August 4, 2008

Chase/U.S. Bank Crack Down On Jumbos, Sterling Bumps TIC Rates

Citing a “dramatic reduction in Jumbo volume levels,” “lack of Capital Markets appetite for Jumbo products,” and “worse than expected delinquency performance on these loans,” Chase is suspending “Non-Agency Fixed and ARM (Amortizing and Interest-Only) Product offerings within [their] Wholesale Lending Business.

At the same time, U.S. Bank is moving to a minimum of 20% down for interest only jumbo purchases and a “minimum of $250,000 of assets/reserves seasoned for a minimum of 60 days” for those refinancing an interest only jumbo loan with a loan to value of greater than 80%.

And from a plugged-in reader:

The TIC lending market just tightened this week. The low cost TIC lender in this market, Sterling, just raised all TIC rates by [50bps] this week and increased financial requirements for borrowers...[Editor’s Note: While our reader typed 500bps (5%), we’re assuming 50bps (0.5%) is what was meant.]

A few more buyers just got kicked out of the housing pool. Now about all those Econ101 and supply and demand lectures…

Chase Suspends Non-Conforming Mortgages [SocketSite]
Twelve New Tenancies In Common At Twenty-Two Hundred Beach [SocketSite]

First Published: August 4, 2008 1:00 AM

Comments from "Plugged In" Readers

To add on to the Gloom and Doom, Roubini seems to think this "socialism of Wall Street and the Rich" will continue in the greatest banking crisis since the Depression with taxpayers paying 2 TRILLION for a bail out:

Shadowstats is predicting a hyperinflationary depression with real inflation now above 10%:

Could someone tell me again why San Francisco will be immune from all of this?

Posted by: Justin at August 4, 2008 4:26 AM

At least they are still making the loans, so the value of every TIC dropped a mere $30-50K overnight.

When the small handful of banks that makes these loans stops writing them, the real problems will begin.

Until then, what happens when your weakest TIC partner who bought 4-5 years ago can no longer qualify when the baloon comes due or can only qualify for a higher rate product? His problems become your problem in a big hurry.

Posted by: tipster at August 4, 2008 8:52 AM

they won't. I don't think that anybody who understands the capital markets ever thought that SF would be immune.

unfortunately, credit crises take a long time to play out. this one still has a long way to go. It's a vicious cycle.

Home prices fell, which dropped the value of the underlying securities, which caused the banks to become undercapitalized, which required the banks to raise capital to comply with federal regulations, which meant less money for lending on housing, which caused housing prices to fall more, which dropped the underlying securities... etc etc etc...

and now we're seeing the cracks in other types of credit: auto loans and credit cards. Business credit is also a problem.

so unfortunately, we are nowhere near the end of this credit crisis, despite what CNBC and Hank Paulson wants you to believe.

more banks will of course fail, others will need to be nationalized/backstopped by the govt. This will constrict lending for quite some time. I'm sorry to say but it is not going to get better for quite some time. as for "how long", nobody knows. I'd say the conservative guesses are probably a year and a half more. the more bearish guesses are 10 years like in Japan. I personally am in the middle... it just depends on whether or not the banks take their write downs or if we drag it out with stupid bailout plan after bailout plan. so far we're going down the bailout plan path... that will prolong the agony. (not that prolonging the agony is necessarily bad... it is possible we can't "survive" a quick fix and that instead we've got to slowly delever)

FWIW: it's not like this is an american-only thing. It's also playing out in Europe/England, and also cracks are showing in other markets. we had a worldwide credit binge for a long long long time. now some of that (not all) has to unwind. It will be quite painful. That isn't to say that our society will collapse or anything... just that we're going to have a LOT more of this.

and there is the rub: those hoping that somehow Europe/Asia will "decouple" from the US allowing us to export to them keeping ourselves going is possible but not overly likely.

Posted by: ex SF-er at August 4, 2008 8:57 AM

Phew, good thing that my FRACTIONAL TIC loan is locked in at 6.6% for years to come.

BTW, Tipster, most new TIC loans are not shared amongst tenants :)

Also, this posting is incorrect, as Sterling is not the lowest-priced lender in the TIC market.

Posted by: NewBuyer at August 4, 2008 9:32 AM

Yup here comes the next wave default, only this time it's prime. And here comes the inflation wave created by the FEDs interest rate policy.

Posted by: badlydrawnbear at August 4, 2008 9:33 AM


I also fear a huge run-up in inflation, but that's why it's great being a homeowner with a fixed mortgage.

