San Francisco Active Listed Housing Inventory: 10/29/07
San Francisco’s inventory of Active single-family, condo, and TIC listings fell 1.2% over the past two weeks (as would be expected). At the same time, and for the first time in at least five months, the number of active listings in San Francisco is nominally higher (1.1%) versus the same time last year (as might not be expected).
SocketSite’s San Francisco Listed Housing Inventory Update: 10/15 [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by badlydrawnbear

    The inventory is interesting considering the continued decline in Sales Volume in SF.
    While the inventory doesn’t appear to be significantly higher the double digit declines in sales volume continue to increase the months supply. Of course we certainly aren’t at any kind of ‘crisis’ level with the months supply.
    We sill see the same steep decline in the winter months as in years past? Or, are more and more of those putting there homes up for sale true ‘must’ seller’s keeping their homes on the market through the lean months?

  2. Posted by anon

    What would also be interesting would be to see the mix of homes that are for sale. For instance, in my area I’m noticing more homes in the “prime” neighborhoods for sale.

  3. Posted by Dude

    Inventory definitely “seems” higher than last year, at least from the amount of open house signs I see cruising around town on weekends. Is this data from the SFARMLS?
    Movoto, which reconciles a few different MLS systems, shows inventory of 1,558. A little higher, but not much. Was looking at CL and noticed that there seem to be a lot of pocket listings as well. Not to name names, but one of the local brokerages has like 1/3 of its listings as “off market.” Interesting.

  4. Posted by anon

    Dude, what is “CL”?

  5. Posted by bird_man

    CL = craigslist i would assume…

  6. Posted by tipster

    The MLS inventory number is being (and has been for awhile) heavily managed to make it appear that inventory is lower than it is.
    Here’s one example from Craigslist (only one of four units for sale is on the MLS:)
    http://www.l335FultonPlace.com – Great New 6-Unit Building in hot NoPa location.
    FOUR UNITS OPEN THIS WEEKEND FOR PRE-MARKET SALE TO BUYERS!
    Open House: Saturday & Sunday 2:00-4:00pm (Oct 27 & 28)
    BUYERS get SERIOUS pre-market PRICE DISCOUNTS and SELLER REBATES:
    ***Absolutely $0 Closing Costs to Buyers
    ***Reduced monthly loan payments for Buyers (by much as $500-1,000 per month!)
    Superb new construction with high caliber design & craftsmanship, natural materials: Brazilian Hardwood Floors, Custom Cherry Cabinets, Granite Counters, Stone Tile, Marvin Windows, Professional Grade SS appliances, GEDuets/front- loading Washer/Dryer.
    Unit #201 is only unit currently listed on MLS: 2br/1.5ba/1Pkg @ $795,000
    4 Units Available for Open House Pre-Sale and Sneak Preview
    ***2 Units are 2Br/1.5Ba/1 Deeded Pkg.
    ***2 Units are 3Br/2Ba/1 Deeded Pkg.
    Fluid Open Floor plans with Tons of Natural Light, Bay Windows, Elegant Professional Kitchens, In-Unit Laundry, Secure Deeded Parking, Video Entry.
    Fabulous common Roof Deck–great for entertaining! Just one block to Alamo Square and Hot NoPa cafes, restaurants, transportation. Couple blocks to Panhandle of Golden Gate Park. Sunny Central location is great alternative to Noe Valley, Bernal Heights and Pacific/Lower Pac Heights!
    http://sfbay.craigslist.org/sfc/rfs/460495585.html

  7. Posted by gh

    I echo the feeling that it “seems” like there is more inventory out there, and continuing to hit my e-mail inbox every day…

  8. Posted by fluj

    There isn’t a ton of good stuff out there right now. You can look at areas and it can be deceiving. Glen Park seemingly has a lot of inventory. But if you look closely, none of the more affordable homes are in the cherry locations.

  9. Posted by SerialJingleMailer

    The reason all the visible openhouse signs and the like are making it “seem” like there’s more inventory is because selling is harder today. Sellers and their Realtor®s have to slut it out there more now. Would anyone in the world at all have put an openhouse sign on the corner back in the days when 55 bidders were stepping on each other’s backs to get their offers through any old front door in the city? OK, that’s not what it was like LAST year, but you get the picture.

  10. Posted by Dude

    “The MLS inventory number is being (and has been for awhile) heavily managed to make it appear that inventory is lower than it is.”
    Not arguing with that, but why? Maybe I’m missing something obvious here, but isn’t it in a realtor’s best interests to have property on the MLS (or any other media, for that matter) to increase marketability? Not like inventory has tripled, right? So what’s to gain by “managing” it down by 15 or 10% on the MLS?

  11. Posted by tipster

    Why would they manage that number, because buyers tend to wait or bid lower when inventory spikes up because they suspect that prices are coming down.
    It is definitely a balancing act to keep the inventory number low while marketing properties using the MLS. But when you have a very few number of agencies handling 90% of the transactions, it is easy to do. Other cities have a much larger number of much smaller agencies, and so they could not enforce such a policy.

  12. Posted by fluj

    Nobody in this thread is writing offers in this market, clearly. It is not that hard to sell right now.

  13. Posted by fluj

    Sellers want everyone to see their properties. There is no widespread MLS avoidance happening to cloud any issue. Craigslist is no market indicator. Craigslist is a handful of properties! And it’s full of flakes! The only people managing listings privately are by and large those who are selling new condos in new developments, because many units simply aren’t finished yet. The only people commenting on perceived smoke and mirrors are people who like to look at real estate for fun and will never buy. LOL.
    Good inventory if priced right is selling quickly in competitive bidding situations. Inventory with real or perceived issues currently has a trend to linger a bit longer in this market. As it should.

  14. Posted by Dude

    OK fluj, so why do certain agencies not list certain properties on the MLS?

  15. Posted by fluj

    Example, please?

  16. Posted by Dude

    Here you go. This building has a few units for sale, some are on MLS and some aren’t. Just wondering why?
    http://sfbay.craigslist.org/sfc/rfs/463011534.html

  17. Posted by Developer X

    I don’t think the MLS numbers are being managed – or at least not being managed any more than they normally would be. San Francisco’s real estate market is still doing well in the mid to upper level homes/condos. In fact, well priced high end is moving rather quickly still-which is the sector I have been watching.
    I echo “badlydrawnbear” -It will be interesting to see if the seasonal drop off in inventory happens like it has in the past, or if they stay higher than in 2006. Anyone have a sense of which way it is going?
    I am a developer down on the peninsula- and my market’s price per square foot is currently at an all time high. It’s still hot in the best locales. I don’t see any significant softening of our market in the short term future.

