December 16, 2008
If You Want To Live Like An Architect, Do
The Your Math (398 Eureka)
It was a plugged-in reader that first connected the dots with regard to the listing of Phil Matthews’ AIA home tour home at 398 Eureka. Asking $2,450,000 in September and then taken "off the market" two weeks ago, it’s another plugged-in reader that points out that the home has been added to the rental pool and is currently asking $6,500 per month.
We’ll let you do your math. And once again, connect the dots.
∙ Listing (for rent): 398 Eureka (3/3.5) - $6,500/mo [398eureka.com]
∙ AIA Tour (And Architect’s) Home Hitting The Market: 398 Eureka [SocketSite]
∙ To Rent Or To Buy, That Is The Question (That Only You Can Answer) [SocketSite]
First Published: December 16, 2008 8:30 AM
Comments from "Plugged In" Readers
With 20% down, a mortgage would be what, 12k/month at 6%? We're still in bubble territory on a rent/buy basis with this one.
Posted by: dch at December 16, 2008 9:13 AM
$6500 rent is too pricey in my book. Let's say this is a $2M house (it failed to sell at $2.45M before the October meltdown, so this is not unreasonable).
In my experience, the proper ratio of subsidization of deserving renters by foolish property owners equates approximately to a GRM of 30-35 at this price range. That would imply a rent of about $4750-$5500/mo. In other words, about 15-25% below the craigslist wishing rent, again within the range of discounts I have encountered renting SFHs in SF and Tiburon.
BTW, whatever happened to the chorus of "rental stock is all crappy - it can't compare with the owner stock" we used to hear so much about (I've never found that - the SFH stock seems about the same as the owner stock, perhaps with some allowances for the cosmetic stuff that is done just prior to sale to sucker in a buyer)?
Posted by: LMRiM at December 16, 2008 9:17 AM
It's not rented yet. 6500 is high. This is not the best of Noe/Eureka Valley and it's on a neighborhood crossing corridor.
Posted by: San FronziScheme at December 16, 2008 9:19 AM
Well, I'm not sure "do the math" really applies here. This is a trophy property. It's like scratching your head, trying to figure out if it makes more sense to buy or lease that Ferrari. If you can afford to be in this market in the first place, you don't ask about 5-year residuals on an F430.
That said, financing 80% of $2.45 million at 7% is a payment of roughly $13,000/month. Add in property tax of $2,300/month for an all-in nut of $15,300. Using a 32% back-end ratio, you need annual income of around $600K to make this work.
I think the equation still favors renting at this point. Just ever so slightly.
Posted by: Dude at December 16, 2008 9:22 AM
I'm curious - what's the consensus on a premium for owning versus renting assuming no expected appreciation/depreciation in home value (or maybe just enough appreciation to keep up with inflation)?
If this were going to be my primary residence, I'd place a pretty hefty premium on being able to remodel/improve at will and, more importantly, on knowing I'm not going to be kicked out if the owner wants to move back in or gets foreclosed upon. Not a $6k premium probably but maybe not that far off after taking taxes into account.
Last time I looked, there were hardly any rentals out there that I would consider comparable to my home, but maybe that's changing?
Posted by: #23 at December 16, 2008 9:27 AM
Most of the premium people were ready to pay for own vs. rent were simply the price for the lottery ticket to get rich.
Tables have turned. When you buy a home today you are buying the risk that prices could go down some more. If you're under water your mortgage will be a huge waste of money. Not only your first 10 years of mortgage payments typically pay only 15% of your debt, but at the end of these 10 years you will not have built "fiat equity". You'll feel compelled to stay put (in a few words: you're stuck) and this is a restrain on your personal freedom.
This is why I think there should be no premium, on the contrary!! You're taking a big risk and risk should be enticed with lower payments on owning vs. renting.
This is why people have smelled the coffee and stopped buying: pride of ownership can be a trap to extract your hard earned cash if there's no "fiat equity" at the end of the deal.
Buy wisely and definitely not at the current overbloated hyperinflated prices.
