in SF. They believe that the market will recover in a few years and that they are forming their asset base now, at historically good prices and attractive interest rates. Many seasoned SF investors believe in this formula. And I think they are right.
Man, me wish me had me some dough 🙂 but it’s cool…I can wait for the lending environment to improve so I can pull equity out of existing projects. In the meantime I have taken on a new hobby- photography. Yep, shooting street action with my leica…and spending more time on photography blogs. But I keep an eye out at socket site too. Real estate and street photography, i can live with that! Cheers.
“early phases of a trade war”?
But, but isn’t that what was widely credited for starting Great Depression I?
Of course, you did say “possible” early phases of a trade war, but the reality is that QE2 really *IS* a trade war.
“English, can someone please translate the sfrenagade posting into plain english?”
Sorry, kathleen, guess I took too many math classes back in the day.
What I was saying is that the seasonal increase in months of inventory is more noticeable than ’07 and ’09, but slightly less dramatic than ’08. ’08 had a huge spike in inventory relative to sales, and we are having a huge spike this year thus far too, but it is slightly less spiky. You can see this trailing 3 months of inventory spike on the graph that Post-It made of the data I gave on SS on the September 16 sales thread (the September ’10 data point needs to be added):
http://www.chartgo.com/share.do?id=b5ec6c54aa
From the last 3 years’ data only, it looks like July-August is often the bottom of trailing 3 months of inventory and March-April is often the top of trailing 3 months of inventory. The tax credits have screwed with this a little bit and caused some extra troughs.
“If you have access to capitol, are a seasoned investor, or willing to take on a fixer, there are definitely some interesting deals out there.”
Good Freudian slip with respect to crony capitalism. 🙂
I just got my Google Mortgage Alert yesterday morning. For the first time, I was quoted 3.5% fixed for a 30-year jumbo conforming. Unfortunately, 3.5 points on that loan (too rich for me right now!) but just the anticipation of QE2 is driving rates down to almost zip! Wife and I are getting our paperwork in order and planning to start the refi process in the new year … QE2 is gonna be great!
According to Bankrate, the average 30 year mortgage went up (very) slightly since last week.
“Wife and I are getting our paperwork in order and planning to start the refi process in the new year … QE2 is gonna be great!”
You can refi all you want. Once interest rates are back up again, the price of your home will be a lot lower than today. QE2,QE3, etc. just guarantee that you’ll never see the price of your place appreciate again in your lifetime.
Meanwhile,
2446 Washington closed at over $1k psf
2729 Pacific Ave is a TIC that just went into Escrow @ $3.5M (although I think that may fall for other reasons)
3085 Pacific sold for 10% over asking in 14 days @ $3.075M
2727-2729 Pacific Ave is also in escrow @ $5M+
I’ll even throw 2542 Fillmore on there as a good trade. Sure, way down from prior sale, but that sale was never justified and was a miracle hail-mary the likes of which I’ve never seen before, but to trade that property @ ~$4M today is still pretty impressive.
These are all pretty prime prices. Just saying.
According to Bankrate, the average 30 year mortgage went up (very) slightly since last week.
I have an existing mortgage with Chase and have been checking out refinancing with them. I blinked and it looks like rates bottomed out on Friday (according to their online quoter). They rose about .25% over the weekend.
Are you all confusing “sales” with “pending” or “in contract”. Sales are usually 30+ days old info – meaning homes that went into contract 30+ days ago are only closing today. It is Oct 12th so you are comparing today’s listed inventory with those that went into contract around Labor Day or before.
Meanwhile you dismiss the drop in inventory as “withdrawns” when few in their right mind would withdraw today during the best weather and 2nd hottest seasonal selling season and while interest rates are at record lows and stocks are up 10%.
Could inventory be down due to homes going into contract????
“Could inventory be down due to homes going into contract????”
That’s possible, but it’s almost certainly not the case. Pendings have been basically steady, slight uptick since late summer but still at rates that are substantially below last year (at least through 10/5, which is as current as this site goes):
http://www.andrewlamont.com/Nav.aspx/Page=%2fPageManager%2fDefault.aspx%2fPageID%3d1953256
Maybe places are being withdrawn because they simply are not selling. Redfin shows more than 950 places at over 90 DOM.