Posted by: NewBuyer at August 4, 2008 9:43 AM

or an SF renter with rent control ;-)

Posted by: badlydrawnbear at August 4, 2008 9:47 AM

the SF market has already suffered. we've gone from double-digit inflation to holding fast, at least when you consider the entire market, not just the 33& that is at $1 million or above. will it get worse, or is it possible that THIS is the hit SF will take?

Posted by: lefty at August 4, 2008 9:48 AM

Inflation doesn't have to affect everything equally. As it is happening right now, House prices are deflating while other things are inflating. Given the current state of the economy, the job market is going to be weak going forward. That doesn't bode well for house prices.

Posted by: akrosdabay at August 4, 2008 9:49 AM

Come on... being a renter with rent control is a hedge against inflation? I hope that you are either:

1) Single, no desire to ever marry, have family, or expand your living space.

2) Retired, with no need to have more rooms in your home

Posted by: NewBuyer at August 4, 2008 10:15 AM

Are we really still talking about inflation? The CPI will go negative in a month or two after the big drop in oil prices. But consumer confidence is low enough that I don't see any associated pick up in spending (aka demand destruction).

Don't buy your house, car, oil, electronics or consumer goods now because it's going to be cheaper soon.

Posted by: Jay at August 4, 2008 10:34 AM

Justin says
Shadowstats is predicting a hyperinflationary depression with real inflation now above 10%

The Shadowstats site is interesting and helpful, but going from 10% inflation to hyperinflationary depression is a huge jump. Contrast that with the more sober analysis from the first link you posted:

"Nouriel stressed that he is "quite bullish" about the state of the global economy and that he is positive about the medium and long term."

and ex SF-er says
so unfortunately, we are nowhere near the end of this credit crisis, despite what CNBC and Hank Paulson wants you to believe.

That we are nowhere near the end of this crisis is precisely what Hank Paulson wants you to believe. Bush was not just voting against the housing bill that just passed, but then he had a long talk with Hank Paulson and decided to just let it happen even though he had spoken out against it. Yes, Bush is all things bad and all that, but it is pretty clear from what went on that Hank Paulson wants Bush and everyone else to know that this crisis is extremely severe and has the potential to go out of control. Your simplified narrative simply doesn't match the known facts at all.

Posted by: Mole Man at August 4, 2008 10:39 AM

Housing ain't gonna be a "hedge" against inflation as long as wages don't increase.

Its just that the cost of everything else will make your now unaffordable $800K condo payment even more unaffordable.

Posted by: wanker at August 4, 2008 10:39 AM

I am afraid that being a rent controlled renter is a great hedge against inflation notwithstanding newbuyers comments. The fact is that a % of COLA is an terrible way to index to inflation, especially a landlords inflation. Cost of insurance, money, roofer, painter & plumber are more appropriate things to index.

Posted by: SF2OAK at August 4, 2008 11:06 AM

Forget about inflation. Just forget about it. We are set for mild general price level deflation. And substantial deflation of asset prices that depend on leverage.

Can anyone point to a single instance of a highly leveraged economy (greater than 200% debt/gdp)using high inflation/hyperinflation to try to get out of its debt in the last 2000 years?

Remember who sets the rules: creditors. They are in no mood to let the debtors off the hook without extracting the last possible bit of productive wealth from them (i.e., their labor, through interest, principal and tax payments).

Once enough leverage has been taken out of the system (either through default/repudiation, voluntary workouts, some repayment, and transfer to USG, thereby reducing the interest burden to the "risk-free" rate, whatever that may be when it;s all said and done), the Fed will inflate. It always does. It will probably take 2-4 years until this happens (just an informed guess).

Smart economists/traders/strategists in the early 90s said that you could not get any deflation in a fiat system. Japan proved the opposite. They are still waiting for their "reflation", going on just about 17 years now. It should go faster in the US, though.

Posted by: Satchel at August 4, 2008 11:11 AM

well as a single gay man in a rent controlled 2 bedroom apt with parking I would say I meet criteria number 1 spot on. ;-)

Posted by: badlydrawnbear at August 4, 2008 11:13 AM

"Yup here comes the next wave default, only this time it's prime."

Minor point, but Alt-A is not prime.

Posted by: mk92 at August 4, 2008 11:16 AM

from the 3rd paragraph in the article

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

Posted by: badlydrawnbear at August 4, 2008 11:29 AM

inflation. ah, how that word is used so carelessly.

our current economic problem is one of deflationary economic contraction.

what matters more? the small increase in the price of gas and consumer staples (like milk, corn, rice)? or the massive decrease in the price of housing related assets (like, I don't know, maybe a 1/1 somewhere in Florida/Sacramento/SOMA)?