Posted by: San FronziScheme at December 16, 2008 9:41 AM
This is my favorite game. Here's the results:
Assuming appreciation is flat over the next five years (and all things considered I think this is a generous assumption) the monthly out of pocket overhead on owing this place (after calculating tax savings from deductions, property taxes, insurance & maintenance) would be in the neighborhood of $10,412 if the house was held for five years. Add in the costs of selling the place at the end of five years and we get ammortized monthly overhead of $13,270.82.
Meanwhile on the rent side if we assume a 2% return (i.e. 5 year CD) on your $240k down payment we can safely come to the conclusion that by renting this place for $6500/month (and I agree that the property is unlikely to command this rent, but just for argument's sake we're going with it) you will be SAVING $6512.99 a month.
So for this particular property, playing the ball as it lays, renting is cheaper then owning by roughly 100%, and at the end of 5 years you will have an extra $390k in your pocket, and a lot less stress and headaches.
Posted by: missionite at December 16, 2008 9:42 AM
# 23 Asks:
> I'm curious - what's the consensus on a premium for owning
> versus renting assuming no expected appreciation/depreciation
> in home value (or maybe just enough appreciation to keep up
> with inflation)?
My parents have been buying rental property in the Bay Area since the 60’s and (other than four years of undergrad and two years of grad school where I worked part time) I’ve worked full time buying selling and financing real estate all over the country since the late 70’s.
With the exception of the interest rate spike in the late 70’s, the mini bubble in the late 80’s and the giant bubble of the last few years the monthly payment to “buy” 80% of the homes has been about equal to the 30/yr/am payment after a 20% down payment.
The 10% of the low end homes have almost always been cheaper to buy since so few people want to buy next to a housing project with drug dealers shooting at each other and the 10% at the high end have always cost a lot more to buy (and it is hard to find the fair market rent for a 10 acre estates in Woodside or 10,000 sf homes in SF with three bridge views).
#23 Then says:
> If this were going to be my primary residence, I'd place a pretty
> hefty premium on being able to remodel/improve at will and,
> more importantly, on knowing I'm not going to be kicked out if
> the owner wants to move back in or gets foreclosed upon.
I’m currently renting my primary residence and since I’m was paying about $50K less per year than it would have cost to buy a similar places in the area I didn’t worry about spending a few grand to fix the place up before I moved in. My landlord (who lives a few blocks away and owns the place free and clear) will probably not lose the place in a foreclosure auction any time soon…
Posted by: PresidioHtsRenter at December 16, 2008 9:49 AM
LMRiM, you know what happened to "rental stock is all crappy, it can't compare with the owner stock". Flippers/developers are getting caught with their hand stuck in the cookie jar and putting their spec homes on the market hoping for an improved market when the lease runs out, and some folks who bought during the peak of the bubble and can't move their home at a profit are doing the same.
This is an unusual situation in the market. Of course the rental pool generally is not as nice as the owner stock in San Francisco. That one really nice/house condo that came into the rental pool was a rarity over the past 10 years, but over the 3 months, its becoming increasingly common because of this denial cycle that homeowners/developers are entering.
Posted by: anon at December 16, 2008 9:57 AM
I'd be careful renting something like this unless I was able to pore over the owner/landlord's books. I'd at LEAST want to make sure that the rent covered the PITI payment.
you want to make sure you're not moving into a pre-foreclosed home. that would be a hassle.
it is one major problem with trying to wait out the downturn by renting. too many horror stories of renters who one day find a NOD on their front door because the landlord was pocketing the rent and not paying the mortgage.
not saying this will happen with the above property, but it is a concern in general.
Posted by: ex SF-er at December 16, 2008 10:37 AM
Luckily the bailout will now extend to tenants. The government is getting ready to help us bitter renters stay in our places if our investor landlords get foreclosed - Fannie and Freddie will take over the lease:
Imagine that...trading one bankrupt landlord for another!
Posted by: Dude at December 16, 2008 10:47 AM
The rent v. buy point of indifference multiple I've seen is 150 x monthly rent. Meaning, if a property costs less than 150 x monthly rent, it's a good deal, and if it costs more than 150 x monthly rent, you're better off renting. Usually in San Francisco, property costs 300-400 x monthly rent or more, meaning it's always better to rent. Part of the premium home owners were willing to pay can be described as "option value"--they assumed the price of their house would go up up up, and when they were "in the money" they could sell at a profit.
