1307 Bay Street #3
Based on the assumption of an appreciating market, and past sales (e.g., comps) in the exact same Marina building, the original list price of $1,229,000 for 1307 Bay Street #3 probably seemed quite reasonable at the time. But it didn’t sell for that.
Nor did it sell for the reduced price of $1,195,000. Or $1,179,000. Or $1,139,000. Or even $1,069,000. It did close escrow two weeks ago, however, for $1,030,000 (16.2% under that original asking).
And yes, that’s $80,000 (7.2%) less that what #1 sold for in April of 2005. That’s $112,000 (9.8%) less that what #2 sold for in April of 2006. And that’s $140,000 (12%) less than what #4 (which is directly below #3) sold for last November (2006).
And while Bay is indeed a busy street, it was last year (and the year before that) as well. So if the Marina location hasn’t changed, what the heck has?
Damn Those Direct Comps In The Marina (1307 Bay Street) [SocketSite]
RealRecentReductions: You’ve Seen These Before (Will You Again?) [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by Jimmy (Bitter Renter)

    Nothing to see here folks, move along. Prices are still rising in desireable areas.

  2. Posted by Foolio

    To answer the posed question (what has changed), I think that buyers are now focusing much more on livability (who wants to spend 5 years hearing Bay’s traffic) and, perhaps more importantly, resale value.
    Where once (in 2006) someone would have closed their eyes, bought the place, and resold (for more) his way up the property ladder to the next guy with his eyes closed, now buyers seem to be staying away from busy streets and over-priced units.

  3. Posted by timkell

    Maybe we can still say now that prices are still rising on desirable streets in desirable areas?
    I have an image in my head of someone running upstairs in a flood, and now climbing out the window and getting on the roof and thinking “I’m still dry!”
    It’s only one property, but at a minimum I think we can all safely say that buyers are doing a lot more due diligence before they make their purchases these days.

  4. Posted by Sam

    So I wonder how the person who purchased #4 at $140,000 feels today? But I would guess it was probably google or trust fund money so it doesn’t really matter…

  5. Posted by Michael

    “Maybe we can still say now that prices are still rising on desirable streets in desirable areas?”
    It may be busy, but since when isn’t that stretch of Bay street or the Marina desirable? This is right across from a park, an easy walk to Safeway and isn’t on landfill.

  6. Posted by ok

    Buyers have more leverage and are simply able to be more selective in this market. This is a pretty clear example of that.

  7. Posted by badlydrawnbear

    now this is a huge assumption on my part, but if the 05 and 06 owners put 10% or less down and used a 2/28 or 3/27 (which of course I have no idea if they did) they are now underwater.
    Thus giving a whole new meaning to the term “liquefaction”.

  8. Posted by Spencer

    prediction: next unit sells for less than $950K

  9. Posted by gh

    Bay is a freeway in front of that building, I live one block away and walk downtown every morning, in front of this place. Properties with negatives like this are the ones that suffer in down markets.
    Good opportunistic buyer though.

  10. Posted by Spencer

    Question: Did someone really think a 2bdroom condo on Bay st would really hold a $1.25M value or much less appreciate?
    Let’s assume the last 3 buyers were of the mindset that SF condos will continue to appreciate at 15+% per year
    Buyer #1 paid $1,110,00 in April of 2005.
    probably expected (15 * 2.5) 37% appreciation
    In reality, 7.2% depreciation
    That is a 44% gap between expected and actual in only 2.5 years
    Buyer #2 paid $1,142,000 in April of 2006
    probably expected (15 * 1.5) 23% appreciation
    Since then, 9.8% depreciation
    That is a 32.8% gap between expected and actual in only 1.5 years
    Buyer #3 paid $1,170,000 in November 2006
    probably expected (15 * 1) 15% appreciation
    Since then, 12% depreciation
    and, most stunning of all, that is a 27% gap between expected and actual in only 1 year.
    and we are only in the 1st 6 months of at least a 2-5 year down cycle. I think these numbers are pretty remarkable.
    Even if they weren’t expecting a 15% retun, i bet they were expecting at least a 5% retun and the difference between expected and actual are still pretty striking.

  11. Posted by Dan

    The seller of unit #3 still got about $600,000 more than he paid for the place in 1997.
    Unit #3 just sold for just over $1000/SF. Unit #2 was bought for $959/SF, so it is not clear that the buyer of this larger unit is now in the red.
    Hopefully, the buyers of unit #1 and unit #4 enjoy where they are living and don’t need to sell right now– because indeed they will lose money of they have to sell now.

  12. Posted by Jimmy (Bitter Renter)

    Spencer,
    Do your numbers include inflation? (either CPI or an inflation figure that includes the cost of food, energy and other relevant items we use on a daily basis — your choice).
    What would the annualized rate of depreciation be for the other owners in that building?
    How low would prices have to go before rental costs and ownership costs are in equilibrium?

  13. Posted by Spencer

    no inflation included

  14. Posted by Foolio

    Dan,
    I think you mean “the seller of #3 still got about $600,000 more than [his bank] paid for the place in 1997.”
    I think the distinction matters because, assuming a normal mortgage, the carrying cost on a mortgage is roughly equal to the principal of the loan. So, using the back of the electronic envelope, a $400k mortgage actually roughly translates to $800k in principal + interest payments over time, making the profit look much more like 20% than 150% (and of course much less on an annualized basis).

  15. Posted by Native

    and we are only in the 1st 6 months of at least a 2-5 year down cycle.
    This assumption is based on . . . ? It’s true that we are not in a market where people can flip properties like they were doing three years ago. It’s also true that San Franciscans live, in effect, on an island (peninsula with undesirable southerly traffic issues) that, unlike Manhattan, has severe height restrictions for new construction.
    Properties with negatives like this are the ones that suffer in down markets.
    As in most markets, it depends on how cookie-cutter the place is and what the other benefits are. Would you rather drive 45 minutes or an hour twice a day to get to and from work or install noise-proofing in a building with some character that’s literally a five-minute drive from Safeway, large parks, Union Street, Chestnut Street, Polk Street, etc.? I have to back out of a garage on Bay Street every morning to drive to work. It’s as easy as waiting for the red light and pulling out on to the street, and that extra hour of quality of life every day is well worth some minor inconveniences commonly associated with urban living.
    Selling a property on Bay Street is more challenging than it was before because the market is generally more challenging. A good property is going to hold it’s value, however; as someone else said, that traffic was there five years ago.

  16. Posted by John

    “I think the distinction matters because, assuming a normal mortgage, the carrying cost on a mortgage is roughly equal to the principal of the loan.”
    First, the carrying cost of the mortgage equals roughly to the principle of the loan – OVER 30 YEARS.
    Second(However), the carrying cost is very front loanded, so the carrying cost over the last 10 years ia probably about 1/2 or the loan, or higher.
    Third(However, However), the carrying cost of the loan (from 1997) is no way higher than the rental cost of the same unit, probably much lower. Just do a little bit math and even you can figure it out yourself.

  17. Posted by gh

    I totally agree with you about the convenience of the City and I also wouldn’t think of living in a place where I had to commute 45 min. each day. No way!
    That being said, I frankly wouldn’t buy a place on Bay Street…regardless of the market. The amount of traffic flow there (compared to a quiet block two minutes away) is a problem you can’t mitigate.

  18. Posted by Michael

    “The seller of unit #3 still got about $600,000 more than he paid for the place in 1997.”
    True, but the seller before that got $32,500 more than he paid for it in 1990. Property taxes during that period would have been $30,000, basic maintenance at least $10,000, and transaction costs around $30,000. Wash the mortgage payments with what would have been paid in rent and the seller in 1997 lost over $40k after holding for seven years. Which period do you really think the next seven years will more closely resemble?

