Purchased for $1.650 million in July of 2016, the 1,366-square-foot, two-bedroom unit #7E in the Lumina tower at 201 Folsom Street, an interior facing unit with “peaceful garden views,” returned to the market priced at $1.899 million in 2019 but was withdrawn from the MLS without a sale having closed.
Listed anew for $1.690 million this past May, reduced to $1.525 million in July and then offered for rent at $7,000 per month, the list price for 201 Folsom Street #7E is now down to $1.400 million while the asking rent was dropped to $6,500 per month without a lease having been signed.
At the same time, the estimated carrying cost of the unit would now run around $10,400 per month “at asking,” including a 30-year jumbo mortgage at the prevailing benchmark rate with 20 percent down, property taxes, insurance and HOA dues of $1,287 per month, but not accounting for the opportunity cost of that $280,000 down payment. The carrying cost with a 5-year ARM would be closer to $9,500 a month, assuming a conforming rate could be secured.
A sale “at asking” would also be 15 percent below the price the luxury two-bedroom condo fetched in 2016 when the average 30-year rate was running at around 3.5 percent versus closer to 7.0 percent as of today.
Why quote a mortgage cost at today’s rates?
They bought it in 2016. The carrying cost for this owner would include a mortgage at 2016 rates.
So the owner is going to buy it from himself?
The mortgage cost was quoted as part of the carrying cost for the current owner. In the greater “see how much this place is costing while it’s not selling” narrative.
Actually, the mortgage cost was quoted in the context of what it would cost a buyer to carry the property “at asking,” not the current owner’s cost basis, which is significantly ($250K) higher, and relative to the “asking” rent for the unit as part of our ongoing “analytics matter” narrative.
And if the argument is that people with 2016-era mortgage rates are sitting pretty and just won’t sell, which is a competing industry narrative, we’ll direct your attention back to the actual property and reality at hand.
I think the editor’s point was that there is a major imbalance between current asking prices and rental economies (which suggests that market forces will attempt bring them closer to equilibrium). As a rental, if someone purchased the place they would be paying a tremendous carrying cost versus its rent (which is not $7000/mo, and not $6500/mo). There’s a major imbalance here.
Yes, but it is rare to find a market where a single family home / condo will break even, let alone make money, as a rental. It was sometimes possible to do so here when interest rates were down close to zero and the borrowed money was almost free, but that’s not the historical norm in SF or elsewhere. The fact that we’ve now reverted to something resembling the norm – meaning that single-unit properties don’t make financial sense as rentals – is not surprising.
You could argue that it makes no sense to buy a home when you can rent the same home for less, and that might be true, although you have to also consider the value of mortgage interest deductibility which balances out some of the delta. And there are intangible benefits to ownership, including the stability of locking in your housing costs at today’s levels. That $6,000/mo (or whatever it’s worth) apartment may be $10,000 in a decade, but someone buying the unit would not see an increase in their outlay aside from increases in HOA dues.
I think that, right now, SF has reverted to a more typical RE market, where it doesn’t make financial sense to buy a home unless you plan to live in it for (at least) several years. How long it stays this way is anyone’s guess.
Maybe because absent any other info, most mortgages are not assumable.
Here’s what we know:
1. The owner CANNOT rent it at $6500; and
2. A sale at today’s price and today’s rates will run ~$10K per month.
Therefore, you can expect one of three outcomes:
A. an investor will pay $10K per month to rent it out to someone else for something less than $6500 per month, eagerly signing up for a $40K annual loss;
B. a buyer will pay $10K per month to buy something he or she can rent for less than $6500 per month, eagerly signing up to flush $40K per year down the toilet; or
C. the price will have to fall.
So can you see how the editor’s current rate information made sense?
I appreciate how clearly you unpacked this.
Don’t worry, a foreign buyer will come in and sweep this up. Oh, wait, that already happened….
or (D), someone will pay more than 20% down so their carrying costs are lower (and yes, that needs to recognize the opportunity cost of the down payment), or (E) someone’s willing to pay more to own than they’re paying to rent an equivalent space.
Not saying this isn’t a stark example of pricing and appreciation problems in San Francisco, but there are many ways this could unfold that don’t involve someone seeming to flush money down the drain on day one.
Well said.
In the days of irrational exuberance investors were buying up these SOMA condos knowing they would lose out on the rental but more than make up for it in a few years when they sold at a much-appreciated price. It didn’t make sense then and absolutely does not now. That segment of potential buyers for SOMA condos is gone which, with other factors, will continue to push prices down.
So if I’m reading this correctly a very rough back of the napkin analysis says the asking price has to come down to ~$1mn to to get it somewhat in line with the asking rent which is probably too high anyway? I could be off though so please correct me if so.
That would need to be closer to $800,000, actually, which would yield a CAP Rate of around 6.4 percent.
When was the last time that SF condo prices (or SFH, for that matter), were in line with rent? It seems there has been plenty of demand over many periods in which that was not the case.
Exactly. The notion that a SFH or condo makes financial sense as a rental property is a fluke of the last few years when borrowed money was essentially free. It has never been normal; it only happened here for a few years as a result of crazy-low interest rates and a severe shortage of housing/high demand.
Now interest rates are up to a more typical level, and housing demand has diminished somewhat. So rents are down, especially in the downtown core where fewer people now work, and carrying costs are up. The temporary alignment of sales prices with rents has ended.
Even when the market was doing well I don’t recall many properties looking all that great on a pure rental income basis. The payout came from increases in home values. But when home values start to turn flat and then dip, you can get a double whammy. The prospect of an ongoing rental loss just to end up eating a large capital loss. That’s why overheated markets can suffer a dramatic reversal (or a collapse in volume). What once looked to be a pot of gold is now an albatross.
Especially in the downtown and surrounding areas? or, specifically? I think more the latter, no? Rents aren’t down in most neighborhoods around town from what I can see.
The owner is from mainland China and has no mortgage per tax data.
so… you’re saying this is still a better performing asset for them than real estate assets in China? (Where they’re blowing up empty apartment complexes that can’t be sold…!)
“Houses are built to be inhabited, not for speculation.”
— Xi Jinping
Of COURSE houses are for speculation — how else would you explain SF/SV and basically the entire West Coast! Prices going parabolic even as people flee the region by the thousands …
Existing supply and demand aren’t the only forces at play determining the price of these units. There is also the absolute cost to build them which as I understand it is well north of 1M. That is not going to go down.
As long as prices are high enough to justify new builds then there is negative pressure on prices as the new construction appears. Once prices drop below new build costs then building stops, supply shrinks, and prices will go up again.
UPDATE: Reductions, Rent and a Harsh Reality Part Two