The good thing about options is if the underlying asset falls in value and you become "out of the money" or "underwater," your loss is limited to the price of the option and nothing greater. Which isn't necessarily true with a house (depending on your ethics and net worth).
Using a 150 x multiple, the implied fair market value for this house is $975,000. So either the rent is too low, or the house is way over priced. Or maybe the multiple is just wrong. (Anybody have a better multiple?)
If anybody has more info on the assumptions behind the 150 x multiple (like mortgage interest rate, implied appreciation), please share.
And I agree with others, I'd want some assurance this house isn't about to go in to foreclosure. Moving company bills alone would be $4,000 to $8,000, depending upon how much stuff you own.
Posted by: DataDude at December 16, 2008 11:09 AM
Quick question for the plugged-in readers here. I was under the impression that under rent control laws in San Francisco you can't be evicted if the property you are renting is foreclosed upon. Is this true for rental houses as well?
Full disclosure I rent a house in Noe Valley and honestly have no idea what the financial condition of my landlord is.
Posted by: NoeValleyHouseRenter at December 16, 2008 11:29 AM
You aren't protected from eviction if you are in a SFH.
Posted by: auden at December 16, 2008 11:35 AM
You make an interesting point about just throwing away some of the savings in the rent v buy equation to spruce the place up a bit. My biggest issue with the single family rentals I looked at is that they needed some love to feel truly habitable. It seemed like spending the money to do this myself would be a waste, but maybe not if the savings is significant enough.
Also interesting that people are seeing some nice housing stock come on the rental market. I looked pretty hard about a year ago and did not find anything I would consider living in (even after some minor sprucing up).
I know you think THE SKY IS FALLING and if one makes this assumption, the rent v. buy equation tilts heavily and obviously to rent (just as it leaned pretty heavily towards buy when your bull counterparts were screaming that real estate could only go up).
I was curious about whether anyone else thought owning was worth a premium if appreciation/depreciation were taken out of the mix. It seems so far that people don't really place much premium on owning (so long as your landlord appears solvent), which I find surprising.
Posted by: #23 at December 16, 2008 11:49 AM
Owned my own house in NV now for 24 years and we have never been that concerned over appreciation/depreciation. Bought the house caused we loved the house and the area, and saw the long term potential.
I have the freedom to do whatever I want to it (essentially) inside and out. Have remodeled it over the years, including a current major upgrade..and enjoy that ultimate freedom of making it my own, and reflecting the way we live, without any landlord rules whatsoever.
Renting can be good for some people, but, in my opinion, home ownership offers a sense of stability, satisfaction, and control over one's destiny.
oh yea..no complaints about the appreciation, but that was never my main concern. honestly.
Posted by: noearch at December 16, 2008 11:58 AM
Even if we lived in a world of no appreciation/depreciation, and let's just assume that monthly payments of rent vs. own were identical (including mortgage, insurance, maintenance, taxes, etc), there's one more thing to consider: transaction costs (i.e., costs of selling).
So owning depends on your time horizon. If you want to live someplace only a few years, it makes sense to rent (unless property prices are going up year after year, which for this example, we assumed wasn't the case).
Also, when it comes time to move, what if it takes you 12-18 months to sell your home?
And let's not forget that uber-important staging fee of $10,000 or more.
Posted by: DataDude at December 16, 2008 12:11 PM
I place a huge premium on owning.
Posted by: plan C-sparky at December 16, 2008 12:15 PM
I agree that at this stage of my life (stable job, no plans to move/sell, kids in school) I'm glad to own my place, and if appreciation/depreciation were out of the equation It's worth a small premium to me to avoid rent uncertainties (eviction, etc.).
But up until about 10 years ago, I'd have paid a premium to rent. I had no idea what town I would end up in and needed the freedom to be able to move. I had no idea where I would end up working for the long term or even what my job would be. And the last thing in the world I wanted was a sizable mortgage that would be quite expensive to get out of (i.e. selling costs).