  18. Posted by fluj

    I couldn’t tell you. I have been inside that building tho. It’s pretty cool. That doesn’t seem like a bad deal. If I had to guess I’d say this one is probably down to a seller testing the waters before he/she puts it on the MLS?
    There’s another exception. That’s the uber high end property that us great unwashed don’t even know about. The $60M+ property that may be for sale for years before somebody buys. Sometimes those don’t even go into the MLS in the first place.

  19. Posted by emmett_brown

    Dude, did you notice 137 Otsego sold for 694k? Apparently 699k wasn’t particularly overpriced (though obviously 799k was).
    http://www.137otsego.com

  20. Posted by movingback

    This site really annoys me – the negativity and overabundance of armchair economists on here has got to be the worst of any blog out there. We are out looking at Open Houses every weekend – mostly in Districts 4 & 5 – and let me tell you, folks, there IS NOT a lot of inventory out there to choose from – especially where we are looking. We looked at one property last weekend in District 5 that already has 5-6 offers. If you spend hours and hours every weekend out looking at place like we have been doing, it does not appear at all that anyone is manipulating the MLS listings – I think you people are dreaming. I think most of you look at all of San Francisco as a whole, and think because you see so many places in Mission Bay, the Excelsior, Sunset, Richmond, etc. currently on the market that you all think there is a flood of fantastic inventory and not only that, that agents are deliberately manipulating numbers. There are so many pessimists on here it’s amazing. Coming from a city where supposedly 70% of the population are renters, not surprising. I am starting to decide to take Fluj’s side – someone needs to balance this forum out, and make the rest of you realize what it’s really like out there – other than what you are reading on these stupid blogs. Or in the Chronicle. Are there any serious home-shoppers on here? Or just armchair economists and bitter renters? Any bitter renters plan on buying when the market bottoms out? Or just keep reading blogs and posting comments? Our neighbor’s house just recently went on the market for $1.6 Million – I am sure they will have 5-6 offers within the week. There might be a bubble out there, I am sure, but I am also sure the other bubble is the one that so many people on these blogs live in.

  21. Posted by movingback

    Craigslist to shop for a house? Are you kidding me? A website where you can look for a late-night blowjob and buy a house at the same time? Just a few days ago a girl who applied for a Nanny position she found on Craigslist was killed by the person who posted the ad. Fantastic!

  22. Posted by SFHawkguy

    Let me get this straight movingback, you don’t like bitter blog people . . . yet you are on a blog and sound pretty bitter yourself.
    Let me guess, you make money when people buy real estate?

  23. Posted by hunting

    I’m afraid I have to agree with movingback regarding the state of the market. We are actively looking at properties at reasonable price points in the better neighborhoods and there’s not a lot of inventory on the market, hence desirable places are still getting multiple bids above asking. We have our fingers crossed that inventory levels will remain steady over the holidays but that our competition won’t be as active.
    (I do disagree with movingback about Craig’s List, though. It’s a perfectly legitimate place to find a home!)

  24. Posted by kriebly

    We used to rent in SF, currently rent on the Peninsula, and are currently looking to buy in SF, specifically in SoMa. We’ve found this website to be quite useful :)
    It seems to me that finding _some_ place to buy in SoMa is not hard, but it can be difficult depending on your criteria. Our criteria are kind of…extensive :(

  25. Posted by fluj

    Bad news sells papers folks. It aint nothin new.

  26. Posted by movingback

    Right on, Fluj. Right on! I salute you!
    Oh yes, SFHawkguy – I am a Real Estate Agent! Exactly! Thanks for helping prove my point!
    Anon, Hunting – nice to hear there are others out there trying, with similar experiences. We have very extensive, if not particular, criteria right now, which makes it even more difficult.

  27. Posted by Nick

    I agree with emmett and the people that have consistently been looking at homes/condos. Properties are still almost as hot as they were in the spring market, the only differences is that not as many get overbid. But they are still selling. And if a house doesn’t sell often its quality or some problem.
    However, I do agree that there is SOME MLS manipulation, and it mostly comes in the way of making sure homes doesn’t sit on the market toooo long. If I home doesn’t sell, rather than, lowering the price, the home is withdrawn only to be re-added to the market as a new listing months down the line. My realtor tells me this intrinsic limit is usually 60 days max to keep on the market – maybe less. (Makes homes seems like they are moving and prevents a build-up of inventory.

  28. Posted by anon

    I agree. All the hard data about sales being way down and prices continuing their downward trend (CS data are out and SF is down again in August right along with the rest of the country) just must be wrong. I know a guy who knows a guy who can’t find a place at a decent price. That is a reliable indicator, not verifiable sales and price data.

  29. Posted by badlydrawnbear

    You know this thread was going along fine until the name calling started.
    there were some thought and predictions about the next few months, some questions about the likely hood of the MLS being manipulated, and even a thoughtful comment by fluj that it just isn’t that hard to sell a place (and with only 4ish months supply who can argue against that).
    Then the whole thread veers off because one post decides to start doing some name calling and complaining the people are leaving comments on a blog, which I sort of thought was the whole point of blogs.
    Hey, I have an idea. If you are sick of reading post you don’t agree with on a blog, don’t read the blogs.
    In my experience, there are comments and opinions I disagree with on every blog I have ever read.
    Or, if you have a counter point you would like to make. Try and make your point without the pointless name calling that does nothing but distracted the comments even more and bring down the level of conversation.