  19. Posted by Foolio

    John,
    Whoa, easy on the snark, big guy. Or, at least if you’re going to go that route, learn to correctly use “principal” and “principle.”
    All I’m saying is that it’s not like the seller of #3 pocketed $600k free and clear after this sale.

  20. Posted by Dan

    Foolio, I don’t think John was being snarky– he was just correcting you.
    And I didn’t say that the seller pocketed $600,000 free and clear of any expenses– only that the unit sold for about $600k more than the owner paid 10 years earlier. So he made out well, even selling for less than his neighbors paid for their places.

  21. Posted by Michael

    Assuming a $350K loan and an average rate of 7% the total interest paid during those ten years would have been around $210K. With similar assumptions the interest paid from 1990 to 1997 was probably at least $150K.

  22. Posted by Michael

    Dan, and the seller in 1997 after holding for seven years?

  23. Posted by fluj

    The interest was written off, tho, surely.

  24. Posted by Dan

    “Dan, and the seller in 1997 after holding for seven years?”
    I didn’t say that that everyone always makes money in real estate.

  25. Posted by james

    what did this great deal consist of at a per square foot rate?

  26. Posted by anon

    Foolio – You have to add back the cost the owner saved by not renting. So let’s say the place averaged $3,000/month for 120 months, that’s $360,000 in after tax money you add back to his profitability. Unless of course, you expect all of us renters to live in crappy rent controlled buildings, or with mommy and daddy? :)
    At the end of the day, the buyer came out much better than the renter since 1997. This new buyer got a great deal. It’s all about getting into the action.

  27. Posted by james

    according to the property shark reports i just ran and then confirmed value on the sf assessors office website, the seller made out really well. paid 435k in 97 and it was only assessed at 535k since.
    it’s 1028 square feet so 1.03mm is just slightly over 1000/sq/foot. what are all you bitter renters so damn excited about?

  28. Posted by sanfrantim

    And I bet you that the lucky seller of this Marina condo, when he paid $435,000 for it in 1997, heard cries of “YOU PAID TOO MUCH.”
    Buy and hold, folks, buy and hold. Sure beats the stock market these days …

  29. Posted by Michael

    “Buy and hold, folks, buy and hold.”
    And the guy who bought and held this very condo to the tune of a $40K+ real loss from 1990-1997? With 20% down that’s a 50%+ loss on his $80K investment. The DJIA almost tripled from 1990 to 1997. Think he’s glad he got “into the action”?

  30. Posted by Anon

    With rents going the way they are, and the stock maket just crushing people, I think money is really shifting back into SF real estate.

  31. Posted by anon2

    ^ you can think all you want, but where’s the proof? yoy sales volume continues to drop and if anything rents are rising because there’s now more demand for rentals not less.

  32. Posted by fluj

    Then don’t buy then! Who gives a crap?

  33. Posted by AdamSmith

    “Then don’t buy then! Who gives a crap? ”
    Heh FLUJ, I thought this was a site about “Real Estate “Tips, TRENDS, and the local scoop”. If people want to discuss the TRENDS as to whether or not this is a good value at this particular point in the market trends, so be it. Why insult them? The defensive rude comments (“Who gives a crap!”) of some in the real estate industrial complex, is another sign of the desperate state SOME are currently finding themselves in.

  34. Posted by fluj

    People weren’t discussing trends. People were coming up with incorrect information, and dismissing other posters. # 3 was purchased for 402.5K in ’90, and it sold for 435 in ’97.

  35. Posted by fluj

    I only get annoyed when people spout nonsense in a dismissive way. Number three was purchased for 402.5K in ’90. It sold for 435 in ’97.

  36. Posted by anon

    I was waiting for our cheerleader fluj. Glad he was finally able to make it and enlighten us with his insight (read: crap).

  37. Posted by james

    touche michael. lets go back in time and find anyone that didn’t make gobs of money during specific time intervals in real estate. how much is your rent?

  38. Posted by Sal

    Fluj, it sounds more like you get annoyed when the numbers don’t tell the story you want people to hear. Where’s the incorrect information?
    Number three gained $32.5K in value from 1990 to 1997 but the seller also had to pay property taxes ($30K?), maintenance ($10K?) and transaction costs ($30K?) when he sold. Net the mortgage costs of $150K? and tax advantage against the savings of not having to rent over those seven years and that gain turns into a net loss of $37.5K on a down payment of $80K.
    During those same seven years the DJIA went from 2500 to 7900. $80K invested in an index fund in 1990 would have been worth $240K in 1997. That’s a net gain of $160K.
    So $37.5K loss for holding this property from 1990 to 1997 versus $160K gain for renting and investing the down payment in the market? That’s not nonsense but basic math.

  39. Posted by another bitter renter

    Fluj, being a realtor, you obviously do give a crap. Just think some happy turkey thoughts and move on to some other blog already.

  40. Posted by fluj

    Sal, you’re wrong. Property tax is tax deductible. Five percent realtor’s fees cost 21.5K. Transfer tax was probably about 2 grand. They pocketed 10 or so. They also deducted interest. It was more than a wash. And it wasn’t a loss. Go back and look at what was said, OK?
    If you look at everyone else in the building over the lat 10+ years, they all made a nice return. And the one who was touted as a loss actually made money. Yet you guys all pile on, erroneously.
    I’m not a cheerleader. I am a crusader for justice.
    Happy Turkey Day, all!

  41. Posted by anon

    How come everybody forgets to add back the rent not paid when one owns?
    I’m thankful I own a home in SF, and not watching my investments evaporate in the stock market! :)

  42. Posted by missionite

    Anon (and please, please, PLEASE pick a name, any name. It makes it SO much easier to talk to you, and figure out who you are among all the other anons),
    It would be a miscalculation from an accounting standpoint to “add the rent back in” on the buyers side, because in a buy vs. rent analysis, the value of rent is already accounted for. Your method is effectively counting it twice. So yeah, if you do that, then buying is nearly always going to look better, because not only do you add it on the rent side, you are subtracting it on the buy side. If you don’t understand that, then I can’t help you, but I can tell you that as somebody who does a lot of accounting work for my business, this is an easy mistake to make.
    Probably the best, most well researched, not to mention easiest to use method for determining buy vs. rent is the New York Times calculator:
    http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
    I plugged the 1990-1997 sale into there, and came up with a roughly $70,000 loss (or $10k annually) before inflation versus renting at $2k a month (which I think is on the high side for average rent for 90-97, given that the median rent for a 2 bedroom 90-97 was closer to $1k, and had only reached $1500 by 1997 [see http://www.sfgov.org/site/uploadedfiles/rentboard/housingdatabook/costandaffordability.pdf, but I’m throwing the bulls a bone here).
    This is based on a 20% down payment of $80k, which is being compared to investing in a CD or similar financial instrument at 5%. Obviously if that money had been invested in a stock index fund during a similar period it would have done much better, and that of course serves to only widen the loss between renting and buying.
    Furthermore, from what I can tell, the housing appreciation (roughly 1%) did not keep place with inflation (which had a median of roughly 2.75% during 1990-1997 [see http://www.inflationdata.com/inflation/images/charts/Annual_Inflation/annual_inflation_chart.htm). As we all know, it’s not how much money you make, it’s how much money you make *over* inflation. In this case, this property was losing value every year 1990-1997.
    As has been said many times, leverage is awesome in an appreciating market, and a bitch in a declining market.