But of course, appreciation/depreciation issues must be part of the equation. Also forecasts of the future direction of rent. Right now, with significant housing depreciation a near certainty for several years and rents only likely to go down during that timeframe, it's a no-brainer for just about anyone facing this decision.
Posted by: Trip at December 16, 2008 12:30 PM
The key in this determination of premium is whether we're talking about identical / interchangable properties. In Soma, the place I rent is virtually indistiguishable from the one for sale across the hall. We're talking identical floorplan, finishes, everything. Premium to own: zero.
But I've looked at places in Sunset or Glen Park, where the property for sale is leagues above the rental home. In that case, the premium should be the cost of the renovation.
Most of the other stuff you guys mention is intangible, and can easily be viewed from the opposite perspective. For example, what if I owned and suddenly got bored of my neighborhood and wanted to move? Or what if we lived in a 1-bedroom and just had a kid, and needed more space? What if I just discovered my house needs a new foundation and roof that I can't afford? The stability of owning is offset by the freedom of renting - this stuff is subjective. Dollars are not.
Posted by: Dude at December 16, 2008 1:41 PM
the only thing uglier than this house is the one next door!
Posted by: sf_housedude at December 16, 2008 2:02 PM
Sf_housedude is right. This place is astonishingly ugly, particular when one considers that it was some architect's personal pet project. It looks and feels like you're living in the lobby of a Walnut Creek office building.
Posted by: anon at December 16, 2008 2:18 PM
When assessing the architecture, don't forget that it is the way it is in part because of the influence of the planning department on the process, as the architect has informed us. If this is too plain, then the prime suspect should be the rules and the process.
Posted by: Mole Man at December 16, 2008 2:47 PM
if you get bored of your neighborhood as a property owner, then yea, you shouldnt be an owner.
if you "just had a kid" and owned a 1br whatever, then you might wanna plan ahead next time.
if you just "discover" that your house needs a new foundation and roof, then you didnt get a very good inspection report when you bought..
bottom line, one can go on and on about "unexpected" things as a renter or an owner. bottom line, owners are farther ahead financially than a renter ever will be.
Posted by: noearch at December 16, 2008 2:52 PM
"bottom line, owners are farther ahead financially than a renter ever will be."
Sounds like a pretty hollow generalization, especially in today's economic environment. What do you base it on? Hopefully not this particular property (buy for $13.5K/month vs. rent for $6.5K).
Posted by: Dude at December 16, 2008 3:13 PM
The following report from the Center for Economic and Policy Research uses (and justifies) 15:1 as the historically typical ratio between house price and annual rent for an equivalent unit.
The report does not address whether the ratio has been larger, historically, for higher-end properties. I would be interested to see data on that question, if anyone has any.
Posted by: cse at December 16, 2008 3:17 PM
@ SF Fonzi...
"Not only your first 10 years of mortgage payments typically pay only 15% of your debt..."
You will pay down about 23% of your loan after 10 yrs (120 payments) according to my amortization tables
Posted by: teacher's aide at December 16, 2008 3:46 PM
# 23 Asks:
> I was curious about whether anyone else thought
> owning was worth a premium if appreciation/depreciation
> were taken out of the mix. It seems so far that people
> don't really place much premium on owning (so long as
> your landlord appears solvent), which I find surprising.
I think that most people (myself included) will pay a premium to own vs. rent.
Right now I don’t have any kids and I’m not sure if I want to stay in the city and play social kiss ass to get my kids in to Burke/Town/Convent /UHS or just move to the Peninsula and send the kids to public grammar schools and private high school I went to so the idea of buying a home that I need to sell at a huge loss (or rent for a huge loss each month) is the main reason that I’m renting.
I’ve owned two homes in the Bay Area and I would love to buy a nice place in the city with a view of the bay if I didn’t think that the prices would be so much lower in a few years and there was not such a huge difference between the price to rent vs. buy (who wouldn’t rent/lease a car if you could get a similar car for 1/3 the cost to buy one)?