  30. Posted by timkell

    The whole bulls and bears commentary on here does indeed get tiresome, but I think both sides should realize that both sides are right.
    The thing about real estate bubbles is that they don’t crash like the stock market does. They deflate. There is not enough liquidity in real estate to make for a 20% price drop in two weeks. It takes years for a bubble to work itself out of the real estate market. Sometimes you don’t get price declines at all. You just get 5 years of stagnation until the fundamentals catch up with the prices.
    But no matter what the bullish people think, the fundamentals are completely out of wack by historic standards, even in SF. Real estate in SF is definitely priced above the fundamentals. And some day in the future it will not be. The only questions when that date will be and how we get there. Is there a price drop or do fundamentals catch up? Is it next year or will it take five years?
    Watch this three part lecture from Humboldt State. Very informative:
    http://www.youtube.com/watch?v=uyOWuczlJCA

  31. Posted by fluj

    On the one hand it makes sense to take a large overarching view of thing, like you do timkell. On the other hand, in the micro here and now, that is not what’s happening. Before anyone goes off and says “Oh, so prices are going to continue to spiral upward, YEAH RIGHT.” — That’s not what I’m saying. NOr what I’ve ever said. I’m saying if you are out there trying to find a nice house or condo you would not notice much of a change from the last few years.
    And real quick, on the MLS manipulation of pulling houses off the market. The MLS changed its rules. You now have to pull a property for an entire month before you can re-enter it as “new.” It used to be two weeks!
    [Editor's Note: As you might recall, the MLS policy change went into effect eleven months ago: A New New Policy Change For The MLS.]

  32. Posted by anon

    “The only people commenting on perceived smoke and mirrors are people who like to look at real estate for fun and will never buy. LOL.”
    FALSE.

  33. Posted by fluj

    Oh sure. Once the 20 point hit occurs and condos in 94123 cost 850K again …. naaah. It isn’t happening the way we were talking about earlier. Sellers want maximum exposure. Only developers would do this sort of maneuver.

  34. Posted by timkell

    Fluj, I just said I didn’t disagree with you. Take off your shield and sword and have a discussion already.
    It’s a fact that sale prices are not in balance with salaries or with rental prices. It’s a fact that anytime that imbalance has been there in the past 100 years, it’s eventually corrected itself. It’s also a fact that people are still buying houses and even competing for nice ones. These two points do not conflict.
    Some people don’t have five years to wait for a correction. They just want a place to live. Some people who own don’t want to take anything other than top dollar, so they stay put and wait, even if it is five years. In the stock market, this doesn’t happen as much. People get in and out of stocks on a whim. You can’t do that with a house.
    Feel free to argue that something has changed to make it irrelevant that the fundamentals are out of wack. Or perhaps something has changed that’s caused a new paradigm with new fundamentals, and there’s a new reason why housing prices are higher than rents and salaries and that reason’s not going away. But you can’t just say forget the fundamentals. There has to be a reason for the change, and until their is, you have to expect them to come back in balance eventually.
    One top reason for the discrepancy between prices/salaries/rents? Cheap credit and interesting loans. If you believe that that’s the new paradigm, and we’ll always have cheap credit/ARMs, etc. dominating mortgage markets, then perhaps the fundamentals have changed. If you think those days are gone and lenders will be more conservative going forward, then that reason goes out the door.
    You have to have one opinion or the other: either we’re out of wack or we have a new formula to use to value real estate.
    But for the bears, even if you do think the pricing imbalance can’t last forever, don’t hold your breath for a price crash. A small price reduction followed by price stagnation is more likely. And due to the lack of liquidity, there will always be exceptions. A really nice house on a great block will always be in demand.

  35. Posted by fluj

    I do have an opinion, and it is that while there may be a correlation between the way stocks perform and the way housing performs, it is not a direct one. I also think that RENT is trending toward “out of wack” around here nowadays. My honest opinion on why this market has sustained such competitive levels in this market, in the face of such overwhelming bad indicators, is the sheer level of liquidity around. I’ve seen it firsthand. $500K down on a 900K TIC — saw it. My clients bought the one downstairs. $550K down on a $1.05M TOTAL FIXER — saw it. My clients came in second, and had bid higher. $600K down on a $1.084M priced fixer that went for $1.465, saw it. My clients came in fourth out of 10.
    Whether or not this mommy-daddy, family, deep pockets, whatever the heck it is, LIQUIDITY can keep us afloat until the rest of the country gets better, I don’t know. If it does, look out. I think it will not. I think the excess liquidity will taper out, slowly. Only truly amazing properties will sell after a while.
    However, the people with the deep pockets are only the ones who are getting in. Their competitors, people with normal good savings and solid credit ratings are trying and coming up short. That’s the market. It isn’t just the deep pockets. But the deep pockets are driving it.

  36. Posted by timkell

    The most important correlation to think of, though, is the relationship between rents, salaries, and housing prices. Not stocks.
    And yes, rents are rising, which will help get the relationship back more inline. Still not even close though. Long way to go before purchase prices are in line with rent/salary prices.

  37. Posted by timkell watcher

    I don’t think we’ll ever get back into line re: salaries – at least not to the same extent as the rest of the country. Why? Because two thirds of our population rents, and because we’re in the unique spot of having a large high income job base within the City – and having a large high income job base south of the City that many people commute to. We’re a job center AND a bedroom community. No other city in the US can say that on anywhere near the same scale (Seattle probably comes closest with their downtown and the Microsoft burbs across the lake).

  38. Posted by Dude

    Sorry to interrupt, just wanted to reply to Emmett way above. I did not see that about 137 Otsego. Interesting.
    But don’t fret, lots of bargains remain in the outer areas. In fact, I’m seeing more and more bargains come on the market in Sunset and Parkside now, and some nice properties, too:
    2694 21st. Asking $759K, last sale was $750K in 12/04. So back to 2004 prices.
    2190 43rd. Asking $650K, last sale was $741K in 7/05. A 12% reduction.
    2536 Pacheco. Asking $749K, last sale was $750K in 9/06.
    Just a few data points.

  39. Posted by arlo

    I agree with fluj’s latest post. There seems to be a surprising amount of liquidity – and it is chasing the relatively constrained supply. The sales volume for October looks to be up from Sep with prices up a bit too. Of course, Oct will be down year over year – but by less than Sep. Will this demand taper out? It should – but I thought the decline would be more evident by now. I thought that the active inventory would be higher too. I know that you can’t directly compare different geographic markets, but, just as an example, Sacramento County’s active inventory is about 5X that of SF on a per capita basis.