Anecdotally, I’ve see a lot of In Escrow’s recently on my radar. And I agree w/ @hangemhi that withdrawing your home now if you really want to sell would be suicidal.
“Could inventory be down due to homes going into contract???? ”
It’s possible that that’s the case, but I’m not sure. I looked at the same data that A.T. did, and it doesn’t appear that that’s happening in huge numbers. Condo pending sales have been done and are much more down from the peaks than SFRs. Condo pendings are similar to mid-February, which is quite low.
SFR pending sales are up from a few weeks ago, but it doesn’t look like the SFR sales numbers have shown the increase yet (since pendings are a leading indicator of sales). SFR pendings have been in a rather narrow range of 370-435 or so for most of the time since February, and we’re just into the upper half of that range now.
For reference, when I determine months of inventory, I try to compare the MLS inventory level given by SS closest to mid-month to the MLS sales in that month. This misses a ton of inventory and a ton of sales, but the former is harder to estimate and the editor often does an admirable job of doing so.
They could also be withdrawn with the explicit plan of putting them back on the market in a week or two with a fresh 1 DOM.
“E2,QE3, etc. just guarantee that you’ll never see the price of your place appreciate again in your lifetime”
whoa. big statement there.
“E2,QE3, etc. just guarantee that you’ll never see the price of your place appreciate again in your lifetime”
The above statement is total BS. Wage inflation is alive and well among people in my income group, which also happens to be the demographic that buys houses in my neighborhood.
The price of my house will rise over time, and inflation will erode the real cost of servicing the loan. High inflation and low interest rates make owning a no-brainer for me.
By the time I pay my house off in 30 years, $3050/mo won’t even be enough to buy groceries.
“You can refi all you want. Once interest rates are back up again, the price of your home will be a lot lower than today. QE2,QE3, etc. just guarantee that you’ll never see the price of your place appreciate again in your lifetime.”
I do think interest rates are working very strongly to support housing values at the moment, but the last sentence seems a little strong. When interest rates are more normalized, asset values should fall in response, but this happens very slowly in the housing market compared to bond trading.
One thing that’s interesting in Denmark is that people sometimes refi when interest rates are higher. This is because home loans in Denmark are more directly connected to the bond market, so you can buy back a bond below par. In addition, the fees for refis are low and transparent (unlike the BS list of fees you get here). Prepayment can be an issue on some of the loans however, but there are ways to deal with it.
Yeah, I also agree that statement is extreme. I think anybody with a 15+ year plan to hold, and don’t mind being underwater much of that time, will be just fine, shorter time periods are much riskier.
I also disagree with that statement. there are many moving parts to nominal home prices.
The Fed is clearly trying to drop the value of the dollar. Thus, assets may increase in price from a nominal standpoint… with houses being one such asset. we already see this happening with Oil, Gold and commodities (and even food).
however, we must not forget the reason that QE2 is being discussed: it is because we are falling back into subpar growth or perhaps recession. Thus, houses will continue to be under pressure for the very reason that QE2 is needed. (crappy economy)
the issue will become: does the dollar devaluation lead eventually to nominal wage appreciation? if so, then the debt burden will be easier for people to handle and then they can pay off their nominal housing debts more easily.
However, if dollar devaluation does not translate into wage appreciation then we are in trouble because Food and Energy and other life needs will rise in price which will crimp American ability to afford housing. Hard to pay a lot for a house when gas is $5/gallon and your food bill doubles.
the problem for the Fed is that their machinations seem to just funnel right into gold and commodities and energy… and not into wages. (this is the conundrum of global wage arbitrage and currencies pegged to the dollar).
who will blink first? the Fed? Or the Chinese and other dollar peggers?
there are ways around some of these problems, and it really depends on HOW the Fed initiates QE2. Unfortunately for the little people, the Fed looks out for the banks. Thus I’d expect them to initiate it in a way that benefits the banks. Again.
===
I’d be interested in your demographic Jimmy because I don’t know many people who feel that they have significant wage appreciation except for the uber rich who are most connected to Washington. I certainly haven’t seen much of that in my income bracket, not that my income bracket is hurting…
===
regardless, you’d have to be insane to think the economy is improving in any significant way… and thus I find any talk about near term home appreciation to be humorous.