Posted by: PresidioHtsRenter at December 16, 2008 3:57 PM
That's a fascinating report. Table 1 (defined as SF, Oakland and Freemont) shows that for the Bay Area, it's about twice as expensive to own than rent. Table 2 shows that for the Bay Area, if a person were to buy a home in 2008, hold it for 4 years, and then sell it, the likely equity lost would be about $250,000 (including selling costs). This number is probably higher for SF, because houses cost more than the East Bay, and SF started the correction process later.
Policy makers know home ownership is most likely a losing proposition for new buyers in markets like New York, San Francisco, and LA. Let's see if the dangle low cost mortgage carrots in front of us anyway, encouraging us to do something that's not in our best interest...
Also interesting is the conclusion: "In these bubble markets, policy makers must not only be less committed to sustaining ownership and home values, but also must proactively facilitate the conversion to rental of vacant, foreclosed and delinquent units to limit the pressure on the rental market.
I wonder what implications this will have for max conforming loan amounts in expensive markets like SF that reset downward starting in 2009.
Posted by: DataDude at December 16, 2008 3:58 PM
"bottom line, one can go on and on about "unexpected" things as a renter or an owner. bottom line, owners are farther ahead financially than a renter ever will be."
My God. That is about as ignorant as it gets.
You must have been a huge supporter of W's "ownership society".... that went well!
Posted by: Irwin Fletcher at December 16, 2008 7:08 PM
There is such a clear concise paragraph in that linked paper you posted:
"As explained in our earlier paper, house prices nationwide have typically risen at approximately the same rate as the overall pace of inflation. Over most of the 20th century, from 1895 to 1995, there was virtually no change in real house prices. Beginning in 1995, house prices began to hugely outpace inflation as the speculative bubble in the stock market spilled over into the housing market."
If you believe this statement, how could anyone possibly think now is a good time to buy. If you apply this logic and use a 3% inflation rate(compounded annually) to a house bought in 1995 for $200,000, that same house would be worth $302,506 today. I think we have to return to the days before house flipping shows were on tv and people actually bought houses to live in and not as investments.
Posted by: Tel Hill renter at December 16, 2008 7:28 PM
Graphical evidence that Ownership Society was for naught:
Posted by: Gail Stanwyck at December 16, 2008 7:38 PM
Open house staging ... by Ikea???
Posted by: pennybags at December 16, 2008 7:48 PM
@Tel Hill renter:
I do think it's plausible that the nicer parts of San Francisco (especially in the southern part of the city) will realize equilibrium price gains from 1985-2015 (say) in excess of inflation, due to supply restrictions, agglomeration economies (tech, especially), and the increasing value of local aesthetic and cultural amenities (which are highly income elastic). Which is not to say that today's prices are sustainable.
By way of comparison, New York City has realized price gains in excess of inflation since the mid-1950s, largely due to supply restrictions (coupled with agglomeration economies). Edward Glaeser of Harvard has a good paper on this, but I don't have the link at the ready.
For what it's worth, Glaeser also finds that cities with supply restrictions experience larger and more prolonged bubbles. See: http://www.economics.harvard.edu/faculty/glaeser/files/bubbles10-jgedits-NBER%20version-July%2016,%202008.pdf.
Posted by: cse at December 16, 2008 8:03 PM
no, don't think I've been ignorant at all. I'm quite happy to have been paying a modest mortgage for the past 24 years rather than hand over a rent check to a landlord.
Owning is not for everyone. Renting is not for everyone. and I have friends who have been renting for the past 24 years and with steady rent increases they are now paying for a one bedroom what I pay on a mortgage for a 4 bedroom house in Noe Valley.
now...remind me again how I am ignorant..
Posted by: noearch at December 16, 2008 8:17 PM
Thanks for the link - it'll take me a while to get through that! I think I get the gist of it though.
Hard to gage the real, sustainable value of RE in SF, but I guess the market will determine that value in the end when this current bubble completely deflates.
Posted by: Tel Hill Renter at December 16, 2008 8:45 PM
Nice strawman noearch. This site hasn't been arguing the merits of RE in SF 24 years ago. Just don't banke on any of your gains in the last 10 years. Whatever makes you content (unless you HELOC'd of course).