  43. Posted by John

    missionite,
    “Add the rent back” is not the right term. However, nobody doing the calculation on the rent side ever add the cost of rent to the calculation. Just roll back to see Sal’s post.
    I agree…the NY Time link is a good way to calculate. Without even using any calculator, I would say the 90-97 owner lost money.
    On the other hand, you can plug in the numbers, no matter how you twist, the 97-07 owner made a pretty good profit.
    And then…past performance is no indication of future performance, so nobody knows what will happen to the 07-?? owner.

  44. Posted by JJ

    You might not be a cheerleader fluj but you’re also not a CFA.
    “Tax deductible” is not the same thing as free. HOA’s? Your $10k gain becomes a real loss at anything over $120/mo. This was both a real loss and a lousy investment for the person who held from 1990-1997.
    Crusader? More like Don Quixote.

  45. Posted by james

    can we get off of the pontification about who made or lost money when you cannot know the facts? you don’t know what that place would have cost to rent. you don’t know what tax bracket that owner was in during the same year. you don’t know the tax basis and property tax for every year in the period. you don’t know what hoa fees would have been back then either. too many unknowns. let’s move on.
    why are there so many renters on here that have no interest in buying? that baffles me.

  46. Posted by Rillion

    missionite, you are comparing the rent vs own value calculation with the did this guy make or lose money calculation.
    For the record, I agree with James on this one, there are simply too many unknowns on this for us to say if the 90-97 owner made or lost money. I just hope he didn’t take any money he might have gotten out of the sale and used it to purchase tech stocks.

  47. Posted by diemos

    We’re keenly interested in buying … just as soon as the correction removes the speculative premium from house prices.
    I’m looking for a bottom in 2011 or so at 50% off peak prices. Saving my pennies for that day, putting more into the house downpayment fund every month than I pay in rent.

  48. Posted by sanfrantim

    Thanks, Missionite, the NYTimes chart on ‘rent v. buy’ is very interesting. Fun to play with. I’m not sure how real-life its assumptions are, however. It assumes that the average renter will take his/her downpayment stash and invest it where she/he will earn consistent 5% annual returns. In actuality, money market, savings, and short-term CD returns over the past few years have been earning in the 1-3% range. If you change the NYTimes’ initial assumptions on cash-returns to more reflect reality, the results change dramatically.

  49. Posted by Jeffrey W. Baker

    That’s funny sanfrantim, I always thought the New York Times assumptions on return on investment were frighteningly conservative. You get 4.5% on risk free overnight interest these days. Charles Schwab is paying 4% overnight rate with no minimum balance on checking accounts, and 4.8% on a 90-day certificate of deposit. If you can’t make 5% in this environment, you are probably clinically dead.
    Actual investments with risk (stocks, bonds, etc) easily yield 20%.

  50. Posted by sanfrantim

    Hats off to you Jeffrey if your stock investments “easily” have returned 20% a year, every year. And if you are a broker, then I want to hire you.
    But ordinary folks without your investment prowress who are seriously considering purchasing a home in the near future typically do not want to gamble their downpayment in (an increasingly volatile) stock market.
    And, sure, you can get a 4.8% cd NOW (still lower than the chart’s 5% assumption, by the way), but returns on cash investments have been much lower for most of the past 5 years.

  51. Posted by missionite

    James,
    Actually, if you read my post, you’ll discover we do know many of those things, or can make very educated guesses. We know what the median rent was during that period, and thanks to prop. 13 we know exactly what the property tax was, and while the tax basis is indeed unknown, even if we put them in the lowest tax bracket (which seems highly unlikely for someone getting a half million dollar loan in 1990) the deductions the owner would receive are not going to turn this into a winner.
    And FWIW, I have an obsessive interest in buying. Two kids will do that to you.
    Rillion,
    There are unknowns, but not so many that we can’t tell whether or not the owner made money 90-97. The exact amount may be an educated guess, but there’s zero chance that this owner made money over renting. It’s not even close. First of all the property’s appreciation didn’t keep up with inflation, so the home lost roughly 1.75% in value, year over year, in real dollars. Then add in maintenance, taxes, buyer and sellers fees, HOA dues, property transfer fees, carrying cost of the loan, interest, and opportunity cost, and we can safely say that determining profitability is not an unknown.
    Fluj,
    As JJ points out, a tax deduction is not the same as a tax credit. For instance, let’s take a typical socketsite reader (from what I recall from the survey), who makes a combined $175k a year, and lives in a 1.2 million dollar home that they put $200k down on. Assuming a 30 year fixed rate loan at 5.5% they are paying roughly $68k a year ($5,600 a month) in mortgage, and $52k/year in interest annually the first five or so years.
    Assuming no other deductions, they are in the 33% bracket, which means that thanks to the interest deduction their taxable income decreases from 175k to 123k, netting them a tax savings of roughly $17k a year. Now $17k a year, or $1400 a month is not insignificant, but it isn’t $52k, dig?

  52. Posted by Jeffrey W. Baker

    Over the last 25 years the S&P 500 index has returned 10% annually*. That’s about as conservative an investment as I can think of which still carries at least some risk. So 10% should be your minimum benchmark annual return.
    If you are going to compare real estate to other investments, you have to pick ones with comparable amounts of risk. Real estate is risky, despite what your agent may be telling you. To compare it properly, compare to something with risk like equities.
    *S&P 500 closed at 1416.77 on November 21, 2007, up from 132.93 on November 23, 1982.

  53. Posted by sanfrantim

    Jeffrey, I think you are missing the point of the NYTimes chart. If one already has decided not to buy a home but instead invest the downpayment elsewhere, one can earn those kinds of returns over a sufficient time horizon in the stock market (if history is any guide). But then you don’t need the NYTimes chart, which is supposed to be a guide to those who are seriously considering buying in the near future.
    Many of us want to have sufficient cash ready and available to make a purchase when the right property is found at the right price. An S&P index fund, for most of us, is not conservative enough for that purpose. In fact, I believe that as of this week, the S&P lost value in 2007.

  54. Posted by Rillion

    Missionite,
    Did the buyer in 90 get any credits back on closing? How much did he put down? What was his interest rate? What was his tax bracket? What were the terms of the sale?
    Did he end up $1 a head or tens of thousands in the red? Obviously it wasn’t a good financial investment but we can’t say how much money he lost or gained.

  55. Posted by Michael

    touche michael. lets go back in time and find anyone that didn’t make gobs of money during specific time intervals in real estate. how much is your rent?
    I own. I just don’t think the next ten years in the San Francisco market will look anything like the past ten. And I’m old enough to remember that people can loose money investing in real estate, even in San Francisco.

  56. Posted by Jeffrey W. Baker

    sanfrantim: If someone already made up his mind to buy, then no amount of information will dissuade him, I suspect. My use for the infographic is apparently different from yours. Instead of using it to justify my preconceived plan, I use it to choose a plan. According to their calculator I would break even with a purchase at $700,000. A price above that doesn’t make sense on the strict financial calculus. I think people should look at this kind of calculator before they decide to rent or buy, and I hope people choose realistic inputs for inflation, return on investment, and appreciation.