“High inflation and low interest rates make owning a no-brainer for me.”
You may turn out to be right, but it is not a no-brainer. Low interest doesn’t do you much good if the value of the place plummets. Japanese buyers might reasonably have banked on similar logic in the early 90s to pick up some housing “bargains” and that was a horrible decision. Regardless, we have two different conversations going on here. If, like Jimmy, you already own a place and you’re happy with it, then by all means refinance and pocket some money. I just did that myself. But if you are considering buying and think today’s low rates make that choice more compelling, you should think twice and dig a bit deeper. lyqwyd’s 15-year horizon is probably a good rule of thumb.
You forgot about the financial services sector mostly connected to Wall St.; from Reuters earlier today:
The report was from compensation consultant Johnson Associates, which also said, according to the story, that some corners of Wall Street are likely to see bonuses rise by up to 15 percent this year.
I’m assuming that this applies to people working in San Francisco’s Financial services sector, a la the couple that purchased 2342 Broadway for $13,500,000 in March of this year.
“except for the uber rich who are most connected to Washington.”
“You forgot about the financial services sector mostly connected to Wall St.”
These are the same thing. Banksters are highly connected to Washington and keep reaping the benefits of light regulation and socialized losses.
My demographic is business owners who get a lot of money from the Federal government and exports. Domestic sales factor in the mix too.
Bankers are another group that are making more money this year. So are lawyers. Everyone loves a good lawsuit! Doctors always do well … Another demographic making money this year is farmers, admittedly not well represented in the Bay Area. My neighbors are all doctors, lawyers, bankers and small business owners. Dual-income households for the most part. I just do not see these groups under huge pressure or needing to sell at any cost, except the contractors and such who were out there flipping houses (e.g. the one I bought in a short sale).
Good houses still change hands for what I consider to be very high prices (most over $1.2M). The market that is dead is the fixer-upper market since renovation costs haven’t dropped much while appreciation is insignificant. Still, a fixer sold in the $700k range. Not exactly an utter collapse.
And with respect to $5/gal gas and high food prices … its a non-issue. Here is a rough breakdown of fixed monthly expenses for me:
Mortgage ($3.6k)
Nanny ($1.5k)
Prop. Taxes ($0.8k)
Groceries ($0.8k)
Insurance ($0.5k)
Gas ($0.1k)
Total: $7.3k/mo
So food and gas are about $900 a month. Do you really think that if gas and food doubled overnight, it would materially impact my spending? Get real. Please.
sfrenegade beat me to it.
there are few who feed at the trough of government welfare more than the finance industry.
one caveat: we must not forget that although average compensation is up the numbers of people in finance is down. Less people making more money.
despite the major giveaways by govt and the Fed, finance and banking revenues have struggled this year compared to last partly due to outflows of cash from equities/money markets and partly due to ZIRP with resultant pressure on fixed income amongst other things. Thus, many firms are looking at downsizing again this year/early next.
But if you are a big time welfare goddess like your $13.5M homebuyers then everything is coming up roses, I agree. I hadn’t realized that was Jimmy’s demographic.
So food and gas are about $900 a month. Do you really think that if gas and food doubled overnight, it would materially impact my spending? Get real. Please.
indirectly. Food and gas doubling overnight will have similar effects to what happened the last time we saw this game. Immediate crushing of the economy with probable recession.
The recession of course would hit most income brackets in some version or another, although you may be spared personally.
$5 gas and doubling of food prices is good for very few people. it is hardly “good” for house prices.
however: if the Fed engineers a way to direct QE2 directly into house prices then we may see nominal home price increases.
I’ve said as much for far longer than anybody else on socketsite… so I’m not unaware of the potential for QE2 to positively affect nominal house prices.
again: it all depends on HOW QE2 is implemented. only a person deeply connected to our politicians and Fed officials would know this information…
so it all goes back to what I’ve said for years. the future of SF RE is dependent on a few people in Washington, NYC, and Beijing.
Random source article but:
“The San Francisco metro area lost 3,100 finance-related jobs in the year through August and 12,800 since August 2007, state Employment Development Department data show.”
and
“About 240 hedge funds closed in the first quarter, following the liquidation of almost 2,500 in the prior two years, according to Hedge Fund Research Inc., a Chicago-based industry data provider.”