Posted by: DealMaster at December 17, 2008 1:01 AM
> no, don't think I've been ignorant at all. I'm
> quite happy to have been paying a modest
> mortgage for the past 24 years rather than
> hand over a rent check to a landlord.
Like many people Noearch feels that it is OK to pay “rent” to a bank to get money to buy a place to live, but it is NOT OK to pay “rent” to a landlord for a place to live
> Owning is not for everyone. Renting is not for everyone.
> and I have friends who have been renting for the past 24
> years and with steady rent increases they are now paying
> for a one bedroom what I pay on a mortgage for a 4
> bedroom house in Noe Valley.
Since your friends are still in the 1 br apartments I’ll assume that they don’t want a 4 br home. It is like saying I bought four Buicks 24 years ago and now my loan payment is the same as my friend who has been renting a Porsche for all these years…
> now...remind me again how I am ignorant..
There are a large number of people who don’t understand financial markets who feel that they need to try and talk others in to doing the same thing they did. “Real estate went up in value after I bought it so you should buy real estate”…
Posted by: PresidioHtsRenter at December 17, 2008 8:03 AM
"now...remind me again how I am ignorant.."
Because you could have sold your place last year for 20% more than it is worth now and 40% more than it will be worth a year from now. With the profits you could have rented an equivalent or better place and pocketed hundreds of thousands. Buying 24 years ago worked out. Buying, or holding, SF real estate the last couple of years was a terrible move.
Posted by: anon at December 17, 2008 8:12 AM
"Like many people Noearch feels that it is OK to pay 'rent' to a bank to get money to buy a place to live, but it is NOT OK to pay 'rent' to a landlord for a place to live."
Personally I like the fact that I do not have to worry that my bank is going to sell my condo and the new owner is going to evict me so he can live in it. Now that I own I do not have to worry about something outside my control forcing me to move (which happened to me twice while renting in SF).
Posted by: Rillion at December 17, 2008 9:49 AM
Happened to me twice while renting as well, Rillion. Also, it's not a strawman to use a 24 year ownership for real estate. It is in fact the purpose of owning. 24 years from now I will not have a mortgage to pay, but I would have rent. Rent does not stop being owed, mortgages do.
Posted by: plan C-sparky at December 17, 2008 10:01 AM
yea, well there are a number of doom and gloom bears here. I'm not one of them.
I especially love anon's all knowing vision that my house WILL bw worth 40% less a year from you. thanks for that sage advice.
and C-sparkys point about rent CONTINUALLY being owed is well said.
As for owning vs renting, there are different reasons for both. I'll stick with owning. no balance on my HELOC..and, oh yea:
I have 6 years left on my mortgage.
Posted by: noearch at December 17, 2008 11:40 AM
Using 4% appreciation for both home prices and rent over the next 24 years a gloomy renter would save $23K PER YEAR using the numbers above and the NYT calculator.
Posted by: toni at December 17, 2008 12:13 PM
Noearch, did you really get a 30-year mortgage and just pay it off during that entire period (with 6 years to go)? I must say, I've never heard of anyone actually doing that in the last two decades. And I though I was conservative on such things!
Posted by: Trip at December 17, 2008 2:31 PM
I doubt noearch got a 30-year fixed rate mortgage in 1984 and never bothered to refi. Mortgage rates in 1984 were ~14% for a 30-year FRM. More likely (yet still conservative) would be a refi into a shorter duration fixed mortgage at some point when rates came down.
Posted by: Rillion at December 17, 2008 2:46 PM
Rents are very expensive these days. Was talking in office about that. one coworking was paying $1900 for a 1 bd in Foster city, he just closed ecsrow on his first house yesterday.
Another coworker pays $1500 for a junior 1 bed in SJ. He used to pay $700 for the same unit back in 2001.
For those of you believing that rent is better than own, you need to bake in all these rent increases over time.
As far as own is 2X renting these days, you are in essence locking into a 30 fixed rent, that is why the premium.
Plus, it is not always true that own is 2X rent. The two units that I owned (and purchased in 05/06/07), one is $300 more than the rent (considering mortgage, tax, HOA), the other is $700 more. And these are purchased during the peak year.
Posted by: ester at December 18, 2008 6:50 AM