August 4, 2006

One Free Pass

If you seek insight into what’s really happening in the local real estate market (and not just the same old industry rhetoric); if you value the inside scoop on new developments, interesting new listings and opportunities, and intriguing (or abhorrent) architecture and design; and if you actually want to make an informed decision about buying or selling a house, condo, or property in San Francisco, then we hope that you’ll continue to “plug in” (and contribute) to SocketSite.

If, however, you simply feel the need to single-mindedly debate (and we use that word loosely) the merits (or “superiority”) of buying versus renting (or vice versa), or the impending crash (or boom) of the local real estate market, then you’re probably wasting your time here. (Might we suggest the real estate forum on craigslist?)

That being said, this is your one free pass. And to get things started, we’ve moved the thread that started with an off-topic comment on our follow-up post on 2760 Sacramento to the comments section below. So have at it. Rant and rave or call each other (or us) names (within reason). Hell, this is the one time we really won’t care whether you’re on-topic or off. Just try to get it out of your system.

First Published: August 4, 2006 12:04 PM

Comments from "Plugged In" Readers

There reason why there is so much bitterness from renters is simple.

Let's say you and your friend 3-5 years ago were both 26-30 years old making a decent $150,000 a year average salary. One friend bought a $600,000 condo which is now worth $1,000,000.. and the other rented a normal one-bedroom with parking for $1,500 and spent $60,000 in rent over that time period. Would you be one bitter person if you were 29-35 and still renting your one-bedroom apartment while your friend has a 400K tax free windfall gain if you owned?

You'll never get rich renting. You'll end up buying a fancy car to substitute. And that's dumb.

Posted by: laadida at August 4, 2006 12:24 PM

Ahem, it's only a windfall gain if you actually sell...

Posted by: Amen Corner at August 4, 2006 12:25 PM

Not even. It's only a windfall gain if you acutally sell and move out of the area. Way out of the area.

Posted by: Bay Gelldawg at August 4, 2006 12:26 PM

Not even? You guys valley girls?

And what do you guys who rented for 3-5 years get? Negative $100,000 in equity since you rented while your friends made $200,000 in equity

Renters in their late 20's and early 30's are generally people who have failed to launch. Maybe you didn't study hard enough, or spent too much time getting your graduate degrees.

But at any rate, over the past 10 years, it's those who bought assets who have become the newly wealthy.

Sorry renters. Keep on paying the landlord's bills.

Posted by: laadida at August 4, 2006 12:27 PM

I do own property thank you very much. I just don't share your economically dubious definition of a windfall gain. And I don't share the belief that right now is a great time to be buying property in the Bay Area. Personally, I'm in a 'holding pattern' as far as property goes.

Posted by: Amen Corner at August 4, 2006 12:28 PM

Oh, you guys live in your own little world of real estate as the only opportunity in the entire world. I took my downpayment I was saving up for a house and went to grad school. Traded up my $43,000 per year salary in 1988 for one that now pays over a million.

Yes, if I had purchased a house back then I probably would have made $300K on a $150K investment. But I realized that there is more out there than real estate and went for the other opportunity. And I didn't have some huge mortgage to worry about, so I took the proper risks along the way that I might not have been able to take if I had some ginormous mortgage staring me in the face.

If you have an IQ of 85, real estate is a great way to make money very slowly and not work very hard at it, at the same time, making a lot of people in real estate very rich (the agents, mortgage brokers, appraisers, remodlers, etc together probably made more than most home buyers). For those of us who have a higher IQ than 85 and are willing to work hard, you can make more in other pursuits.

So it depends on what your hypothetical late twenties renters do with the money and what they could be doing with it. If they sit on the money and sit on their asses, real estate might be a better way to go. If they could have put it to good use, in an education or starting a business, real estate was probably a very poor choice.

Posted by: Tipster at August 4, 2006 1:00 PM

My real estate story: bought a cute condo in Nob Hill in June 1999 for $243K. Sold in April 2003 for $379K. I had lost my job in January 2002 and I couldn't hold on to it any longer. Moved into an apartment. April 2003 is when my money I had in savings ran out. Nice profit made. Didn't work regularly until 2004 because the economy was still too bad and I didn't want to leave the area. It's a good thing that I had the equity from the sale of the condo or I would have been on the street.

I'm starting from scratch now, but that purchase and sale helped me through a very bad time. Thank god I was able to make it work for me.

Posted by: Lori at August 4, 2006 1:28 PM

This might be off-topic, but I just wanted to compliment SocketSite on your excellent writing skills: punctuation, grammar, etc. That's rare nowadays. Well done! Keep it up! ;)

Posted by: Sexy & Sassy in SF at August 4, 2006 1:40 PM

I do not live in S.F., but am contemplating doing so. As so many on this site are informed, what is the general consensus regarding TIC properties.
I have a down of $150,000 and make about $100,000 - so, I think I could buy a TIC; but, I am concerned about the lack of a secondary market with TIC arrangements. Yet, condo prices seem out of my reach?

Also, it appears to me, via my long-distance assessment, that the market, even in S.F., has softened a bit? Any thoughts on that topic - does anyone think the prices will decline a bit this fall - I am told Sep/Oct is a good time to buy in S.F.?

Posted by: Paul at August 4, 2006 1:49 PM

Paul - the answer to your question will depend on whom you ask. Most realtors will chant their usual mantra of SF being unique where prices never fall, how you can never go wrong if you buy and occupy the place for a few years (i.e. not attempt to flip it a.s.a.p.) and so on. Others will tell you that you are probably right that prices will take a significant (>5%) dip by the end of the year - especially for condos & TICs.