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a5kmC1vB51Ic
“So are lawyers. Everyone loves a good lawsuit!”
Might be true for the top tier of big law firm partners and the head lawyers at plaintiff’s firms, but the rest of the profession is feeling some pain, salary freezes/cuts, and job cuts.
“Doctors always do well …”
But let’s be serious here, we’re not talking about the young family practitioner buying a $2M+ house either. That would be young subspecialty people.
Tech Bouys San Francisco
Start-Ups Drawn to City’s Design Talent, Amenities and Rents Create a Boomlet
[…]
And with the city’s unemployment rate at 9.7% in August, tech companies have fueled pockets of job growth, with a 50% increase in the number of software jobs and more than a 20% jump in Internet publisher jobs for the 18 months ended in late 2009, according to Ted Egan, chief economist in San Francisco’s Controller’s Office.
The influx is also buoying commercial real estate. Tech companies are seeking 1.3 million square feet of space—either to expand or set up shop here— and make up 30% of the current demand for office space, according to Colliers International. Investors are pouring money into the city’s start-ups, with venture capitalists putting $528 million into San Francisco companies in the second quarter, more than triple the $164 million in the same period a year earlier, according to research firm VentureSource.
San Francisco now rivals Silicon Valley for hot start-ups, some investors say. “The growth rate of exciting companies is happening more in San Francisco than elsewhere,” said George Zachary, a venture capitalist at Charles River Ventures in Menlo Park, Calif. Of the 16 companies he has recently given “seed” financing to, Mr. Zachary said, about 10 are located in the city.
[…]
As I have said before, The City is hotter now than it was in 2000, as far as the number of start-ups, how fast they are growing, and how aggressively they are recruiting talent.
This is no doubt helping prop up rents in the office sector.
“Late last month, Zynga announced a seven-year lease for a 270,000-square-foot space in the South of Market neighborhood, one of San Francisco’s biggest commercial-rental deals in years.”
Tech Bouys (sic) San Francisco
[…]
“It isn’t clear how sustainable San Francisco’s tech boom is, though, especially since start-ups are by definition unproven. Many of the Web-based ones aren’t yet generating revenue, much less profit. And most rely largely on the same cadres of venture capitalists, so if funding dried up, the impact would be widely felt.”
[…]
Typical of NoeValleyJim to omit this paragraph from his article’s “highlights”. Just following his usual pattern, like “omitting” the news that he got laid off from his SF tech job while at the same time hyping the SF tech industry to high heaven at SS.
A lot of withdrawn inventory may not come back on the market for a few years, so not certain that is “shadow” inventory. I know folks who want to buy a bigger home (and additional kid on the way, etc.), they see their chance to sell a condo/TIC and maybe take a haircut there, but gain some “hair” (I’ll keep the metaphor going) when they find a house that is cheaper than it would have been a few years back. That all said…it is a game of dominos, if they don’t sell their property, they can’t buy the other property….
And interest rates on a jumbo loan $729,500 are at 4%!
If you don’t like the message, attack the messenger. That’s a fine discussion technique, nnona.
“doctors always do well”…
oh, right. Ask a primary care physician about that statement. Certain specialties do well, but many medical professionals are not doing well at all. Certainly not compared to what people “think” given their traditional social standing. Our medical system truly is broken.
Look, you want to buy a run-of-the-mill 3BR/2BA house in a nice neighborhood with good schools. Figure $850k-$1.1M give or take. So combined family income of $250k-$300k. That’s $125k per person. I can guarantee that most lawyers, doctors, mid-level management and a large number of experienced engineers make $125k/year or more. Some of the latter group are even my employees. So, pretty much any two-engineer, or two-doctor, or two-lawyer family can afford to live in a nice enough middle class neighborhood. Not luxury, but not bad either. That’s my demographic, they are numerous and overall they are doing fine. I don’t really care if a GP doesn’t make $200k a year like they used to. The system’s not broken … there are too many of them in urban areas and they should get used to lower pay.