Satchel already said it, so I'm just chiming in to agree. The deflation that has ocurred and will occur among leveraged assets is and will be massive. This will far outweigh the mild upward trend in commodity goods like gas, corn, rice etc.

I am continually amazed that people who spend less than 5% of their disposable income on gas/rice/corn and 30+% on housing will worry about inflation running rampant when the first class of goods costs 20-30% more and the second costs 20-30% less.

And before you attack me because 'housing costs are falling but rents rising' - that may be true in the SF Bay Area (for now), but as housing prices in much of the nation have collpased, so have rents (and they will level off and fall here too - maybe not as much though). The conclusion is inescapable.

Posted by: enonymous at August 4, 2008 12:06 PM

of course the point of the post is that the credit crunch is hitting TICs, which were previously holding up well because of the required 20% and more thorough documentation of income and assets.

But it appears now that the financial industry sees rising risk of defaults even in TICs.

Interestingly I haven't seen anyone comment on the impact of the other borrowers when one of the members of the TIC has to default. While fractional TIC financing helps mitigate this risk, there are plenty of TICs out there that are not fractional and even with fractional financing there still has to be some kind of risk exposure or why the lower asking prices for TICs?

Posted by: badlydrawnbear at August 4, 2008 12:20 PM

Isn't Circle Bank one of the boutiques offering TIC loans? If so, it's obviously not hurting their bottom line:

Posted by: zzzzzzzzz at August 4, 2008 12:24 PM

Another thing to consider with inflation is nominal interest rates. If expected inflation jumps from 2-3% to, say, 6-7%, then interest rates will rise from 6-7% to 10-11%. Needless to say, this will severely depress housing values. In the long run (say, 15-20 years), steady higher inflation would win out, but in the short run (10 years or less), the decline due to the interest rate spike would probably offset or exceed the "benefit" of higher inflation.

Posted by: gmh at August 4, 2008 12:29 PM

@ enonymous & satchel

A true question, not a statement in disguise... ;)... so you guys don't think that the Fed is doing the usual Fed obfuscation thing in this case, i.e., talking tough about inflation, but doing nothing, with an implicit wink that we're going to get out of debt by inflating costs and wages (though hopefully not to the degree we did in 79-80)?

I ask (and within the context of TIC & jumbo loans), as I'd love your opinion on when/where in this cycle you think holding housing debt would be advantageous (as it's clearly not right now).

Posted by: tony at August 4, 2008 12:30 PM

@ tony,

I don't think the Fed is trying to fan inflation. They are terrified about the idea of a rise in USG funding costs. In the late 1970s, the US was not nearly so leveraged (aggregate corp + household + USG/municipality). Nevertheless, interest cost ran approximately 20% of the Fed budget. Today, it is about 10%. They don't want to return to those days IMO.... Watch the adjusted monetary base for evidence of money printing (google the St Louis Fed series - or I have posted the link a million times). When you see narrow money supply growth go above 5-7% for 6 months or so (we're barely at 1-2% now), start worrying!

About when to take on housing debt, I think it depends on whether you are talking owner occupied versus investor. The "trick" of course will be to buy when the bulk of the nominal asset price decline is behind you, but before the nominal interest rates rise enough to reflect the new policy of reflation.

I'm guessing in 2-4 years, as for timeline. However, you might find YOUR place faster. For valuation for a nice SFH (which you can live in for 10 years) in a nice neighborhood where you want to live for 10 years, I would buy when the price is less than 200x the equivalent rent. For a nice condo (2/2 at least) I would look only if the price were less than 150x. For a "starter property" or 1/1 in a transitional neighborhood, I wouldn't touch it unless it were MUCH cheaper to buy it than to rent an equivalent property. Those units (rightly) should be smashed. They are really only appropriate as short term rental equivalent property. As such, they should embed an imputed "profit" to the owner, who is taking all the risk (in other words, trade at a discount to rental value - cheaper to own than to rent).

As an investor, I'd subtract another 25x from those ratios.

I hope that all helps!

Posted by: Satchel at August 4, 2008 1:15 PM

And before you attack me because 'housing costs are falling but rents rising' - that may be true in the SF Bay Area (for now), but as housing prices in much of the nation have collpased, so have rents (and they will level off and fall here too - maybe not as much though). The conclusion is inescapable.

There were more rentals listed for SF on Craigslist this last Friday than any other Friday in August since 2002. More than twice the number listed last year.

It ebbs and flows with the economy, and tends to draw downward as the end of the summer approaches (instead of rising like it did last week): and to be sure, it can jump up 5-10% in any year from other factors, but 2X last year?