  57. Posted by John

    missionite,
    Aren’t you in the “typical socketsite reader” income range?
    If you are, you would know that you are in AMT, and your marginal tax rate is 35% fed + 9% state=44% total.
    It is 35% fed because the AMT tax rate is 28%, and as your income increases, the exemption disappears – so the effective marginal tax rate is 35% until your income reaches about 500K.
    Also, since we are talking about the “10% average rent of stock market” too, which is not inflation adjusted either, we will have to use the raw number when comparing RE.
    And I just cannot figure out why we are talking about the 90-97 owner. I think even fluj would agree the owner didn’t make much (if any), and even Trip would agree the 97-07 owner did pretty well. So what? Everyone has his own finance (income, tax rate, family situation etc). It is pointless to second guess here.

  58. Posted by sanfrantim

    I agree that people should consult such instruments, be informed about their assumptions, test them against reality, and make reasonable financial decisions.
    And, if you really are making 20% annual returns on your investments then, by all means, do not buy a home for investment purposes, but keep doing what you’re doing!

  59. Posted by fluj

    Fifty percent, off peak? Wouldn’t that be unprecedented?

  60. Posted by james

    ok missionite. you did your homewok, well done. even so, you still can’t tell me exactly how much he put down on the loan or even if he used an agent to sell it.
    incidentily, i admire your obsession with being right. i am an equally dysfunctional human being. ;)

  61. Posted by diemos

    fluj,
    A house purchased in 1929 would sell for 10 cents on the dollar in 1939.
    Here’s a nice book that describes the last time the banks went crazy and florida real estate went through bubble and bust in the 20′s “The Florida Land Boom: Speculation, Money, and the Banks”
    It’s all there, loans that no one possibly could pay back, people flipping pre-construction contracts, owning multiple investment units, second homes, retirement homes, people buying swampland sight unseen, people borrowing against thier stocks to invest in real estate, people borrowing against their real estate to invest in stocks, everything we’ve come to know and love so well.
    Unfortunately, there is nothing new under the sun. It’s never different this time.

  62. Posted by fluj

    Come on man. You’re comparing this to the Great Depression.

  63. Posted by ex SF-er

    wow, a spirited debate!
    to me, it is less important who is “right” and who is “wrong”… it is more important that this dialoge is finally taking place.
    Too long have San Franciscans blindly thought that RE can only go up in value.
    hopefully this debate will help people critically analyze for themselves what the best path will be… and hopefully they will make financially sound decisions while also satisfying their emotional needs!!!!

  64. Posted by diemos

    The 20′s were a time of great prosperity. Prosperity was high because people had discovered the secret to endless free money. You see, all you had to do was borrow money and buy stock with it. Then, when the stock had gone up you sold it, payed off the loan and kept the excess. It was so easy, and best of all, ANYONE could do it. You could do it with stocks, you could do it with bonds, you could do it with real estate. As long as banks were willing to lend ever increasing amounts of money and borrowers were willing to borrow ever increasing amounts of money asset prices could go on increasing forever.
    The era of endless free money, where everyone would be rich forever, had arrived. No one ever need work again. Just keep flipping assets and collecting the profits.
    But, as always happens, asset prices finally got so far out of whack that the people woke up. They decided to hold off on buying, so prices stopped going up. As the short term balloon mortgages of the day started coming due the investors had to sell their assets to pay off the loans. This put downward pressure on asset prices. As prices went down loans started going bad so bankers pulled back on their lending, no longer lending any amount of money to anyone who wanted it. Without access to credit fewer buyers could pay the high prices, so prices fell. With prices falling people stopped wanting to invest. The market got into a positive feedback spiral with fewer buyers willing to buy, fewer borrowers willing to borrow, fewer lenders willing to lend.
    As the people stopped receiving free money and had to start paying it back they stopped their discretionary spending. Economic activity crashed throwing people out of work. People out of work could no longer pay back their loans leading to even more losses. Eventually the financial system imploded under the burden of unpayable bad debt.
    The chairman of the federal reserve, Dr. Bernanke, is said to be an expert on the Great Depression. I think he is going to get a chance to test out his theories on how to prevent one from happening again.

  65. Posted by fluj

    Scholars disagree on exact root causes of the Great Depression.

  66. Posted by diemos

    You might want to spend some time reading
    http://calculatedrisk.blogspot.com/ and
    http://globaleconomicanalysis.blogspot.com/
    That would give you a ring-side seat to watch our current debt bubble implode in realtime.

  67. Posted by diemos checker

    $50 condos for all, coming soon!
    Folks, we now have proof from diemos that the second worldwide depression is soon to be upon us! If only rg would chime in with his infinite wisdom!

  68. Posted by diemos

    Actually, since we’re no longer on the gold standard I expect a stagflationary recession, not a second great depression. But let’s not quibble over details. ;)

  69. Posted by Anon

    Again, one must add back to the owners profit the money saved by not renting a comparable place.
    Let’s say I rent for $3,000/month for 10 years. What is my return on rent? The return is MINUS $360,000 in after tax on rent or about $550,000 in gross income.
    Compare to $400,000 purchas price in 1997. The total cost, including interest, prop tax, etc could be around $2,500/month or $300,000 pre tax benefit. Post tax benefit is around 70% of 2,500 or a cost of $210,000. Sale price is $1 mil, so take the $600,000 “profit”, minus 210,000, then minues $50,000 for selling cost = $360,000 in profit.
    $360,000 after owning vs. MINUS $360,000 renting.
    To figure out what the owner made above the renter, you ADD BACK the cost of renting to the owner. Hence, the owner came out about $720,000 ahead.
    Have a great weekend everybody!

  70. Posted by diemos

    “Scholars disagree on exact root causes of the Great Depression.”
    OT but I thought I’d let you know. Nobody gets a PhD by going to their advisor and saying, “Well, I’ve read all the source material and they got it right. I have nothing to add.” You get a PhD by having a new, unique, stunning interpretation of the material. Basically you don’t get to be a scholar unless you disagree with something about your subject area.

  71. Posted by John

    diemos is a PhD? In Economics?

  72. Posted by diemos

    physics. economics is just a hobby.

  73. Posted by dub dub

    I think fluj/deimos have a good point: Scholars, real-estate salesmen, housing bubble freaks, and armchair economists with PhD’s in physics can disagree.

    Modern financial markets are very different than those during the great depression, so comparing the two situations is like comparing getting cancer in the 20′s with getting it today.

    We still don’t know what kind of cancer we’ve got — let things unravel a bit more before pronouncing us dead, okay? ;)

  74. Posted by John

    Dub dub, the problem is, when the things unravel, maybe it is too late.
    One’s financial strategy depends on his outlook. So, I wonder what would a person do if he truely believe the second depression is coming. Buy gold? Buy land in the middle of nowhere and stock food? Buy guns? Buy a farm? deimos, any comments?

  75. Posted by diemos

    ok, my current investment strategy is FDIC insured bank accounts, t-bills and precious metals. My expectation is that as the debt bubble implodes the asset prices that have been supported by it will deflate, i.e. real estate and stocks. At some point the pain will get bad enough that the gov will fire up the printing presses and start bailing out banks, bailing out homeowners, bailing out bond funds, creating make-work programs to put people back to work. This will lead to significant inflation, so I’ll want to be in real assets at that point. When the ratio of real estate price to rent returns to it’s long term average it’ll be time to purchase a property.
    As to the other options mentioned. I’ve always thought that if it gets to the point where you need guns and farmland in the middle of nowhere you’ll just be overrun by the starving hordes from the city anyway so there’s no point. In reality we have all the physical resources we need to feed, house and cloth everyone so I don’t spend any time on survivalist scenarios.
    In the last depression we were on the gold standard so the government couldn’t just print money. This led to farmers plowing under their crops even as the cities starved since the people in the cities had no money to make it worthwhile for the farmers to bring in their crops. With our current system of fiat money it’s always possible to put money in the hands of the people through tax refunds or welfare payments or make work jobs. So a true depression where productive assets sit idle because people have no money is impossible.