Well, your “combined family income” is the rub. It requires not only two wage earners, but two relatively high wage earners. No opportunity for one to be a teacher, non-profit administrator, or the like. Not to mention the thought of taking time off for child rearing (or unemployment!)
I don’t discount that there are many many folks who make 125K or better. AND that they more often than not settle down together. But your conditions make it a somewhat narrow demographic.
I will note that you threw in a references to houses that were $1.2M+ earlier. Anyway, I think the part I’d disagree with is:
“I just do not see these groups under huge pressure or needing to sell at any cost”
You’re talking about households dependent on dual incomes of that level. Lawyers have certainly seen their fair share of the downturn and layoffs, at big firms that levered up during the boom at least. Plenty of non-big firm lawyers make below the threshold you’re saying too, although perhaps they don’t live in your neighborhood.
Even in the other fields, the fact that you’re dependent on dual incomes to live in that neighborhood places additional constraints on those households as well. However, it’s true that these constraints apply more broadly and that dual incomes in that range are more able to deal with rough circumstances.
I think I revealed my numbers as far as fixed monthly costs in an earlier post. If one person gets laid off, things will be tight but its not the end of the world. They will eventually get a new job and life goes on as normal. Most people in this income bracket have savings to draw on.
In the meantime the family is still bringing in $10k/mo. Not great with $7,300/mo in expenses but their world is not going to end tomorrow. Plus they can then take care of the kids, saving a little money on the nanny front.
For some reason, I have not met any teachers or non-profit workers in my neighborhood. There are several schools but the teachers all seem to commute in from somewhere.
There are some stay at home moms, though, in the case where the husband is a senior executive, or a partner at a law firm.
what about clothing, car insurance, car payments, medical insurance, dry-cleaning, etc? There are many expenses that are necessary in addition to what you listed. Sure, not everybody needs all the same things, but almost everybody needs at least some of them. Then of course there’s the stuff that’s not necessary, like cable, entertainment, going out for dinner.
And $125K annually is $10,000 a month only before taxes. After taxes you are already below the $7,300 a month
Also, not everybody has stellar credit, or paid 20% down, so their mortgage payments could be quite a bit higher.
If you have a combined household income of $250k-$300k and youdid not put 20% down and do not have stellar credit, something is seriously wrong with you or your spouse or both.
Perhaps you’re taking care of a chronically ill parent with an expensive condition whose insurance has hit the lifetime benefits limit. Or perhaps you have a serious gambling problem, a cocaine habit or a shopping addiction. Maybe you bought into more home than you could actually afford or have other self-imposed lifestyle issues with your personal finances.
Whatever it is, seek out professional help. If it’s not a medical or psychological condition (or the aforementioned family member support commitment), Suze Orman and/or Dave Ramsey have spent their lives writing just for people like you.
Don’t worry — we’ll make more; just don’t call it pent up supply. Currently, 1425 homes are in some state of foreclosure (NODs, NOTS, bank owned) in Ess Eff. This is compared to 1422 homes two weeks ago. Standard disclosures about noise in the data; information deemed reliable but not guaranteed.
We all know SF RE is a different animal and each of the neighborhoods is as different as a -(insert favorite breed here), each has to be cared for and fed accordingly. JNLB, your pure-breed areas need to eat people like you to survive, and more to your point – they have to keep attracting people with your demographic and income (or better), at an increasing rate, for there to be any chance of real price appreciation.
Perhaps the creation of households making $250k+ is growing faster here, perhaps local wages are growing faster than inflation, perhaps all the economic headwinds are just exaggerated tales coming from the bear camps or possibly SF is just super cool and worth any price. But I doubt it.
I’m not really a bear & I tend to see most glasses as half full, but I have to wonder with the $4,400+ you are spending each month on Tax & Mtg, could you rent a place that is equal or possibly better than the one you own? Plus no worries about maintenance/ depreciation/ transaction costs etc. Seems like there is value in staying on the sidelines and watching till the economy stops it’s convulsions. just sayin…
@Brahma, actually it’s just making bad financial decisions, nothing wrong with the person. It’s quite common in fact, even at that income level. I have a friend that manages HR at a hospital, she knows exactly how much the doctors are making when they come and ask her for a pay advance. It happens much more frequently than one would expect for people making upwards of $300K annually, and some of them do it on a regular basis, and have been doing it for years.