Posted by: tipster at August 4, 2008 1:17 PM


Most helpful (and very much appreciated); thank you!

Posted by: tony at August 4, 2008 1:24 PM

"Can anyone point to a single instance of a highly leveraged economy (greater than 200% debt/gdp)using high inflation/hyperinflation to try to get out of its debt in the last 2000 years?"

Germany in the 1920s.

Posted by: anon at August 4, 2008 1:40 PM

Satchel is right about a lot of things. So much is built on debt, we'll have quite a few years of humbleness (less consumption, more saving, asset destruction) before we can go back to normalcy (for whatever that means).

80X to 120X in my opinion is the ratio that will make me jump back into the landlording business. I wish I could find some 50X to 80X like in 94-98 but I guess these were the opportunity of a lifetime.

Posted by: San FronziScheme at August 4, 2008 1:41 PM

Satchel - So you made the move to the burbs, huh? I know you explored this a bit in previous posts, but what did you see in the rental stock that you were looking to rent? Are the homes nice, generally updated (not all new stainless steel appliances, but not from the 60's either), and look cared for?

We have had a different experience with finding a rental. We are going for specific, pretty desirable locations, and have seen too much demand even at the high end to get any discounts to the rent, especially on owner occupied places where the owner took off for some reason and wants to rent the house instead of sell it. Those tend to be the nicer stock, and tend to be difficult to find at a good price, or if they are a good price, they are only available for 1-2 years before the owner comes back and the renter is ousted. The flip side has been long term rentals which are almost always run down, and even if at a good price, not somewhere we want to live.

We have been looking now for almost a year, so I feel pretty comfortable with my market assessment on rental costs, and I don't see too many deals out there, and if they are a deal, they quickly turn into a bidding war on rent. However, I feel like just this month things have turned a little. Lower asking prices, places sitting for longer, and a whole lot of homes that are on the MLS also on Criagslist as rentals(supporting your theory that people don't want to reduce price and take a "loss", they would rather just rent the place).

Anyway, wondering what you saw out in Marin, because we have not seen anything all that good in the sub $3500 range for 3 bdr SFH's, and the ones we have seen, we did not get due to people paying above the asking rent.

Posted by: The Bunk at August 4, 2008 1:52 PM

@badlydrawnbear:"even with fractional financing there still has to be some kind of risk exposure or why the lower asking prices for TICs?"

I can think of two reasons for the lower asking prices. 1. Rent control applies to TIC's. You really can't rent your TIC. Much easier to rent out your condo. 2. You always pay higher interest rate for a TIC compared to a condo.

There may be other reasons too.

Posted by: chuckie at August 4, 2008 1:55 PM


You have correct identified the reasons why TICs cost less. Rent control and fewer lenders (which in turn leads to higher rates / downpayments).

Does this mean that they deserve to be 20% less expensive than comparable condos? Perhaps.

I'd like to think that I am savvy enough to figure out which prospective renters are the kind who will live there for twenty years, versus the kind who will leave after 1-3 years.

Oh, and, again, I got my loan at 6.6% fixed for a fractional TIC, so I don't know what rates people think are going around. And like many SS readers, I believe that downpayments are a good thing, and was more than happy to put a reasonable sized one on this unit.

Posted by: NewBuyer at August 4, 2008 2:13 PM

@ anon -

"Germany in the 1920s."

Weimar was a very different animal. Aggregate debt/gdp was much lower than 200% (has anyone seen an exact stat? - I've never been able to find one). Moreover, the "debt" was externally denominate, imposed by the victors at Versailles.

What happened in Weimar was the inability of the German gov to service externally denominated debt, and so it resorted to printing domestic currency (as all external reserves were siphoned off by the foreign creditors). It was not a "choice" of course, and led to change in government, change of central bank (after the Reichsmark was officially buried, having been devalued numerous times) and the catastrophe of WWII.

The Fed, having the monopoly control over the money supply, would like to avoid the Weimar outcome. And the USG hasn't embraced revolution in more than 200 years (in fact, it chose to sacrifice 500,000 americans out of no more than 30 million in the 1860s to avoid the revolutionary dismemberment of the union).

I wrote a lot of stuff about some of this a while back on SS thatyou might find useful:

(See my long post there at Posted by: Satchel at January 20, 2008 6:53 AM)

I should have rephrased my question: "Does anyone know of a highly leveraged first world economy tat *chose* hyperinflation, without first having undergone an intervening catastrophe?" The Fed and USG still has control of the situation. I really believe they will ultimately choose deflation, just as they did in the 1930s when confronted with a similar situation. When the pain gets to great, the Fed wil inflate, but this will just offset the deflationary contraction, as the Bank of Japan did in the late 1990s/early 2000s.