  76. Posted by fluj

    So your thesis is that we are on the brink of a much larger economic collapse. Following this horrible series of events, you plan to snap up a 2000 foot house in Cow Hollow for $1M.

  77. Posted by james

    the bigger question and challenge for folks like that owner of unit in 97 was, how do we avoid selling right before the largest run-up of real estate prices in recent history. he needed a place to live, so i am of the mindset that he made money while deducting everything he paid but he missed out on the appreciation the next buyer got, over 200%. that’s a shame, and worse than losing money imo.

  78. Posted by dub dub

    deimos: In 1934 roosevelt changed the dollar/gold peg devaluing the dollar about 40% (executive order 6102) — so yes, there were no printing presses, but the results were the same.

    The modern economy is very different — in your crop example, these would simply be exported, not destroyed, financed by foreign investors (who could simply be domestic investors trading in a foreign currency). So unless you folks are contemplating a global financial meltdown, why all the panic? The dollar is already reflecting the early consequences of this credit binge, and being foreclosed on is not the end of the world — they don’t put you in jail or anything. Learn your lessons and move on, and don’t forget to take your 50 inch plasma TV when you move out!

    And if we do have a global financial meltdown, any rulebook you use to plan for it will be changed in ways you cannot predict (see executive order 6102 above). You already see rumblings from the frustrated, self-righteous savers on the bubble bl*gs, and we haven’t even gotten started yet.

    Anyway, it’s absurd to compare what’s going on now to a depression. What softies! Get a life or a less-depressing hobby, like ooing and aaahing over properties you cannot afford, depression or no ;)

  79. Posted by John

    james,
    Once you own, it is very rare that you would sell to become a renter. Instead, most likely it was a sideway move – he sold to buy another house somewhere else.
    As long as he stayed in the market (in bay area), he would have done pretty well. Of course, if he moved to Texas and bought there, that would be a different story.
    diemos,
    ever thought about doing a blog? Those gloom day blogs are very popular these days.

  80. Posted by diemos

    “So your thesis is that we are on the brink of a much larger economic collapse. Following this horrible series of events, you plan to snap up a 2000 foot house in Cow Hollow for $1M.”
    If I still have my job, yes. Although not in that neighborhood or price point. If I’m out of work then my down payment fund will keep me eating for a decade.
    John,
    Nah, plenty of good economics blogs out there for me to kibbitz on. I try to restrain myself here and keep the mad prophet act to a minimum but occasionally, when the kool-aid runs deep, I feel compelled to point out that this is nothing new, we’ve seen it all before, and we know how it turns out.

  81. Posted by viewlover

    So will the new buyer at $1,030,000 make or lose money; flug, missionite, diemos?

  82. Posted by fluj

    Are you serious? This thread took a turn into the absurd about three days ago.

  83. Posted by diemos

    Depends when they sell. The value will stay flat for a year, decrease as the Alt-A and option arm reset waves hit, then increase as the gov ramps up inflation. If they hold for 30 years they’ll make money, at least nominally. If they have to sell in a year or two they’ll lose money.

  84. Posted by fluj

    What if they stay for five? For 10? I’ll answer for you. The answer is that we don’t know the answer. But historically speaking, longer holds are sound.
    Diemos, stop. First you talk complete collapse. Here you talk incremental change. And you “know” that values will decrease vis a vis the ARM tsumami?

  85. Posted by Jimmy (Bitter Renter)

    What’s wrong with a little inflation? We are suffering under the weight of a huge national debt ($9.1 Trillion and counting), and a huge trade deficit… there’s nothing like dollar devaluation and rampant inflation to make $9.1 Trillion dollars look like 9.1 Trillion Pesos… it’d be good for everyone in the long run.

  86. Posted by John

    How much is the rent for this unit would be, if you have to rent it?

  87. Posted by diemos

    After a quick peruse of craigslist I would estimate 4k a month to rent a place like this. fluj can correct me, I’m sure he’s more plugged in.

  88. Posted by anon94123

    “there’s nothing like dollar devaluation and rampant inflation to make $9.1 Trillion dollars look like 9.1 Trillion Pesos.”
    Since it seems that the current regime is on a steady course to trash the dollar, could real estate become one of the last safe havens because of inflation? I have been a gold bug for the last two years and have been very happy for it, but how high can gold and Euro go?

  89. Posted by anon

    Definitely around $4K-4,500/month for this place. That’s $50,000 a year in after tax income, or about $80,000 in gross income one has to make to pay this rent.
    The buyer got a great deal. Nobody made any money doing nothing.

  90. Posted by John

    If the rent is about $4500/month, as long as the buyer stays there himself instead of renting out, I don’t see much risk of losing money.
    Even if he takes out 100% loan at 6.5% mortgage rate, the monthly payment is only about $5500 interest + $1000 property tax + $600 HOA=$7100. If he is in AMT, the tax deduction will be about $2500. The final (after-tax) cost to buy is about $4600/month, so the buyer is at the sweet spot to buy.
    On one hand, the buyer had buying cost and will have selling cost when he sells. On the other hand, the rent is increasing.
    So, yes, I will agree the buyer got a good deal, even in this uncertain market.

  91. Posted by james

    anon94123, how friggin hard is it to put your first name in that field?
    you guys are so immature some times
    anyway, no hedge in real estate against the devaluing dollar unless you demand a foreign currency when you sell

  92. Posted by anon94123

    Because someone is already using my name! James, are you saying that holding dollars would be better than owning property at this point? I would think that with real estate you have something with real worth unlike paper money that is not backed by anything at this point. When real estate crashed in the early 90′s I remember that Los Angeles (especially the Westside-Beverly Hills area) became awash in foreign buyers who were scooping up everything in site because it was so “cheap”. You had a huge migration from the Middle East and even parts of Europe as people bought large homes that were selling for what their small flats in London and Paris were worth at the same time. (This was L.A. however, which really is a whole different market)

  93. Posted by fluj

    I’m hearing a lot of French, in particular, being spoken these days at open houses.

  94. Posted by anon

    “The final (after-tax) cost to buy is about $4600/month, so the buyer is at the sweet spot to buy.”
    Can’t beat that logic. For an extra $100 per month the buyer is sitting on a deprecating asset which can be totaled any time by the next shake hitting the Bay Area. Sounds like a really sweet deal to me. Guys, get some professional help.

  95. Posted by anon

    “I’m hearing a lot of French, in particular, being spoken these days at open houses.”
    How would you even know it is French? They teach French now in elementary school?

  96. Posted by jimmy

    The best thing about this location is the parking. I sprained my ankle 5 years ago and found a doctor willing to give me a blue parking scrip, which I renew every two years.
    With the convalacent hospital around the corner, there are blue zones a plenty, and the SF meter maids are afraid to ticket blue parking permits on street cleaning days.
    Seriously, it’s worth $500/month for the parking alone.

  97. Posted by John

    “Can’t beat that logic. For an extra $100 per month the buyer is sitting on a deprecating asset which can be totaled any time by the next shake hitting the Bay Area. Sounds like a really sweet deal to me. Guys, get some professional help.”
    With that mentality, I am afraid that you will be renting forever.
    I am not saying there is anything wrong with it…however, when the rest of the population would be perfectly fine with sitting on a (who knows whether it is appreciating or depreciating) property for the cost of rent, you will never get in the market, especially when you consider only 30% of SF households own.
    The cost to buyer will easily be lower than the rent as the inflation pushes the rent up. Actually, that $100 difference is only 2% difference from the $4500 rent, so the buyer will be ahead in one year.
    Assuming the buyer sits on the property for 5 years, at moderate 4% rent increase annually, he will be ahead by about $800 to $900/month by 2012.
    But, there is nothing wrong with renting. It is a life style that many choose. However, please don’t play sour grapes.