  40. Posted by timkell

    Hey timkell watcher. LOL. nice name. I like it.
    I can agree with what you’re saying, but that does not conflict with any of my points.
    You can argue that SF is a unique place that has its own set of fundamentals. That may even be true. But whether SF has unique fundamentals or not, the prices on houses are not matching SF fundamentals that have been in place for decades.
    So either something has changed dramatically about our fair city, or something has changed dramatically about real estate in general, or nothing has changed and things will get back in line sooner or later.
    Until someone points out what’s changed about SF in the past 10 years or about RE in general, I’ll throw my hat in with 100 years of history.
    It’s true that people have paid comparatively more for SF real estate for quite some time. They just haven’t paid this high a percentage of their paycheck or this much more than rents are. Even if you think they’ll continue to do so, you should have a rational reason for that belief, no?
    Why are people willing to pay a higher percentage of income than they used to?
    Why are people willing to accept such a major disparity between rent prices and housing prices?
    There have been times in the past when they did so as well, and eventually, they stopped doing so and went back to keeping those three inline. Why would this time be different?
    No matter how you feel about it, it’s good to have answers to these questions.

  41. Posted by timkell watcher

    Agreed Timkell – prices are certainly still out of whack. I was more pointing out that things will stay out of whack comparatively speaking, but as you mention, we’re still out of whack historically for SF.
    However, I don’t think things will go back to completely where they were before, and I base that on broader socioeconomic trends – more and more people across the US are interested in urban life and the amenities that it offers. You see it in just about every urban center in the nation – DINKs, singles, and retirees flocking to condos in cities. With this new group of people (in addition to those that were here before) competing for urban places to live, it’s hard for me to imagine prices going back to the same percentage level that they were in, say 1985. What do you think?

  42. Posted by John

    Fundamental is a big word.
    The real question is, whose fundamental do you use? The existing home owners, or the buyers?
    If you use the income stats of the SF residents (existing owners and renters), yes, the fundamentals are off. However, why haven’t the price dropped? Because the buyers are a different group from the existing residents. There seems to be a new found interest in city living from those Google millionaires, who don’t see a big problem paying 1.5M for a condo or house which would rent for $6000/month. And no, they are NOT paying higher percentage of THEIR income on mortgages than other folks. They just have higher income.
    So, don’t fall into the trap using the selling price vs AVERAGE income. I am sure if there is a study of the sellling price vs the BUYER’s income, the number is not that extradonary in SF.

  43. Posted by timkell

    John, “sure” is a big word too. Every buyer and new city resident is part of the average income.
    Until you can show us some hard data that says buyer’s incomes vs. sale prices are still in line with historic trends, you really can’t be sure now can you?
    There have been rich people in Silicon Valley since HP opened its doors. Google isn’t the first nor will it be the last.
    I need more them “seems to be”. What you got?
    The “broader socioeconomic trends” point is something worth considering. From the 50s to the 80s, the trend was definitely to go to suburbs and it is reversing. I could see this contributing to a minor change in the relationship between income and price, but I can’t see it being enough to justify the current difference. Still something though.

  44. Posted by John

    timkell,
    There is no hard data because nobody in the industry care to collect data on the price vs buyer income.
    I cannot prove that the buyer income/price is still in line, but you cannot prove that they are off either. So we are both talking in the dark.
    At least, I am pointing out what matters, instead of using the average income which doesn’t matter at all, especially when 70% of the residents are renters.
    My next post will look at a different “fundamental number” which often get thrown around, and it will use real numbers. ;)

  45. Posted by John

    First, I am not a RE agent. Like a lot of people here, I have watched the market in dismay and/or disgust.
    However, I have reached my conclusion that we won’t see a dramatic price “correction”.
    Let’s look at some numbers.
    An often quote number is the “percentage of residents who can afford a median priced home”. This number is around 13% for SF (probably higher now, since the average income of SF household increased by 10% in 2006, which is probably not factored in the 13%). 13% is pretty low, right? It definitely points to a downturn, right?
    In a ideal city, where 100% residents own, this number should be 50%. So should we compare that 13% to the ideal 50%?
    Well, in the same ideal city, if you take the bottom 70% residential units off market and make them rental, what’s the effect on the “%household who can afford median home”? Use a little math, that number becomes 15%.
    70% of SF residents are renters. That also means 70% of the residential units are off the market, and I think we can agree those 70% are mostly low end units.
    That means, the IDEAL number in SF for “% household who can afford median home” should be close to 15%. Maybe 17% or even 20%. Definitely not the “50%” that most of us think.
    Now, compare the 13% in “reality” to the 15% to 20% “ideal”, it doesn’t look so bad, does it?

  46. Posted by poster

    John,
    I see your point about trying to pin down the “true” income of the buying pool in SF. I suspect you’re in part correct that they have higher income than the reported overall median income.
    But you have to also factor in two things that have had just as much, if not more effect in driving up home prices in the past few years – loose lending practices for mortgages, and psychological hype of the “buy now or be priced out forever” ilk. These factors are finally out of the equation for the most part, so I do think we’ll see what the true economic “fundamentals” for the SF housing market are from here on out.

  47. Posted by poster

    John,
    I see your point about trying to pin down the “true” income of the buying pool in SF. I suspect you’re in part correct that they have higher income than the reported overall median income.
    But you have to also factor in two things that have had just as much, if not more effect in driving up home prices in the past few years – loose lending practices for mortgages, and psychological hype of the “buy now or be priced out forever” ilk. These factors are finally out of the equation for the most part, so I do think we’ll see what the true economic “fundamentals” for the SF housing market are from here on out.

  48. Posted by fluj

    To the point, what has changed in the last 10 years in San Francisco?
    What hasn’t?
    Web is a viable industry. Tech and its ancillary industries — many headquartered near here — rule American commerce. An industrial wasteland is now “South Beach,” anchored by the prettiest ballpark in America. At least four massive new towers are being erected for the first time in 30 years. Another wasteland has been designated a world class research center, as well as an extension of a world class medical university. The Ferry Building has successfully anchored the Embarcadero’s rehabilitation. There is a north south line going out to the Southeastern neighborhoods. The northern portions of San Francisco have become an almost unparalleled destination for Yuppies. The city continues to see monied Asian immigration. A high profile mayor condones same sex marriage, increasing our reputation for tolerance, etc. etc. etc.

  49. Posted by emmett_brown

    Dude, the numbers you post are actually the SF real estate crash. It just happens so slow it is not immediately apparent. It’s block by block, year by year. Looks like Mission Terrace is trying to hold onto the 700’s (ignoring the Malkovich-Malkovich-Malkovich house which seems atypical of the neighborhood – based on my walkabout).

    If Parkside works for your commute, that seems like a much safer area. Plus the park, of course!