I think it’s foolish, but not everybody thinks living below their means is the top priority. It doesn’t mean there’s something wrong with them.
“It doesn’t mean there’s something wrong with them.”
Yes it does.
no, it doesn’t.
It doesn’t mean there is something wrong with them in the sense that they need professional psychiatric help. Like lyqwyd, I know a lot of people who have incomes in this range yet have no savings and/or poor credit. Common characteristics:
Very high student loan debt from law or biz school — well into 6 figures to get those degrees from pricey grad schools (I have both degrees and graduated with 0 debt — it can be done)
Expensive car(s) — can’t expect me to be seen in a Honda Civic
More home than they could afford — it’s an investment, plus I’m sure my income will rise considerably, plus have you seen the dumps that we could afford on our after-tax incomes?
No retirement savings — I’ll just earn more later
And then a smattering of nannies, private school tuitions, frequenting of trendy restaurants, and expensive clothes.
250-300k gross doesn’t get you far in this town if you’re trying to keep up with the joneses. That’s the rule, not the exception. No professional help is needed — they’ve just made a decision that these material things are more important than the debt-related stress that accompanies them.
(Jimmy NLB’s monthly budget indicates they indulge in none of these, except the nanny — good for him)
Just to expand upon what diemos said, at that income level, regularly making bad financial decisions isn’t something that “just happens to you” like walking out of your door in the morning and immediately getting stung by a bee.
At that level, it’s overwhelmingly likely that you are educated enough to be financially literate or be able to pick up a book and easily become so. You can afford to buy a copy of Quicken or Moneydance or what have you out of the spare cash you carry around in your wallet and to follow what it says to do.
I don’t have any training in HR, but if I were your friend, I’d start subtly reminding the physicians asking for advances about the hospital’s policies on employee substance abuse and the programs available to help them if that was their issue. Or helpfully offer to refer them to a qualified psychotherapist.
Because unless the expensive chronic condition or something like that like I already mentioned is at hand, something is obviously and seriously wrong if you can’t come up with a substantial down payment and maintain above a 740 FICO score. And you should be able to do both of those things at that income level without elevating “living beneath one’s means” to a top priority.
A.T., thanks for explaining it better than I could.
“I have both degrees and graduated with 0 debt — it can be done”
Sure, but do you have an Option ARM?
“what about clothing, car insurance, car payments, medical insurance, dry-cleaning, etc?”
I was thinking utilities too, but what you said works too.
regarding the mention of student debt…a lot of people think that is the next shoe to drop. It CERTAINLY impacts home buying decisions, because a greater and greater percentage of young people are carrying crippling student debt loads, which means they have to delay all kinds of other investments even IF they have the kinds of incomes that Jimmy was talking about.
I was recently chatting with a professor friend of mine (at an expensive nationally ranked private school), and he says it’s really becoming apparent that folks are rebelling at paying 50K per year for an undergraduate education (not to mention graduate). As with many other things in our debt fueled society, people are beginning to realize that they can’t easily pay off those loans with income (or home equity).
I know this conversation is getting very far afield, but I just wanted to add that tidbit. I feel extremely lucky that I graduated from a fine school with a very modest amount of debt, and I paid it off within five years of graduation. For many now, that simply not possible. And that can’t help but impact the real estate market.
Car payments? I’m insulted. Smart people like me don’t borrow money to buy consumables.
A.T. wrote:
I mentioned Dave Ramsey earlier. On his radio show he frequently says that you shouldn’t try to keep up with The Joneses. “The Joneses are in foreclosure and have just filed for bankruptcy!”
As to curmudgeon’s comment re: student loan debt, I have to recommend Ron Lieber’s May 28, 2010 column on the subject, even though I usually disagree strongly with his investing advice. As of that date, Cortney Munna, the 26-year-old graduate of New York University profiled in the piece, had nearly $100,000 in student loan debt from her four years in college and was making $22 an hour working for a photographer in San Francisco:
As they say in the blogosphere, go read the whole thing. The child you save from half a lifetime of debt service might be your own.
graduating with an interdisciplinary degree in religious and women’s studies
Only rich kids can afford to do that kind of study. The rest have to compromise somehow. Sad but true.