  98. Posted by Jimmy (Bitter Renter)

    Wait a minute… your rent vs. buy analysis only includes interest!! What about principal payments?? Doesn’t anyone actually try and pay off their loans anymore?

  99. Posted by John

    “Wait a minute… your rent vs. buy analysis only includes interest!! What about principal payments?? Doesn’t anyone actually try and pay off their loans anymore?”
    Principal payments are not expense. That is one form of asset changing into another form.
    Let’s say the buyer paid cash for the property. Would you say his “expense” is 1.03M? No, because his net worth doesn’t change. His real expense is the buying cost, property tax, HOA, and the oppotunity cost of the 1M+ cash.
    The potential interest earned on the paid principal (down payment + monthly) is an oppotunity cost. To keep the calculation simple, I used the example of 100% IO loan (which probably doesn’t even exist). You can do your own calculation with 20% down, etc, just keep in mind, when you make principle payments, you decrease the mortgage interest expense.
    Actually, the 6.5% rate I used is pretty high (even in today’s market). If you can put 20% down, you can easily get a 6%- on the mortgage rate on a 5/1 ARM if you have the guts to bet that the interest rate will stay flat or down in the near future.
    Please, feel free to do your own calculation. My numbers are rough numbers. For example, I assumed the buyer is in AMT. I believe that’s a sound assumption for properties in that price range. If you are a true bubblehead, you may assume the buyer only makes $60K/year and in the 15% marginal tax bracket and then conclude the buyer is spending $2000 more per month than rent. It is up to you.

  100. Posted by missionite

    Let’s take a hypothetical look ten years into the future shall we?
    New owner bought at 1,035,000.
    Now let’s (for the ease of argument) make a couple assumptions:
    30 year fixed with 20% down at 6.25%
    Annual appreciation of 2.5% (no one here thinks we are going to see 13.9% annual appreciation for the next ten years, right?)
    1% spent on maintenance and renovation annually
    .46% spent on homeowners insurance
    $600 monthly HOA that doesn’t increase for ten years.
    6% in real estate commissions.
    And for the sake of argument, inflation isn’t a factor.
    Here’s what we got at the end of ten years:
    Total HOA $72,000.00
    Homeowners Insurance (.46%) $47,610.00
    Renovation & Maintenance (1%) $103,500.00
    Property Tax $117,472.50
    *After Tax* Interest Expense $346,510.71
    Realtor Commission $77,625.00
    Total expenses $764,718.27
    Sale Price in 2017 $1,293,750.00 (25% appreciation!)
    Loan Balance $697,488.26
    Equity in house $596,261.74
    Total cost to live in house for ten years:
    $168,456.53 or $1400/month.
    Now let’s look at renting….
    I’m too tired to calculate rent control increases, so we’ll just call it $5k a month, which is on the high side of what the average would be over ten years given a base rent of $4k to 4.5k.
    Total $600,000.00
    Interest @ 5% on rent deposit $8,144.47
    Total Rent Expense $591,855.53
    Looks bad, huh?
    BUT OH CRAP WHAT ABOUT OPPORTUNITY???
    Remember you got $207k to play with that isn’t tied up in a down payment. And you got the cash flow difference between what you would have paid in homeownership bills and rent, which I calculate as quite a bit more then $100. More like $2073.83 ($5098.14 mortgage payment + $978.74 Property Tax + $600 monthly HOA + $396.75 Homeowners Insurance = $7073.83 vs. $5000 rent).
    Note I left maintenance and renovation expesnes out of the cash flow equation. That would make the spread even wider by $862 per month.
    Now if we took that $207,000 down payment, and put it in some sort of place where we could safely expect 5% returns, and then added to that our $2073.83 in extra cash flow we have available every month, then we would wind up with a nest egg of $659,209 after ten years.
    Subtract the $591,855.53 we paid in rent expense and we netted $67,000 while renting. Or $558/month.
    When we compare that with what owning we discover that renting comes out ahead to the tune of $235,810 over a ten year period.
    Other benfits to renting:
    1. Our net worth would be much more liquid the entire time we lived there.
    2. We would not be financially destroyed by an earthquake (which I think is certainly a risk worth considering in the Marina).
    I made a spreadsheet to figure all this out. If you are interested here’s a link to check it out:
    http://spreadsheets.google.com/pub?key=pM4Gw0s2zSeCXIvKktNGLbg
    If anyone cares enough to check my work, or wants a copy for themselves, just let me know and I’ll email you a copy.

  101. Posted by anon

    It’s ok to rent past 30 years old, but many culture it is unacceptable. Nobody got rich renting, but to each his/her own.

  102. Posted by ex SF-er

    “Even if he takes out 100% loan at 6.5% mortgage rate, the monthly payment is only about $5500 interest + $1000 property tax + $600 HOA=$7100. If he is in AMT, the tax deduction will be about $2500. The final (after-tax) cost to buy is about $4600/month, so the buyer is at the sweet spot to buy.”
    John:
    2 things:
    1)
    A person in the AMT would NOT get $2500 back.
    You can only deduct your INTEREST paid on mortgage…. not the HOA fees or insurance.
    A person hitting AMT will be in the 35% marginal tax bracket.
    They WILL be able to deduct the mortgage interest
    They LOSE the ability to deduct property tax
    NOBODY can deduct HOA fees.
    Thus, they would get $5500 interest (x) 0.35 = $1925 back.
    THis makes your calculation:
    $7100-$1925 = $5175/month.
    2)
    I’d challenge you to find a lender who will lend 100% LTV loan on a $1 Million property at anywhere near 6.5%
    -first: it’s a super jumbo loan.
    -second: it’s high LTV.
    thus, it would be at least 7-8% (if you can get that at all)

  103. Posted by John

    ex SF-er
    I have posted this multiple times.
    AMT=28% + 7% because of losing exemptions=35%
    State income tax 9.3%.(you forgot this one?)
    I also said, 100% is just an example. You can use 80%, but then you have to add the oppotunity cost of the 20% down payment – if you assume that oppotunity cost is also 6.5% (actually, you cannot get risk free 6.5% return anywhere at this moment), then the calculation is no different from 100% loan.
    Again, feel free to use 80% loan – 5 year ARM is easily 6% or 5.875% at this moment, and you can use your own oppotunity cost number for your calculation.
    Of course, a true bubblehead will say:
    1. The buyer is only making $60K/year, in 15% tax bracket, the itemized deduction is no higher than the standard deduction so there is no tax benefit.
    2. The oppotunity cost of the equity (down payment + monthly principal payment) is 20% because anyone can easily make that much in the stock market.

  104. Posted by fluj

    “I’m hearing a lot of French, in particular, being spoken these days at open houses.”
    How would you even know it is French? They teach French now in elementary school?
    ^^^^^^
    Wake up on the wrong side of you shitty residential hotel bed, asshole?
    This guy does nothing but insult. Period. Can we stop humoring him?