  50. Posted by timkell

    John, renting and buying are in no way completely separate markets. I’ve been to plenty of open houses for condos/apartments that are currently rented.
    Just look for yourself. Go to an open house for a $900k place in Hayes Valley. It would rent for no more than $3k per month. That just is not sustainable. Either the rent has to come up or the price has to go down eventually. People who buy rental properties expect to be cash flow positive unless they think the capital gains will be worth the expense. I suspect that’s what they’ve been thinking for the past 5 years, but if they stop thinking that, they won’t buy anymore.
    And if rental condos drop in price, so will purchase condos. All of these little submarkets are very much intertwined.

  51. Posted by anon

    I agree with timkell. Fundamentals are out of whack and have been for some time. If doctors can’t even afford to live in the bay area, what does that tell you? Granted the article is from 2001, but haven’t home price increased even more since then? I doubt doctor’s salaries have increased significantly.
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/03/17/BU224016.DTL&hw=recruiting+doctors+affordability&sn=001&sc=1000

  52. Posted by Dude

    Emmett, we may be partially hijacking this thread…but anyway, I agree that the correction has already started (ironic that others on this thread are still arguing about whether it ever will).
    I’m repeating myself, but real estate does not “crash” like stocks/commodities can. I think we’ll see attrition over a few years as sellers capitulate and slowly lower prices. It starts in the outer regions and seeps in. A few years ago all of California was a hot market, then coastal California, then the bay area, then the city, and now it seems it’s just districts 4-7 that are still doing well.
    Will the weakness keep spreading? I think so. But I could be wrong. Maybe there are enough millionaires rolling massive bubble equity to keep the party going there indefinitely. But the areas I’m interested in are definitely falling in value, both here in SF and in the east bay.

  53. Posted by peanut gallery

    When I bought my first condo for $245k in 1999 it was rented for $1,200 which was full market back then. Small one bedroom with parking in Chinatown/Russian hill. It was kept as rental and was cashflow negative for the whole time. Without a huge down payment, SF realestate is not cash flow positive when you purchase it with out a huge down (30-40% plus). I no longer own it, but would now rent for $2,200 and would sell for about $500K. These numbers do not seem all the different to me…17 GRM vs 19 GRM. Am I missing something? Nice place will sell for about 19 gross yearly rent.

  54. Posted by fluj

    I posted a long post to answer Timkell’s question what has changed in SF in the past 10 years, but it got flagged somehow. It didn’t contain anything offensive?
    Anyway, in a nutshell, what hasn’t changed in the last 10 years in SF?
    We’ve seen at least four new highrises greenlighted for the first time in decades, high volume desirable real estate in former industrial wastelands anchored by the prettiest ballpark in America, a new north south line to facilitate research facility infrastructure and a world famous medical school extension, tech as American’s top product, Web has come and gone and is back and profitable, Noe Valley has emerged as Pac Heights South (not really, but quite expensive), Bernal Heights has gone from dangerous to desirable, ditto Potrero Hill, Ocean Beach has gained a foothold as a desirable location, etc. etc.
    What else?
    [Editor’s Note: A keyword match on “sex” set the flag (as it looks like you might have figured out in your second post).]

  55. Posted by johnqh

    “renting and buying are in no way completely separate markets”
    timkell,
    Actually, you proved my point.
    The market availability is only 30%. However, we used the 100% population for calculations on % afford median price. That’s why we get 13%, which seems to be low, but when you look at 100% population competing for 30% of the residential units, it is not that off from the ideal number, which is 15%.
    Also, let’s use peanut’s number – 19X yearly (or about 230x monthly) rent has not changed a lot over the years. This is where SF different from stockton or tracey. (Personally, I am willing to pay up to 250x monthly rent for a SFH, or 200x for condo.) peanut’s number shows this multiplier hasn’t changed that much.

  56. Posted by timkell

    Fluj, things like that have changed everywhere you can think of, and I can come up with plenty of counter details, like one very big one: the population of SF is still lower then pre dot come bust.
    That’s not what I’m talking about. SF has been a desirable and sought after place to live since long before you and I got here, no matter how old you are. That’s why it’s always had higher costs of living than most places in the US. It’s also had the comparable higher rents, and the comparable higher salaries.
    These details you mention still don’t explain why now all of a sudden salaries and rents have stayed at one point and real estate prices have soared.
    Everything you mention, if they were the cause, would have caused rents to skyrocket too. But rents stagnated or dropped with the post bust population decline, as expected. Housing prices didn’t decline or stagnate post dot com bust/pop. decline, and that’s unexpected. Why the difference? SBC park is certainly not the reason for the difference.
    You keep trying to explain why prices have gone up. Don’t explain why price went up. Explain why the difference between rents and prices has increased dramaticall, why people have bought cash flow negative properties, and why they’ll continue to do so. If you can find some permanent cause for that, you’ll make me a buyer!

  57. Posted by timkell

    Peanut gallery, why did you buy the cash flow negative condo? I assume because you expected a significant capital gain (which, BTW, I’m sure you got and you’re quite happy about! Congrats). Great to have a personal example on here, so let’s hear more. I’m sure we can all agree we won’t see 10% increases every year for the next ten years, so do you still feel the same way and would you buy that property today?

  58. Posted by timkell

    Here’s a good presentation from the SFFRB:
    http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html
    See figure 2. The P/E or price to rent ratio increased about 30% in San Francisco between 1995 and 2004. It’s gotten worse since is my guess.
    There’s nothing about SF that’s changed much since 1995 to justify that change, as far as I can tell.

  59. Posted by badlydrawnbear

    Aren’t most rental units initially cash flow negative and then after a few/several years they start to cover or exceed the mortgage.

  60. Posted by Dude

    peanut gallery’s example, which I’m sure is truthful of their experience, is just not accurate of the broad market in 1999.
    Check out this link from the SF Affordable Housing fact sheet:
    http://www.sfgov.org/site/moh_index.asp?id=5812
    In 1999, most households made over $100K. Their midpoint rent was $3,085/month while the corresponding purchase price was $423,500. That’s 11.4x GRM, not 17x. So the multiple has risen substantially.
    As tim kell points out, rents and salaries have risen modestly while prices have gone out of control.