Posted by: Satchel at August 4, 2008 2:24 PM

Satchel - more good stuff! So the US today has nearly twice the total debt level (350% v 200% +/-) as the Weimar Republic - that's a really scary thought.

Posted by: FSBO at August 4, 2008 2:57 PM

Satchel, you said, "About when to take on housing debt, I think it depends on whether you are talking owner occupied versus investor. The "trick" of course will be to buy when the bulk of the nominal asset price decline is behind you, but before the nominal interest rates rise enough to reflect the new policy of reflation"

I think you're spot on. How would this analysis change for someone looking to buy mostly cash? I would think rent and wait even more until reflation is kicking up the interest rate and bringing down the prices even more. Correct?

Posted by: chukie at August 4, 2008 3:22 PM

Quiz: How many TICs in San Francisco have defaulted?

Posted by: Espumoso at August 4, 2008 3:45 PM


Under identical conditions, if you were buying a condo, I would guess you would get 6%. That's a diff of about 10%. So I would guess you would pay about 10% less for a TIC vs a condo to account for this factor alone.

Inability to rent, and other factors if any, could easily account for the other 10%. So 20% discount does not seem out of line to me.

By the way, was your realtor pretty knowledgeable about these issues? I am wondering if the realtor community understands these issues and does a good job of educating the buyer?

Posted by: chuckie at August 4, 2008 3:58 PM

what I find confusing is that from the Satchel link above it shows P/E ratios of 42 for SF.
I know that since 2006 rents have increased significantly and but that still doesnt seem consistent with
which came out last week.
Only the Outer sunset (with a p/e of 28.5) makes it from SF. That suggests the remainder of the SF zip codes are lower than Wilow Glen, San Jose, in 10th, at 26.1.
Am I missing something? This suggests we are close to the 24x long term average quoted in satchels thread above.

Posted by: REpornaddict at August 4, 2008 4:04 PM

TIC's are required to have a fund for the rainy day when one of the tenants falls behind. That's a main reason why the defualt rate is so low. If the reserve is 3 months, that buys some time for the tenent in question to look for alternatives.

The idea behind the TIC was for renters to have the opportunity to buy the units they were renting as a form of affordable housing, at least that's the impression I was under. If that is the case, the price would be less than a condo. There is no marketing, no need to fix up the units in order to "sell" them, just make get into the lottery to convert to Condos. However, just like everything else, things change and now TICs are very close to CONDOS in terms of financing, that's probably why TICs are now asking Condo pricing.

Posted by: view lover at August 4, 2008 4:06 PM

I just signed a lease in a newer SOMA highrise, purchase cost was 300x rent. There wasn't any methodology in the Forbes/Yahoo article but I'm guessing the P/E is over 30.

Posted by: unearthly at August 4, 2008 4:25 PM

300x is the based on monthly rent while the E in P/E is annual rent. 300x would be P/E of 25.

Posted by: chuckie at August 4, 2008 4:39 PM

For a condo with a monthly gross rent of 1/300 of its purchase price, the GRM (300/12) is 25 and the cap rate is probably no more than 2% (ie a P/E of 50+). The cap rate reflects the net before debt servicing but would include costs such as management and leasing fees, HOA, insurance, property taxes and repairs. 2% is obviously pretty bad (for the owner - not the renter) and it's even worse if you factor in long-term repair and replacement. That's why you need to pay no more than the 100 - 150X monthly rent as Satchel and San FronziScheme and others have recommended.

Posted by: FSBO at August 4, 2008 4:55 PM

@ Satchel: "For valuation for a nice SFH (which you can live in for 10 years) in a nice neighborhood where you want to live for 10 years, I would buy when the price is less than 200x the equivalent rent."

Why 200x? That seems too pie-in-the-sky and a recipe to never buy. Since the late 1990's, I've been keeping an eye on house prices in 2 qualifying nabes - Noe and Castro - and I cannot remember a time in the last 10 years when SFH prices in those hoods were at 200 times monthly rent.

Posted by: sanfrantim at August 4, 2008 5:00 PM

Here are some MLS stats for condos v TIC's:

Condos: 1,284 sales, $757K median price, 1,241 ave sf.

TIC's: 281 sales, $585K median price, 1,346 ave sf.

The figures above are for YTD 2008 sales. Condo category includes "Loft Condos". It's obviously not apples-to-apples, but it looks like TIC's are still priced well below condos.