Anyway, for that person, enlisting into a monastery could have been a safer bet. Very minimal outlays and you can write a misery life-based novel when you come out. A career right there.
@Brahma, if my friend took your advice and started suggesting such things to doctors she would quickly be out of a job.
Knowing how to make sound financial choices is learned skill, one that is not taught to many people in the U.S. It’s not taught in college, and it’s rarely taught in high-school anymore either.
There is nothing “wrong” with a person who makes poor financial decisions, although there are certainly downsides to making to doing so.
@Jimmy, you certainly seem to make sound financial decisions, but most people buy their vehicles on credit, even smart ones (only about 10% of people buy cars with cash).
Really? A car only costs 1-2 months’ pay at that pay level ($20k/mo). Is it really that hard to save your pennies for 3-4 months and then buy something you need? Wow.
Yeah, I’ve never financed a car. But then, my first one was $500. And my current, my dream car, I dropped a cool $15k on.
Of course, I’ve never had a shiny new car.
yup, really.
Of course 20K per month is really about $12K after taxes, so now we’re talking about 2-4 months entire salary, and since we have to deduct ~7K for necessities, that leaves about $5K, we now talking 4-8 months of their entire disposable income, and many people at that pay level buy much more expensive cars, which put it at about 8-20 months of their entire disposable income. So yes, very few people pay cash.
I’m not saying it’s wise, just that it’s done. I definitely agree that buying cash is almost always better, especially if the car is a couple years old. But most people do not behave that way.
I financed my current car, but I’ve now had it paid off for 5 years, and am hoping it will last another 5 before needing to be replaced. When it is no longer usable I plan to buy a used one, hopefully cash, although I can’t be certain that my wife will agree to my plan…
Even below 6 figure incomes you ideally keep a decent amount of liquid savings. Like at least 6 months worth of living expenses. Once you have that in place, you can potentially put a nice lump sum of disposable cash together prety quickly.
Any personal car over $10k is completely discretionary. And buying discretionary items with credit is living beyond your means.
Yes, people try to make excuses like saying they would rather use the money(that they probably don’t actually have) for other investments(that probably don’t do well).
And occasionally you can get 0% deals, on cars that are not selling well enough on their own. That never happens for cars I would actually want.
When you start taking home and car financing into consideration, the picture is not so clear. Consider all the suburbanites who bought SUVs, boats, and RVs with HELOCs a few years ago. They probably say they paid cash too.
No auto loans/credit card debt 4 me.
I think your (30%) estimate for tax rates is way too high. I paid 19.5% combined state and federal last year, due mostly to a lot of interest and property tax-related deductions. Whatever. According to you, “most people” just spend it all every month. I don’t see that behavior among people I know. They all save, some of them are almost miserly in their spending despite high incomes and huge stock portfolios.
Someone asked about buy v. rent and I was also curious about that in my case so I ran the numbers:
$800/mo taxes
$3650/mo mortgage, of which $2880 is interest.
$150/mo in house insurance.
19.5% tax bracket
so we’re looking at $4600/mo in housing cost (this is pre-refi, remember). $770 of which is payments on principal.
Leaving $3830 in net costs. Of which $3680 is tax deductible.
The tax savings is 19.5%, which is $718/mo. Which leaves me with: $3680 – $717 + $150 = $3113 in net housing cost a month.
Could I rent an equivalently nice place, with a dog, for under $3113 a month? Maybe. But its very close to break-even.
After my re-fi, things will be even more slanted towards owning than renting. Post-refi (at 3.5%), my monthly after-tax costs will be closer to $2570/mo. At that monthly cost, there is no question that buying is preferable.
Somewhere out there in internet-land, people claim that buying here is 2X the price of renting. But in real-land, where I live, its perhaps 10% more, perhaps break-even. You can tinker with the numbers, but no way are you gonna convince anyone that buying is 2X as much.
J wrote:
I think $10k is a little low for that income level; I don’t make that much but I’m going on people I know and the people I see at the gym and what they drive.
I guess the “out” in this statement is the opening phrase “any personal car”, since if you need a car to ferry clients around in, etc. that counts as a work vehicle and thus we assume can be over the $10k mark. And the company will probably lease it for you a la George Clooney’s character in the movie Michael Clayton.