  61. Posted by fluj

    Actually, rents are higher than ever.
    You totally discount my points regarding the complete sea change undergone by certain parts of this city. This after you ask what has changed. Yet you want me to continue to debate.
    Where else has stuff like this occurred? It isn’t just the ballpark. That area was uninhabited. Yet we’ve lost population?
    Last, does anybody really know how many people actually live here? We have one sign on the GG Bridge that says one number, and one on the BAy that says another.
    How do censuses work? I really don’t know. Are families that refuse to fill out census data accounted for? I always felt like the 770K figure was untrue.

  62. Posted by John

    Dude,
    that number $423500 is a calculated number by the government. It is not the real number. The real medium price in Nov 1999 (see your own link) was 420K. We don’t know how much it would rent for the same unit. However, you really think an average apartment would rent for over 3000 in 1999?
    timkell,
    When everything else is constant, the fact people are making more money (especially in bay area) and got pushed into higher tax bracket (or AMT) is enough a factor for the Price/rent ratio to increase. Keep in mind, top bracket pays about 45% marginal (fed + state) tax rate, and it is not difficult to get to that bracket these days.

  63. Posted by Dude

    @fluj:
    “Where else has stuff like this occurred?”
    Most major cities around the country. Look at all the development San Diego has done, or Chicago. Those cities, like most others, grow steadily over time with the needs of their populations and most folks don’t notice it when they add a building or a bus line. San Fran did nothing for 20 years, so suddenly any activity becomes viewed as some transcendental event.
    @ john:
    “you really think an average apartment would rent for over 3000 in 1999?”
    Said link shows average 2-bedroom was going for $2,200/month in 1999. According to this chart:
    http://www.rent-sf.com/avg_rent.html
    the average 2-bedroom currently rents for about $3,200/month. This is apples to apples. So rents have gone up about 45% since 1999, or around 4.9% a year. How much have prices gone up since then?

  64. Posted by Trip

    I can add my anecdotal backing for Dude’s 1999 rent numbers. We were looking for 1- or 2-BR rentals in 1998 and early 1999 and 2-BRs were right there at around $2200-$2500. That’s why we bought our place then instead — made sense at prevailing 1998 prices w/ tax breaks, etc. The rent-buy equation has gotten way out-of-whack ever since then.

  65. Posted by peanut gallery

    timkell, Why did I buy the cash flow negative condo? It seemed like a good idea at the time. Without getting too deep, I thought I wanted to move into the condo put ended up keeping it as rental. The negative was not too bad and owning in SF seemed like a good idea. I honestly was not expecting 10% appreciation. I wanted to own something and this property seemed like a deal in that market, and the building and HOA was good. As everyone on the board does, I was looking at condos for fun and thought about trying to buy something. My parents had always purchased the homes they lived in had done work on their homes in the past and always done ok. Saw this condo in the paper and went to see it. Seemed about 75K lower than other similiar units I had viewed. It was listed at about $200K and I offered $245 with 5k credit for NRCCs. There were nine offers, and I was the sucker that offered the most. Did 97% financing so my payments were relatively high. I ended up selling in 2001 so did not make out all too well but was a good investment for sure. Used the proceeds to purchase income properties in other markets (central valley) that were cash flow positive. It seemed like a no brainer at the time. Getting checks as opposed to writing them…Looking back, should have keep this condo as it appreciated more than the central valley investments…Did not loose money in out of market investments but would have done better in SF. I am out of the income properties in other areas and back in SF. When I purchased again in SF it was a slightly cash flow negative property again but had a better down payment. Would I buy that property for $500k today? No way. It would drive me nuts knowing I owned it at $250K and am paying payments based on the higher purchase price.

  66. Posted by fluj

    You guys are discounting all the changes in SF too much. There has been some serious change in the last seven years, let alone 10.

  67. Posted by timkell

    “You totally discount my points regarding the complete sea change undergone by certain parts of this city. This after you ask what has changed. Yet you want me to continue to debate.”
    “You guys are discounting all the changes in SF too much. There has been some serious change in the last seven years, let alone 10.”
    But Fluj, what changes have occurred that impact buyers and not renters? I didn’t discount your points, I just said those would have the same impact across the board. If the city has become more appealing, it would be equally more appealing to renters and so both would go up right? Why has that not happened?
    As for population, SF population declined from 2000-2003 and has risen each year from 2004-2006. As of end of ’06, though, the population is down by 2% from pre-2000. It’s also got 11.18 percent less jobs in that time, according to Nuwrire’s analysis of census bureau data:
    http://www.nuwireinvestor.com/articles/top-5-declining-us-markets-51299.aspx

  68. Posted by fluj

    Has the city not become more appealing? Clearly there are many attractions, and in fact whole neighborhoods, that did not exist 10 years ago.
    How is the creation of an entire neighborhood of upscale condos not affected buyers?
    Rents and property values have both gone up in the last 10 years. How can you say they have not?
    I’m a census skeptic. I always have been, even in my pre R.E. days.

  69. Posted by timkell watcher

    As I’m sure you know, timkell, the State estimated population figures differ by more than 50,000 people – currently showing SF’s population at an all time high. The state’s estimates were SIGNIFICANTLY closer to the 2000 actuals than were the Census Bureaus. I’m definitely inclined to think we’re at an all time high population – in spite of the trends we’ve seen accelerate over the past few years – singles with parent’s cash buying in the city, DINKs buying in the city, retirees buying the city – all in much larger numbers than they did in the 90’s and other decades.
    Just sayin…

  70. Posted by fluj

    Didn’t mean to double post. But couldn’t you have deleted the one with the typo? ;)

  71. Posted by timkell

    No one has said rents haven’t gone up! They just haven’t gone up anywhere near as quickly as real estate prices.
    And YES, the city is more appealing. And YES, this should mean similar increases in both rents and real estate. But that’s not what happened. Why are you not getting this? I’ve said it multiple times in multiple ways, but you keep
    misinterpreting what I’m saying.
    As I posted above, the P/E in San Francisco has gone up over 30% since 1995. It’s now significantly higher than it was at it’s 1989 peak before our last real estate downturn in SF. By any measure, it’s overvalued compared to historic norm ratios or price/rent, price/avg income. That is an undeniable fact. So we have two choices:
    -believe it makes sense and that the new values in relation to rents and incomes are correct and sustainable. [More appealing city doesn't cut the mustard as rents would go up proportionally too. It doesn't matter that both went up. It matters that they didn't go up at anywhere near the same rate.]
    -believe that they aren’t sustainable and either rents/incomes will increase to bring it back into normal ranges or prices will drop.
    It seems like it’s really one or the other. It’s got to be. Any other third option I’m missing?
    Remember the 90s stock boom? Remember books like Dow 40,000? Those guys turned out to be wrong, but at least they recognized that either a bust is coming or we’ve moved into a completely new paradigm that justifies higher P/Es compared to history. Back then, people thought perhaps computing power would help maintain ridiculously strong productivity improvements indefinitely, which would justify higher P/Es for stocks.
    Oh well, they were wrong and history reared its ugly head, bringing stocks right back to where they’ve always returned.