  105. Posted by ex SF-er

    James,
    I HAD forgotten the California state tax deduction. That clears up the math. Thanks.
    (35% federal plus 9.3% state tax… duh)
    also:
    I know you were simplifying with the loan example…
    I didn’t mean to highlight the 100% ARM (although I know I did)… more the SUPER JUMBO aspect of the loan.
    even w/ 20% down, you’re financing over $800,000…
    I’m interested to know: are deals getting done in the 6% range on super jumbos?
    I have a few friends looking around… they’re not finding anything so generous. At this point they’re looking at 6.8% or so, and I know that BofA and Wells quoted them over 7%.
    I know it only seems like 1 to 1.5% or so…
    but that comes out to $1,000+/month difference in interest interest…
    ========
    in terms of “opportunity cost” of the downpayment money… it’s difficult to calculate. The reason: the downpayment is a RISK FREE rate of return (the rate being what you’re not paying in interest if it were part of the mortgage)
    in a down equities market (which I believe to be the case) the assumptions of high returns are spurious at best, even moreso once RISK is taken into account.
    in the current market, I would use about 4%-5% rate of return… the reason: because I can get that return guaranteed and RISK FREE in Treasury Securities
    ==========
    and lastly: I know nobody thinks this is possible, but there is risk in this transaction EVEN IF it is comparable to rent: that is the risk of asset depreciation.
    Let’s pretend that one could this home for $1 Million or rent the EXACT SAME unit for the exact same monthly costs after taxes, insurance, fees, HOAs, you name it.
    If the asset depreciates then you still come out with a LOSS. (example: loses 3% over 5 years… that would be $30,000 in the hole over 60 months, or $500 loss per month). Does anybody NOT think that a 3% loss is POSSIBLE (I’m not saying destined… just possible). that wouldn’t seem to be “bubble mentality” to me.. only common sense since it has happened before.
    ALSO: transaction costs
    Let’s say the house keeps it’s EXACT value over time. even then, you lose big, as you pay transaction costs of 6% or so… if you only held the house for 5 years… that’s 6% x $1Million = 60k … or $1000 a month.

  106. Posted by diemos

    “Does anybody NOT think that a 3% loss is POSSIBLE (I’m not saying destined… just possible).”
    It’s hilarious that you still have to politely beg people to even consider the possibility of loss when you can already see 30% losses in various regions of the country.
    http://flippersintrouble.blogspot.com/
    And yes, blah, blah, blah it’s different here. (The difference being that our loans start resetting two years after theirs do.)

  107. Posted by anon

    “I am not saying there is anything wrong with it…however, when the rest of the population would be perfectly fine with sitting on a (who knows whether it is appreciating or depreciating) property for the cost of rent, you will never get in the market, especially when you consider only 30% of SF households own.”
    I totally agree. Just not in 2007 or for the next few years for that matter. I did own a house in San Francisco which I sold in 2006. And I have been a happy renter ever since. And I will buy again. Just not here anytime soon.

  108. Posted by dub dub

    Everyone — These pedantic own versus rent calculations make so many assumptions, and *still* leave out many subjective reasons for buying a particular property for reasons other than pure investment.

    Just off the top of my head, the spreadsheet above omits a “public school versus private school” differential — good public schools in the area (are there — I don’t know) will save you 30k/year per child. Over five years you’ve just made the house break even by your own calculations! For my part, I don’t presume to speak for every possible purchaser of this property. Thanks for taking the time to shade all the rows though…

    I realize this is a self-flagellating hobby for some of you, and basic knowledge of the trade-offs are useful, but there’s a lot more out there to life than this, folks. Can we knock it off for awhile, or at least take it to the b*bble blogs? I’d hate to see socketsite turn into one…

  109. Posted by missionite

    dub dub,
    Obviously you aren’t a parent. In SF we use a lottery system. Neighborhood has nothing to do with what school your child goes to. You could live next door to a great school and your kid will wind up spending an hour on a bus crossing town to go to another school that they were assigned.
    As for your request: denied. At least as far as I’m concerned.
    Sorry, it’s a public comment section, and these intricate discussions of economics and financials are exactly what draws me here. If you don’t like them, you don’t have to read them.
    There are a lot of posts on Socketsite I don’t read because I’m not interested. Presumably you have the same ability.

  110. Posted by ex SF-er

    dub dub… not sure I follow the private/public school argument.
    you could simply rent in a good school district…
    I agree that buying a house is often more emotional than analytical… but I’d guess that most of us agree on that point so there would be silence… :)
    In the end though, I highly doubt Socketsite would turn into a bubble blog. Instead it will simply reflect general housing sentiment. obviously, general housing sentiment has gone from euphoric to more muted (but still quite positive overall)… and we’re seeing that reflected here. If SF RE takes off again or if the economy really does well or if we win the war in Iraq etc then public sentiment may improve and the discussions will follow

  111. Posted by dub dub

    ex-SF — maybe there aren’t *comparable* rentals in that neighborhood, maybe he/she doesn’t want to get evicted in 2.5 years, maybe he/she just loves the morning/evening/late afternoon light in *that building*, maybe he/she owns a business 3 blocks away, etc.

    I don’t know the answers to any of those questions (for all perspective buyers), but they are *very important* considerations, and none of them are modeled. So the spreadsheets are not terribly useful (unless it’s a pure investment property).

    Anyway, thanks for your reply and your posts: I almost always enjoy them ;) Gotta go have leftovers now…

  112. Posted by ex SF-er

    thanks dub…
    and your point is a very good one… not oft debated only because I think we all do agree… buying a home for most people is primarily an emotional process.
    I myself prove your point… from a fundamental analytical position, I should sell my house. However, I love my home, I love my neighbors, my neighborhood and so on. I love that I can do whatever I want here…
    however, tempering emotions IS important when it’s the largest financial decision one will likely ever make in one’s life… (hence I bought a home well under my means… originally it was 3x annual income… now mortgage is 0.5x annual income)
    and I get irked when I see the “negative emotions” especially when they are exploited by sources of trust like parents, family, and even realtors who are often referred to as experts… when I bought my house, everybody around me told me that renting is ‘throwing money away’ and that I had to ‘buy now or be priced out forever’ and that ‘only fools rented’.
    luckily for me it worked out well… but much of that was due to blind luck of buying during the biggest runup in RE of all time in my neighborhood (prices tripled on my block in 7 years).
    I think I post here more so that people remember to temper their enthousiasm/emotions with at least a little bit of financial analysis…
    there is NOTHING wrong with buying a depreciating asset, there is NOTHING wrong with “throwing away” money (either in rent or in mortgage interest payments!)… as long as
    -1) one can afford it
    -2) one understands the downside risk.

  113. Posted by dub dub

    @missionite: I have a 2.5 year old son. Also, you don’t have to apply each year (at least that’s what I thought (!!!!)). To fill in my example, assume the parent(s) buy after they get their school choice (one of their 7, etc).

    Hopefully you get the general point (which has nothing to do w/ public schools, I happened to be thinking about that when I posted).

    A bit of advice (which you will probably ignore): being so very bitter won’t serve you (or your children) well. Also, incomplete financial models can be worse than no financial models at all!

    Thanks for your comments, contributions, and meticulously-crafted spreadsheets.

  114. Posted by missionite

    Who said I was bitter? Anybody who knows me in person knows I’m a friendly, chatty fellow.
    If my posts here seem a bit dry, well I am a renter who very much wants to buy that first home, but with no external resources for funding that initial down payment besides dollars that were earned one at a time, I am looking at the market quite carefully.

  115. Posted by Amen Corner

    “As for your request: denied. At least as far as I’m concerned.
    Sorry, it’s a public comment section, and these intricate discussions of economics and financials are exactly what draws me here. If you don’t like them, you don’t have to read them.”
    Agreed, it’s not exactly difficult to avoid these rent v buy threads if one wants to. I have to wonder about the motivations of someone who doesn’t and then tries to lecture others about what they should and shouldn’t be posting about.