Posted by: FSBO at August 4, 2008 5:03 PM

I know people who bought a house on prime Noe Valley (2 blocks up from 24th and Castro) in the low 400Ks in 97. At the time it would have rented for around 2000, maybe a bit more. The house was a fixer but definitely habitable. This gives us a 150-200X monthly rent.

Even at this pricepoint, they had a lot of expenses to handle and struggled a bit with OK salaries (and 2 kids).

Paying 4 times that today even with double the rent is pure madness.

Posted by: San FronziScheme at August 4, 2008 5:13 PM

Since everyone is talking about rent ratios, maybe I can chime in here as well (also response to Bunk's question above).

I recently rented a nice place in Tiburon. 3/2 expanded 50's ranch, 2 car garage, PRISTINE shape, BUT it hasn't had any major renovation since the mid-1980s. Completely unobstructed bay view (including both towers of the GG Bridge, All of Sausalito and almost to Mt. Tam) in one of the nicer parts of Tiburon (not Belvedere of course, but not the "flats" either). Front and back yards and deck. All paint, window coverings, every carpet and every square foot of flooring is BRAND NEW (but only tasteful vinyl flooring and marble entryway). Many new fixtures, including new toilets and some plumbing hardware. Some appliances are brand new, the stove is old. (No problem, just get a handtruck, comb craigslist and for a small stack of Benjamins pick up a viking or wolf out of one of the foreclosures building 20 miles north in Novato.....)

The rent is less than $3K per month, which was about 25% less than the initial craigs price. (BTW, this is exactly the discount from craigs when we rented in St. Francis in 2002.) We have been in the houses of three or four of our neighbors, and honestly think the rental house we have is as nice or nicer than ones that were purchased as recently as last year for $1.2M and $1.5M (all approximate to protect some privacy here). In any event, no one would objectvely say that the houses are in different leagues, and of course the location is identical. This rental rate is approximately 400-450x the purchase price, depending on subjective appeal I guess.

There are about 6 houses for sale within 200 yards or so of where we rented. They range from about $1.5M to over $3MM, with a median around $2.25M. It's a nice neighborhood! A few are spec builds, at least 3 were purchased within the last year or two and look to be priced at just breakeven for the homemoaners. They seem to be sitting there.

This is one of the very best school districts in Marin, if not the best. We signed a 1-year with an option to renew for a year at the same price.

@ Bunk = sorry to hear that you are having some problems finding a rental - maybe we just have low standards! My advice is to only look at the $3.5-$4.5K market and lowball them.

Here is a nice 4/3 in Kentfield (originally listed 2 months ago at $4K, now down to $3.5K):

That is Bacich school district. Have you seen that one? That I would consider fair value at $3K, but note that there are other rental houses on that block. One of them (another 4/3) within a few houses of that one currently rents at $2300. This is not possible in NYC metro suburbs for instance. A $750K house can easily generate $5500-6000 in reliable steady income, higher if you are willing to settle for shorter term tenants. (My brother owns one in a good school district and rents it out.) Thank you prop 13!

Here is another Tiburon house that might be interesting. It started out at $5995 a few months ago, and is now down to $4500 (asking). School is starting in two and a half weeks, and the rental market should die here when it does:

Maybe it's worth $3500/mo.?

It's funny that you say that just in the last month you are seeing some cracks in the rental market for SFHs. I have a good friend who sold his Oakland house last year and is now renting in Campbell. He said things were crazy all summer (he's looking for a bigger house). Now, he just found a nice 5/3.5, updated and some renovation, in Los Gatos for $3,500/mo.

I don't know Marin very well (yet) but let me recount the story of a good friend up here. He rented a condo in Tiburon in 2001 for $3,500 and felt he was lucky to get it (demand was through the roof). He forced a rent decrease to $3,000 in 2002, and then rented an SFH in Tiburon school district for $2,800ish in 2004, and it hasn't gone up since then. He tells me that from what he can see, all rents up here are back to 2000 levels, and perhaps even earlier. FWIW.

@ sanfrantim -

200x seems reasonable to me in view of the risks and benefits of owning a nice place. The key to your thought is "since the late 1990s". This has been a once in a hundred years' credit orgy. I'm pretty confident that the old ratios will reassert themselves. As a point of reference, starter condos in Greenwich, CT, a MUCH wealthier area than anywhere in SF (save perhaps for a few square blocks) in 1996-97 traded at about 100x rent ($300K bought you a nice and BIG 1/1.5 in a nice prewar building like those on West Elm Street, and rents were around $3K then).