  72. Posted by timkell

    Yeah, those census numbers might be wrong, but the general observation that there was a population drop post 2000 is true. We may have recovered completely or maybe slight below, but the main point holds: our population growth has not been the cause for the increase in property values.
    Population growth would, again, have the same impact on rents as it would on purchases.

  73. Posted by fluj

    I give up. This direct causality economics as applied to real estate is not my cup of tea. Think what you want. But people don’t live in stocks.

  74. Posted by timkell

    LOL. I win, I win!
    Just kidding fluj. Indulge me and watch the humboldt state lecture, all three parts. Agree or disagree I think you’ll like it.

  75. Posted by chuck

    I would like to value investment proprety in particular the same as my other investments. For example my building has 3 units (one basement apt) that brings in (2400, 2400, 1200) for 6000 monthly. 72000 annually, minus taxes and expenses optimistically call it 60000k of income. I’d be willing to pay a cool 1 million for that then, earn 6% (discounting my own rent).
    The building is not worth that. Any TIC around here (nopa) including one right next door same thing is selling for 900k in the last few months. So the building is worth at least 1.8 million, especially as I personally know people who have an offer on a 2 unit building for 1.8 million, they will pay 800k down (family money of course). Even 800k it doesn’t make sense to me, as you have a $20,000 tax bill and a one million dollar mortgage and insurance, it could come in for a massive 9k a month mortgage on a building that could only return 6k on rent. Even bought with cash, after taxes and expenses, it would return some where around 2.6%.
    I agree with Tim Kell, it is out of whack. But I also agree with John and Fluj, the people buying these houses have massive incomes and liquidity that makes it possible.
    I have about 850k in investments, and I made my money the hard way (kind of). I am unwilling to trade it in for a 2.5% “return” compared to renting. But I don’t feel great about it… kind of guilty for not buying. Who’s with me?

  76. Posted by timkell watcher

    timkell – population oftentimes doesn’t affect price one way or the other. If it did, we’d have sky high prices in Phoenix and housing prices would continually be dropping in Western Europe and Japan.
    One major change of the past ten years that could have an effect on purchase prices, but not rents? Baby boomers entering retirement. If you only have twenty years left and have money to burn, why not go ahead and plop money into real estate? Declining household sizes (which are no doubt happening) should also cause an increase in price – assuming population is not decreasing.

  77. Posted by arlo

    Chuck – good analysis. Why are properties yielding such low rates of return? Cap rates for investment properties have been in the 2 – 4% range – and, as an owner occupier, you get about the same rate of return versus renting. I don’t get it either – why would anyone buy at these prices? To make the investment work, you need 1) cheap debt for the debt portion of the acquisition cost, 2) no other good investment ideas for your cash that you’re using for the down payment (otherwise you would put your money there), 3) an expectation of higher rents over time, and 4) an expectation of ever-increasing appreciation.
    Well, cheap debt is harder to get, right? Even if your name is Frank Lembi, can you really borrow money at 2%? Maybe you’re not bullish on any other sector of the market, but surely you can get a higher initial “cap rate” elsewhere with your down payment money. Sure rents will go up over time – but they have had a pretty good run the last couple years and they are tied to job and population growth. How much higher are they going to go? So it seems to me that anyone who is buying anything in SF must be absolutely convinced that prices will rise by at least a solid 5 – 10% compounded per year every year – no dips or plateaus allowed. Seems pretty unrealistic to me.
    There are other costs too that don’t always get factored in to the already ridiculously low cap rates. Capital repairs, vacancy costs, rent control for long-term tenants in rent-controlled buildings, eviction issues (what if you get a protected tenant?), normal tenant issues, nightmare tenant issues, etc – these will all lower the true rate of return. And, after tonight’s temblor, don’t forget about earthquake insurance.

  78. Posted by chuck

    Thank Arlo. I am interested in historical cap rates in SF, I wonder if anybody has information about that. In SF, Seems there has been a fundamental shift related to multi unit buildings (in good nick). That is, they are split and sold as TICs. That has completely changed the game, and prices have skyrocked and cap rates have plummeted for these buildings. The cap rates were reasonable back even in 99-2000 when I was looking at multi units. Wish I had bought of course.
    But that has already happened. If you are looking at a multi unit with a current cap rate of 2.5%, and expecting it to appreciate at 10% a year, how low does the buyer think the cap rate will go? Do they think they will sell them with massive appreciation in the future and presumable cap rate of 1%? Being a landlord is not a pleasant way to earn 1% (or 2.5%). And if you are borrowing at 6% and earning 1% you are loosing 5%, cash money.
    Seems like a wierd situation to me. However I’m not naive enough to think the prices will actually fall in our fair city. More likely, fail to beat inflation by much if at all. And rents will rise. Inflation and the low dollar will keep prices steady or rising in nominal terms. If I had to guess.

  79. Posted by arlo

    I agree – being a landlord is a pretty tough way to earn your couple % – and then you have to come out of pocket with an additional 5% of the purchase price to meet your debt service. Who can afford to invest like this or are we missing something? I just read on the new post about the 21-unit Pac Heights building that Lembi is a likely buyer. They are advertising a 3% cap rate for this building. Again, how to you finance this? I’ve heard some of these buyers have hedge fund and foreign money – but those “lenders” would want to get paid too, wouldn’t they? And probably a lot more than 6 or 7%.

  80. Posted by Dude

    chuck & arlo – cap rates have indeed been terrible for years now. Will the balance return? I believe it has to, and prices will fall (they already are in many areas) along with rents rising. But you shouldn’t feel weird that you can afford to buy and are renting, especially when it’s the wiser financial choice. There’s no shame in being financially prudent. 1 to 2.5%? You can earn twice that on a CD, which you can even invest in foreign currencies to hedge against the continued devaluation of the dollar.