  116. Posted by dub dub

    @Amen Corner — Oh, snap, I am so busted! Conspiracy theories now?

    The thread didn’t start as a rent-v-buy, it was kind of hijacked, got ridiculous, sucked me in like a rerun of Entourage, and I politely requested that it not happen too often in the future (especially when “intricate” financial models supercede “complete” ones). You voiced your comments, can’t I voice mine without being accused of “lecturing”? That’s hurtful and disrespectful (just kidding, bunky: fire away!)

    You bubble folks are pushy, yet soooo delicate and fragile when someone leans back! But thanks for your input, as always — like I said, I enjoy most of the regulars’ comments, and have learned much from them…

    That’s (finally) a wrap for me on this thread…

  117. Posted by missionite

    So let me make sure I understand you correctly:
    A more complete financial model would be one that numerically quantifies “late afternoon light”.
    A post about potentially declining comps in a condo is “hijacked” because people like me are trying to analyze the financials behind said condo’s sales history. Meanwhile you are getting into a discussion with someone about global depression, but that’s presumably on topic, right?
    Oh, and I’m a “bubble person” who is fragile, and bitter towards my kids because I like to try and understand the financials behind real estate.
    You’re right. I should stop worrying about the financials, and just make the most important decision of my life by pouring all my earning power into a potentially declining market simply based on subjective criteria. Understanding the math and the market is a waste of time. And while I’m at it, I should restrict my comments to whatever you think I should be commenting.

  118. Posted by missionite checker

    I believe dub dub was talking about the coming second depression talk when he mentioned the “hijacking” of the thread. Gotta go now, busy canning food for the next seven years of deep darkness…

  119. Posted by John

    ex SFer, how much is your house worth now, comparing to when you sold?

  120. Posted by Amen Corner

    “You bubble folks are pushy, yet soooo delicate and fragile when someone leans back! But thanks for your input, as always — like I said, I enjoy most of the regulars’ comments, and have learned much from them”
    A very odd reply to me given that I don’t sit in the bubble camp but in the “open-mided on the market” camp!

  121. Posted by Spencer

    People are focusing on what the owner made who bought in 97 and sold in 04.
    Shouldn’t the focus be on what the buyers paid in 05, 06, 06 and 07 for the last 4 properties and the fact that 3 of them have already lost over 10% and prices have just begun to fall.
    What do you think their 5 year return will be?
    I would venture to say that in 2010, all 4 of these properties will be worth less than $1M, meaning they will all have lost somewhere between 10-25%.
    It’s funny how people see this story and point to what the 7 yr holder made or didn’t make. Those 7 years are unprecedented in SF real estate history. The next 7 years will be very different.
    05, 06, and 07 will go down as the worst years ever to buy a property in SF in terms of appreciation.

  122. Posted by Spencer

    “Definitely around $4K-4,500/month for this place. That’s $50,000 a year in after tax income, or about $80,000 in gross income one has to make to pay this rent.
    The buyer got a great deal. Nobody made any money doing nothing.
    Posted by: anon at November 24, 2007 4:06 PM”
    Personally, i would need to make about 300K/ year to pay this much for rent. If anyone is paying $4K in rent and making less than 200K, they are insane in my book

  123. Posted by fluj

    Shouldn’t people be focusing on whether the people who bought the properties can afford to live there? And whether or not they are happy living there?

  124. Posted by james

    so who bought this place?

  125. Posted by diemos

    “Shouldn’t people be focusing on whether the people who bought the properties can afford to live there?”
    Yes.
    Although I think there may be a cognitive problem as I use the old definition of affordable rather than the new.
    Affordable (old): Having sufficient income, barring job loss or illness, to make regular monthly fixed payments for 30 years until the loan is payed off and the house is owned.
    Affordable (new): Having sufficient income, barring job loss or illness, to barely make the teaser rate payment while subsisting on ramen noodles.
    Which leads to my own personal dilemma, that I can easily afford(new) to buy a place in SF I just can’t afford(old) it.
    “And whether or not they are happy living there?”
    As mom always said, “All that matters is that you’re happy.”
    And in the past several years millions of people in the central valley, inland empire, vegas, phoenix, florida, NoVa, Maryland have been VERY happy with their house, ecstatic even. They would laugh and sing. Oh, how they would laugh and sing.
    And then their payment reset. And they discovered that they couldn’t make the new payment and couldn’t sell or refinance because they were upside-down on their loan … and now they are very UNhappy.

  126. Posted by anon

    Spencer, you misunderstand.
    $50,000/yr in aftertax income for rent = $80,000 or more in gross income, not the owner makes $80,000 gross. The owner has to make $80,00 gross to pay $50,000/yr in rent!
    Now you see why renting is verypainful. After 10 years, you’re talking $350,000 in after tax income in rent, with nothing to show for it except being 10 years older.

  127. Posted by missionite

    Anon,
    You act like only renters pay taxes.
    “Now you see why renting is verypainful. After 10 years, you’re talking $350,000 in after tax income in rent, with nothing to show for it except being 10 years older.”
    Well there’s the small matter of having access to your down payment for investments that might generate a better return then real estate over the next 10 years, and there’s also the cash flow differential between rent and mortgage which can also have a substantial impact on your investment portfolio, not to mention your quality of life.
    As long as the house appreciates faster then inflation, your cash flow differential, and your amortized purchase and closing costs, you are home free. But if housing goes into reverse, or even just putters along at say 2% annually, as seen strictly from a financial viewpoint it is the owner who will have nothing to show for ten years of ownership, and it is the renter who will come out ahead (provided of course that they invested their money during the duration.)
    Housing does drop in price from time to time, and these dips have the ability to, upon occasion, last a decade or more. I’m not saying it’s going to happen, I’m just saying I think the level of confidence you have that renting is a bad investment strategy is a little over exuberant given the current environment.

  128. Posted by fluj

    “Can they afford it” — my model of that hypothetical has built in any ARM reset eventuality. Hasn’t yours? Not, has your neighbors? or, has your neighbor hypothetically built in this eventualyt. No. hasn’t yours?

  129. Posted by Dan

    “Housing does drop in price from time to time, and these dips have the ability to, upon occasion, last a decade or more.”
    When did SF housing prices go down for a decade or more?

  130. Posted by james

    hey bitter renters,
    did you notice the s&p 500 has taken back all of your gains this year? stop acting so smug. we all lose money sometimes. happens to everyone, and nobody is immune to making financial mistakes.

  131. Posted by John

    Actually, the annualized return on S$P500 is 6.64% over the last 10 years. Yes, it does better if you look at 20-years or 30-years (8 to 9% range), it is again under 7% if you look at 40-year.
    http://www.moneychimp.com/features/market_cagr.htm
    Those are not inflation adjusted.
    Supposely, RE market appreciates about 2% (adjusted for inflation) over long term. However, that number does not count the rent saved.
    So, for most people, it does not make sense to take the max mortgage and use IO loans so you have money to invest in the stock market. It is much riskier and the return is not that much higher than your mortgage rate.
    Of course, everyone would say “it is different for me, I can make 20% annual return on stock market easily”.

  132. Posted by gh

    To the editor: another good stress test down in that neighborhood is newly re-listed 1774 Beach. It sold 13 months ago for $1,000/sf…and the current owner wants that price again. It’s in a more textbook marina location and we can’t bag on the Bay St. thoroughfare on this one. Should be interesting to watch.

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