Posted by: Satchel at August 4, 2008 5:52 PM

TIC are priced way way less than condos. Again, this reiterates my point that if you can get it condo-converted (odds of which are about 50/50), then that will account for instant/massive valuation increase.

In the event that you can't convert it before selling, then you sell as a TIC anyway, which is precisely what you bought it as.

What's more, there's also the chance that TIC lending becomes looser. Rates are moving closer to that of regular condos, more banks are supporting them, etc. If major banks like Wells or Wamu start backing their mortgages, it will also lead to huge valuation increases.

Still a fan of TIC buying, and for the record, my P/E ratio was probably about 21x, so I am not too worried about it sagging.

Posted by: NewBuyer at August 4, 2008 7:23 PM


I think thou doth protest too much.

Posted by: michiko at August 4, 2008 7:30 PM


Didn't you say you were considering that St. Francis fixer, at $1.3M or so, and in that shape it would rent at what $2000, maybe. SO 650X rent.

I think you said that it didn't work for you on numbers but those aren't even close. If you are look to move to St. Francis and houses rent there for $4500, are you really expecting to see prices drop to $900K before you move on something. I doubt it, and if you are they won't be there too many other renters waiting to buy with a bigger X number than you. Plus lots more who would upgrade to that neighborhood at a higher number as well.

Posted by: sparky at August 4, 2008 7:31 PM

If you are renting in Tiburon for $3K (or so) per month and you have kids that are taking advantage of the Reed Union School District, why would you move (or buy)? Your rent is not much more than private school tuition (for one kid) or property taxes. Stay put until the kids are in high school - or stay longer and send them to our mayor's alma mater, Redwood. Prices may have corrected by then.

Posted by: FSBO at August 4, 2008 7:53 PM



Posted by: NewBuyer at August 4, 2008 8:22 PM


We do have a son that will be starting at Reed in a few weeks, so yes we are taking advantage of the willingness of Bay Area buyers to pay $15-30K in prop taxes alone on comparable properties in order to "lock in" to the good school district.

The downside for us, of course, is that there is some chance that rents will rise dramatically over the next two years AND purchase prices will not have corrected by then. Any renter takes this chance, but of course the more assets one has, the less one fears being "priced out forever" and the more rational one can be.

At these insane rent v buy multiples (we are literally paying about 1/3rd the cost to rent it as to buy a similar one, and of course without incurring ANY of the pricing risk or unforeseen maintenance expense) it still seems a no brainer to me. I'll take the risk - I'm a trader, taking risks is what I am supposed to do! This distortion could only exist because the owner of our house pays about $1500 in property tax, and is preserving the asset to pass to future generations at the grandfathered low tax basis. Once again, thank you prop 13!

Posted by: Satchel at August 4, 2008 8:27 PM


"Didn't you say you were considering that St. Francis fixer, at $1.3M or so, and in that shape it would rent at what $2000, maybe. SO 650X rent."

No, you're misremembering it. I'm nothing if not absolutely consistent! It was all renovated, my wife was willing to pay $1.1M cash (a little more than fair value IMO, but hey isn't marriage great?, hehehehe), and it was about a year and a half ago (the school situation changed for us since then, and now we'd rather be in Marin). It probably would have rented for about $4K or so at that level of renovation back then, perhaps $4250-4500 now (there did seem to be some pressure upwards on rent in the last year or so out there). So, at the time, about 275x (what can I say, we all want to make our wives happy!) - above fair value IMO, but no big deal as the subjective "psychic benefit" received would have made up for the overvaluation on an objective basis.

I think you were confusing that property with the unrenovated rental house right next door, which sat at $3,900 wishing rent, later reduced to $3,500, and seemingly vacant all the time.

Just FYI, here was my whole description (I love the google feature on SS! - LONG, so if readers don't care about this, please ignore!):

"OT - Due to popular demand from John, a few words about 1 Santa Paula, and it does show what has been going on out here.

Bought for $1M in October 2005, fully renovated (perhaps down to the studs - definitely many new walls and some walls removed to open up the kitchen etc), new systems, floors, room added in the attic, new kitchen and baths, light landscaping, perhaps brand new detached garage, some foundation work, new sound wall (it abuts a somewhat busy street, Portola, etc. All in all, a nice, solid 3/2 with bonus room in an EXCELLENT neighborhood. But NO view. Looks to me like a good (but not overboard and garish like many renovations) redo of a solid, smallish house. Potential to add some workshop space in the basement, or a family room (although you don't need one). I'd guess $125-200K of work, judging by what the flipper (who I stringly suspect has a contractor "connection" - otherwise the work would have been more) initially sought last year.