But just for kicks, I was wondering if someone with the salary level we’re discussing here would be comfortable driving A.T.’s suggested humble, anti-status symbol Honda Civic at that price point. Going out to eBay and using the local ZIP code yields a few 2006’s, all with over 100K miles on them. Kelley Blue Book shows a 2005 Civic EX located at Autowest Fremont for $10,982 and the next least expensive is a 2005 at another dealer. Can’t imagine anyone at that income level I know going for any of those.
Jimmy wrote:
Not just 2x, but almost 3x before the bubble popped. And not just according to “Somewhere out there in internet-land”, but to an esteemed publication that bills itself as a “Capitalist Tool”. From Forbes magazine’s list of “10 Cities To Go From Renting To Buying”:
Emphasis added. It doesn’t appear from a cursory look that the entire original article is on-line anymore, but you can always go to where I quoted it last time or the dead trees version at your local library or dentist’s office. I’m not going to defend their numbers or methodology, but that’s at least one place where the 2x multiplier came from and into common usage.
I just meant that a used $10k car is going to do pretty much whatever you need. Whether you feel it captures the sum total of your manhood is a whole different issue.
I don’t really care right now. I have had a sports car but I feel it’s not worth the hassle to park it in random parts of SF. Now I have an older Honda that is worth about 1/50th of my salary that I drive once a week on average.
I think KBB has been overly optimistic since the onset of great recession too. Then again, some cars hold their value better than others and don’t make as good of a bargain compared to other used cars of the same year.
This stuff is not according to me, it’s according to publicly available census data, IRS data, and surveys. The average FEDERAL income tax rate for the top 5% of earners (people making over $150K) is over 20%. That does not include state taxes. (see table 1 in the link).
lyqwyd wrote:
Yes, I was trying to be funny there, but only a little bit. I agree with this:
But the people who are in the income bracket we’re discussing aren’t a cross section of the American working class, either. “Many people”, even when you limit the population of concern to San Franciscans, aren’t part of it: as of 2007 (i.e., bubble top) the median household income was $65,519 in The City. So I think the people in the upper tier should have learned it one way or another. I’m assuming they did because both members of the the couple in this fictional but representative household were highly likely to have parents that were either comfortably wealthy or quite affluent, and even if they didn’t learn it in school, they probably learned about money from their parents. I’m willing to admit that I could be quite wrong in assuming that.
Like I said, I was trying to be a little funny there (and it didn’t work), but the idea I was working with was, barring the aforementioned care for chronically ill relative or something similar, if you’re in that bracket and consistently making bad personal financial decisions (and assuming, as I said above,that you know something about personal finance due to your socio-economic status), it’s likely that you have some kind of condition that’s driving it and you could probably use some professional help.
Anyway, I get the point you and A.T. are making, that its really a value judgement thing and that I just have different values from people who decide that having certain status-indicating or luxury material items is more important than the anxiety that accompanies their acquisition and maintenance if one has to borrow money in order to do the acquiring and maintenance. In other words, they’re not nutty, they just have different values. Point taken.
Jimmy, I see what you’re doing by excluding principal, but you lose it when you say “Could I rent an equivalently nice place, with a dog, for under $3113 a month? Maybe. But its very close to break-even.” You’re living there for $3883/mo minimum, and that’s without considering maintenance or opportunity costs, and the AMT.
The calculations also change a bit if you’re not in the super-conforming loan category (you said $850K-$1.1M, and 20% + $729K is $911K).
sfrenegade — no, you’re wrong. The principal payment reduces my mortgage balance. That money is saved, not spent. Just look at the balance sheet every month.
New listings per redfin are over 100 again today.
Here are some mid-month sales numbers (access to sales info is quite fun):
October 1-15
2010
SFRs 61
Condo/TICs 40
(obviously some more will come in before the end of today)
2009
SFRs 103
Condo/TICs 100
Maybe we’ll see the deluge of pent-up buyers yet, but the big slowdown from the already slow 2009 appears to continue.
2009 spring and fall were pretty different in behavior
True. Fall 2010 is looking a lot like Spring 2009.