  81. Posted by anon

    For those wondering how anyone makes it as a landlord – they don’t. Most units in the city fall into a few classifications:
    1. Owned by one of the two old time big boy landlords
    2. Owned by Avalon or another of the newer national companies
    3. Owned by a small landlord who owns the property outright
    With the tenant laws in this city, very few “new” landlords are likely to be produced. Rents are artificially kept high by constrictions on building and rent control, etc, etc – but at the same time, rents are kept LOW by the many small landlords who own their buildings outright – thus not needing to service any debt.
    For example, I know two Chinese couples who own a six unit building in the Richmond together, that was bought in the 70’s. They view the property as a way to keep income rolling in (right now around $11,000 a month) and ALSO as a way to have other family members and friends from China come to America. A new immigrant’s hardest challenge is usually in finding a place to live – there are many situations similar to this one. A group of Russians bands together and buys a small apartment building to give other immigrants a chance to make it – etc, etc.
    The SF market is so small, that I would reckon situations like these have a dramatic effect on the market as a whole.

  82. Posted by Gdog

    Here’s a data point on what rents are doing are doing at my very large South Beach apartment building. I moved there in spring 2004, and every year the rent has increased either 9 or 10% (including the now long gone incentives). Just got my renewal notice in the mail yesterday and in 8 months my rent increased 8%, and the management says I’m still well below market which very much jibes with posted rents on their web site.
    I won’t speculate how long this will continue, but if it’s only for a few more years that certainly makes buying look like a more favorable choice in the rent vs. buy decision.
    And when I move I won’t have to deal with a crappy fridge, lame shower, laundry down the hall, ugly carpet, etc.

  83. Posted by John

    I want to get back to the discussion on what caused price/rent ratio to increase.
    Dude, when we talked about price/rent ratio, it only makese sense to use the same unit. You don’t use the median price/median rent. If all the rental units get “deferred maintainance”, while all the owner occupied units get remodels, you will see a big departure on the ratio.
    However, nobody is going to deny that the price has increased a lot from 99 to 05. Actually, timkell’s number is about right. The price/rent ratio increased about 30% from 99 to 05.
    What caused it?
    Note, I am comparing 99 to 05, the peak of the bubble, and my theory is purely on the price/rent ratio, not on the absolute price.
    First, let’s look at the mortgage rate. In late 99, the 30-year mortgage rate is about 8%. In 05, the 30-year mortgage is about 6% (see http://mortgage-x.com/general/historical_rates.asp).
    If you look at monthly payments, that 2% difference is equivalent to almost 20% price difference.
    I would say about 15% of the price/rent ratio is caused by the low mortgage rate.
    Second, I have pointed out before, when people get pushed into higher tax bracket, the mortgage tax deduction become more significant. If a couple is making $250K/year, they are paying 45% marginal tax rate (fed + state) thanks to AMT. If the couple is make $120K in 99, they probably paid 25% marginal tax rate. The income level in bay area increased significantly over the last decade thanks to the high tech industry.
    About 10% to 15% of the increase is caused by the tax deduction/bracket.
    The ideal number of price/rent ratio in 05 should be about 25% higher than 99.
    Then, we still have about 5% to 10% which I call bubble factor – people rush into the market because they don’t want to be “priced out”. Due to the already high price in SF, this portion is relatively small. In other areas (Sac, Stockton, Tracey…), this portion could be 30% to 40%.
    When the bubble deflates, the extend of the drop is more or less equals to the bubble factor. Meaning – I can see 5% to 10% drop in SF (the city) contributing to this portion, not much more than that.
    Fast forward to 07, we already see the mortgage rate back to 7% range. We don’t know if it will go higher or lower.
    However, I believe the tax deduction factor is still a positive force on the price/rent ratio. This factor is slow moving, probably 2% per year.
    So, let’s look at price/rent ratio of 05 vs 07.
    positive factor:
    tax deduction factor: 2 years x 2% = 4%
    mortgage rate factor: -8%.
    The ideal price/rent ratio of 07 should be around 20% higher than 99.
    I don’t know how much of the bubble factor is still there.
    My point is, don’t expect the price/rent ratio to go back to the 99 level, unless the mortgage rate goes to 12%.

  84. Posted by notachineeselandlord

    anon – interesting points.
    1. Some questions: who are these big boy landlords?
    My building is owned by a chineese landlord, I’m sure owned outright by now. When he boughtin the late 70s what was the caprate I wonder? What is the building worth now? I know the builing was bough for about 170k, don’t know what rents were.
    You are probably right, very few new small landlords. The numbers don’t makes sense. For the seller, they should sell individually as tics, instead of trying to sell as an investment property and convince some sucker to buy at 2.5% cap rate. For an investor buyer, it doesn’t make any sense at all to buy at these rates. I guess if a hedge fund wants to make 2.5% return on their investors money its an option, but the people I know in commerical real estate wouldn’t touch that type of return with a 10 foot pole. They are looking for 10% plus.
    Individual units are just as bad deal in terms of cap rate, but you can discount some of that. Not really an investment, just a place to live. Currently can’t justify buying vs renting though, I figure I am making much more with my investments that produce enough return to pay my rent vs more or less loseing money by borrowing at 6% rates or paying cash, “earning” 2.5% instead of 7.5%.
    I guess I have to give up the dream of becoming a chineese landlord, or watch closely for deals/market conditions make it possible. I won’t embarass myself by asking my landlord if he will sell for what I’m willing to pay.

  85. Posted by anon

    The big boy landlords are:
    1. Citi Apartments/Skyline Realty/Lembi (different names, same dudes)
    2. Trinity
    [Editor’s Note: Some background on the Lembi’s might: Nothing Like A Little Leverage In San Francisco (So To Speak).]

  86. Posted by timkell

    Nice thread this turned out to be!
    Who knows if your numbers are right John, but I’d agree you’ve identified many of the contributors to price increases.
    I don’t see a major jump in average incomes to justify the assumption that many more people are in the 45% tax bracket, which would increase housing demand. The period we’re talking about is post dot com bust. We lost a lot of high income earners in 2000-2002, and Bay Area peeps lost beaucoup bucks in the market, so I can’t agree that we have a ton more high earners that we did in 1999. You see the same disparity increase between incomes/housing as you do between rents/housing over the same time, so doesn’t that discount the theory?
    The big drop in interest rates was a huge help for prices. If we see continued increases over the next few years, that will for sure create price pressure, as many people are very concerned with total monthly payments over most other details.

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