It went on the market last year, initially at $1.5MM, later lowered to $1.395MM. My wife went to see it twice, and liked it a lot, so I told her to offer what she thought it was worth but to make sure she told the realtor that it was subject to an inspection. I never saw it then, but my wife offered the realtor $1.1M cash deal, no need for buyer's agent, we'll sort everything out quickly, etc. The realtor of course laughed. I actually thought that was a fair offer! I mean, the fair value of the property based on income of the area/rents, etc. was about $900K (at most) and I figured the flipper was in it for about $1.3M (after carrying costs), so we split the real loss and each contribute $200K to the credit inflation bonfire!


Now, it's relisted, initially at $1.399M, now lowered to $1.375M, so I went to see it out of curiosity and talked to the realtor a while.


Anyway, the market is worse now than last year, and prices are down out here. Real estate is a funny asset. All you need is one person to fall in love with a place, and you can get an irrational price. But I'm guessing this can't go for more than $1.25M."

It actually went for $1.315M Oh well, no one will ever accuse me of being an optimist!

Posted by: Satchel at August 4, 2008 8:40 PM


OT alert.

That quoted stuff is here:

(See Posted by: Satchel at March 19, 2008 6:28 AM)

I just reread it, and see that I wrote fair value is about "$900K (at most)", or at lost 225X estimated fair value rent. Maybe I was adding a little premium for that new house smell.... Or maybe because when I dug behind the cabinets I didn't see all the sloppy shims sticking out all over the place, or see electrical cutouts within the work (hidden from easy view) that looked like some drunken yahoo attacked the cabinet/drywall in place with an out of control saber saw, as I do in 95% of the crap I see listed as "Needs Nothing!" or "Done!". I'm sure you do better work, though, sparky :)

Posted by: Satchel at August 4, 2008 8:50 PM

I'm with you on the keeping the wife happy, and the cabinet cut outs...a personal pet peave of mine as well. And not seen in my projects for sure.

Posted by: sparky at August 4, 2008 9:32 PM

Satchel - I saw that one you have been tracking in Tiburon and thinking about going to see it. My concern is my wife will love it and then she will throw down the gauntlet and make us get it at what they are asking. There should be a pricing theory around that reality.

It has been a tough go for us, but I am starting to see some interesting signs. We have been looking mostly in North Berkeley and Rockridge, and there are a bunch of places there that are pulled of the MLS that listed for between 800k to 950k (which they obviously didn't get), and they have been mostly asking less than 3500 per month for rent. Before these places would have asked much more than that. There was another place in Kensington that languished for a few months without selling at $1.2 MM, and they just rented it for under 4k a month after 6 weeks on the market, and it was totally redone and very nice.

A few months back every place we went was very competitive, and now I see the owners/landlords changing their tune and pursuing us, hopefully something good will turn up soon. Glad you found a good place to call home.

Posted by: The Bunk at August 4, 2008 9:38 PM


I think your condo/TIC price comparisons (medians, or average $/sf) could be are substantially misleading because of two factors:

1. The sales figures combine (a) TICs in two-unit buildings (entitled to fast-track condo conversion), (b) TICs in 2-6 unit buildings that have not been Ellised (eligible for condo conversion through the lottery--a long term proposition), and (c) TICs in 6+ unit and other Ellised buildings (ineligible for condo conversion or subject to an additional 10-year waiting period). I'm guessing that there's a substantial price disparity between TICs in category (a) and TICs in categories (b) and (c), and a small disparity between categories (b) and (c). But that's just a guess.

2. Most condos are new or newish construction, whereas nearly all TICs are found in older buildings. I'm guessing there's a significant premium for new construction but again, this is just a guess.

One way to partially control for these "mix" variables would be to disaggregate the TIC data into the three tiers suggested above, and then to compare the TIC prices with the prices of condos in buildings constructed prior to, say, 1950. I don't have access to the MLS database so I can't do this. But I'd be very eager to see the results if someone else does . . . .

Of course, the more one disaggregates the data in the rough-and-ready way suggested here, the greater the risk of distortions due to the other "mix" factors (neighborhood, unit quality, etc.) What is really needed is a hedonic model, but regression analysis seems not to have penetrated the residential real estate appraiser's trade.

Posted by: cse at August 4, 2008 9:49 PM

Good points cse. I'll try to do something by building age. Building size would be possible - but may require linking to (or manually inputting from) another data source. You're right about cutting it too fine - there aren't that many TIC sales and location is probably a huge factor. Yes, we need a hedonic model - and then, just like the BLS does with the CPI numbers, we can make it say whatever we want.

Posted by: FSBO at August 4, 2008 11:02 PM

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