Regrettably there are very few platforms where you can get an unbiased answer.

PS. And that, Mr. Socket, is an opportunity for you. Let the hoi polloi pollute the CL Housing Forum, where you provide a venue for an intelligent (and useful) Q&A session!

Posted by: It depends at August 4, 2006 4:34 PM

Bought my first SF condo in the late '90s for $69k (The Hamilton). Lived in it for about 18 months and sold it for $105k. In '98 bought a 1br/1ba condo on Lake Merritt in Oakland (Park Bellevue Tower) for $163k. Lived in it four+ years and sold it for $355k. Put $150k down on a brand-new Yerba Buena loft. Hated it and sold it for $5k over what I paid for it within six months--a $50k learning lesson (commissions, etc.). Put $100k down on a $339k 1br/1ba condo on Nob Hill at the end of 2002. Still there and now it's worth about $550k. I like to hop around a bit, which isn't the smartest way to go. But, because of the gains I saw with each purchase, I was able to put down fair amounts of money each time and keep my living costs comparable with renting, which they still are. I've also been able to stay out of any additional debt (beyond my mortgage), because I've been able to (carefully) use equity loans at the right times--like to pay off my car. The bottom line? There's no one right answer to any situation. The SF housing market is tough, and it's best to bet on slow gains. But, I do think purchasing--at the right time under the right conditions--gives you leverage with your finances in general that can never be gained as a renter. But, overextending oneself in a volatile market is a scary prospect. I feel very lucky I bought my first place when I did, and I feel lucky (for the most part) with my purchases since. I'm pretty careful and think things out. But, luck has definitely been a key factor. I don't think anyone on these boards has enough information or knowledge to get haughty and judgmental.

Posted by: Christopher at August 4, 2006 4:41 PM

The San Francisco and Bay Area real estate market has averaged a 10% annual increase since 1970. There have been years where the market turned down (1971-72; 1981-84; 1990-94; 2000-01), but the end of each of those decades had dramatic increases.

That 10% increase has been on the purchase price.
The average buyer has made a 20% down payment and over those 36 years has had a mortgage with interest rates from 4% to 18% annually. That buyer has seen several recessions, a real earthquake and numerous economic booms.

A house or condominium that sold for $100,000 in 1970, now sells for over $1,000,000. In fact, condo's that sold for $500K in 1995 now sell for over $1M.

If you make the assumption that the holding costs for an owner (loan, property taxes, maintenance, HOA fees, etc) after the tax benefits are equal to the cost of renting the same property, then the return on the sale of a primary residence, including the $250K or $500K capital gains savings, makes residential real estate ownership highly lucrative.

And you get to sleep there.

And believe it or not, the best is yet to come!!

There really is a place called China & India & The Eastern Bloc and their annual GNP is not 3% (US) but closer to 10%.


[Editor's Note: we have to point out that at an average annual increase of 10%, a $100K property bought in 1970 would now be worth $3.1M, and a $500K property bought in 1995 would now be worth $1.4M. An average annual increase of 6.6% would make either of these properties worth about $1M today.]

Posted by: Frederick at August 4, 2006 11:44 PM

Studies I've seen suggest that the after-tax holding costs (interest, insurance, taxes, hoa fees) of SF apartments are almost twice the cost of renting. That matches my only experience.

Posted by: Amen Corner at August 5, 2006 8:44 AM

Oops "own" not "only".

Posted by: Amen Corner at August 5, 2006 8:45 AM

For those of us who can afford and are fortunate enough to buy a home, yay for us. But let's not bash those who rent. For some people who rent, it's an option -- they prefer to rent so they don't have to deal with the maintenance, taxes, etc. Also, some can't afford a downpayment/mortgage, so renting may be their only option, not that they are any less intelligent than the rest of us. At least they're trying to make an honest living and are not societal parasites leeching the Welfare system.

And one other thing: renters are bitter because rents, admittedly, are high nowadays, just as buyers are bitter about the high price tag of homes.

Posted by: Sexy & Sassy in SF at August 5, 2006 9:58 AM

Yeah, there's nothing "sexier" than a 40 year old who still rents or 'god forbid' lives with roomates. :-)

But seriously, it's more a lifestyle choice. Buying means putting roots down and "staying for awhile". So many people who can afford to buy are spending their money on that BMW and vacations to Thailand rather than a good downpayment.

Paul, avoid the TIC unless you can sleep knowing that your credit rating will change at the whim of your neighbors' financial stability. I contemplated going into a TIC with a gay couple (friends) a few years ago, and thank my lucky stars I backed off. They have since broken up, and it would have been a sorry mess.

Posted by: etslee at August 6, 2006 12:17 PM

I hear a lot of owners boast about their investments but if you actually do *all* the math, even on the figures they quote (owners always understate their cost and always overstate their worth), renting is a reasonable way to go. It's not like other asset classes haven't been growing as well.

Posted by: pwb at August 7, 2006 10:35 AM

Since this is the temporary free-for-all section of the site..why does etslee feel the need to identify his/her potential TIC mates as "gay"? Because they can't be relied upon to stay together long enough to get through the condo lottery? Try substituting "black" in that sentence and see what it sounds like.

In any case, the use of that one word makes Etslee seem to have a few issues with homophobia which I hope are due only to fast typing.

OK, back to ownership vs renting....

Posted by: whatphobia? at August 7, 2006 5:18 PM

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