February 20, 2009
A Rental Market Anecdote From A Plugged-In San Francisco Hipster
From a plugged-in hipster’s comment:
I have rentals in SF and though it's still pretty easy to fill a vacancy here, the prices are softening. I just re-rented a condo in the [Mission] for $2450 (was getting 2600 before).
∙ San Francisco Recorded Sales Activity In January: Down 21.8% YOY [SocketSite]
∙ Marcus & Millichap San Francisco Rental Outlook (And Quick Rebuttal) [SocketSite]
∙ SocketSite’s Residential Real Estate Outlook For 2009 [SocketSite]
First Published: February 20, 2009 7:15 AM
Comments from "Plugged In" Readers
I increased my TIC unit by the max allowed, hitting $3000 for 2/2 in pac height. Again, purchased back in 2006 for $625K.
Posted by: ester at February 20, 2009 7:23 AM
Not in my building. Several are going months vacant. Strange thing is, some owners rather go vacant than willing to take 15% off what they think is the market rate.
Re-renting with lower rent is smart thing to do in this market. You lose your current tenant, you risk going vacant for a long time. I ended up re-leasing mine for 8% off for another 6 mo since others refused my offer of 15% off their asking price. (They are all still vacant, and will be for another 6 mo). Given the hassle of moving, it also makes sense for the tenant to renegotiate and stay put unless you can shave another 8% off.
It also depends on the market segment. Sub $3000 market may still be healthy, but over $4000 market, which is where I am, is pretty much dead.
Posted by: jj at February 20, 2009 8:39 AM
Here in the Financial District things have definitely softened up, to my delight. At the Gateway (next to the tennis courts) it used to be really tough to get a townhouse, and now there are at least two 2BR/2.5BA sitting empty at around $3800. They have a ton of space, fireplaces, patios, and secure garage parking. Most don't have views, but one that looked at the water and Bay Bridge recently went for $4k with TWO parking spots. That's after sitting on the market since at least September at $5k (when it was offered with one parking spot).
We ultimately chose a 2BR/2BA corner unit (1000sq ft) with an insane panoramic view of the Bay (Coit Tower, Alcatraz, *and* the Bay Bridge) for $3120 including parking and doorman. When I looked about a year ago, a semi-comparable place in the same complex was close to $4k. Oh, and it's rent controlled. A nice perch from which to watch the housing market....
Posted by: P at February 20, 2009 8:43 AM
One thing that attract me to SF rental market, as opposed to buying home based in south bay, and it is also one thing that I am still trying to figure out: why would people pay $3K to rent, and not buy???
NOt to offend, sincerely asking.
Last time I rented, back in 2000, I paid $1500 a month. I was making $85K back then.
I still remember the rent felling like such a big burden each month.
Posted by: ester at February 20, 2009 8:47 AM
ester, the answer is: you can't buy $1.2m unit with view for $3000/mo. At least not yet. You think that is a burden, imagine having to pay $6000 in mortgage + $700 HOA + $1000 tax.
Posted by: jj at February 20, 2009 9:07 AM
"why would people pay $3K to rent, and not buy???"
ester, I am guessing you are -ve cash flow on your unit mentioned above... it's definitely been a better deal to rent for your tenants.
I am guessing but I would say you have put in at least $50,000 dollars more through -ve cash flow into your unit since you bought it.
I will further guess that you would be -ve cash flow for at least 5 years more.
What would you guess is the market rate rent for your tic?
Posted by: chuckie at February 20, 2009 9:21 AM
While ester's mindset has many here shaking their heads, it actually pretty accurately reflects the CW. The RE industry has been very successful in peddling this. Paying rent is "flushing money down the toilet" (but mortgage interest somehow isn't). Real estate only goes up (but look at every SS chart the last year). You have to own to "build equity" (there is no other place to invest money?).
I've had this same conversation with (very smart) countless friends over the last couple of years, and while I've convinced them on the numbers about the insanity of buying at still-prevailing prices, they still have a hard time grasping it because it runs counter to years of being told differently.
Posted by: Trip at February 20, 2009 9:32 AM
Exactly one year ago, I inquired about a 1 bedroom apartment in the Inner Sunset. The asking rent was $1900. The leasor (lets call him "David") at the management company asked me to fill out the all-invasive paperwork and fax it to him. We scheduled a showing for the next day.
When I showed up at the apartment, David was a no show. I called his office and he said he was running late. 30 minutes later he called back and said they had already found someone to lease the apartment!
6 months later a different 1 bedroom went for $1700. It was rented after a mild delay.
2 months ago yet another 1 bedroom came on the market for $1650. There have been no bites. A few more decreases since then and now it is sitting at $1575.
I'm tempted to schedule another showing and this time be the no-show.
Posted by: anon1 at February 20, 2009 9:33 AM
I have put in $500-$600 a month since buying, so that is $20K, instead of the $50K.
How much longer will it be -ve? depends on whether I can refi at a reasonable rate. I am currently paying 7.5%.
I am currently charging the existing tenant $3012 per month. So, I don't know what "market rent" is, but mine seems to be THE lowerest on CL for comparable units, by about $300 a month.
Posted by: ester at February 20, 2009 9:36 AM
what's with the reluctance to type out the word "negative" (which i assume is what "-ve" is)?
Posted by: yao at February 20, 2009 9:49 AM
BTW, $3000/mo can buy you SF Blu 5E with kick-ass finish, if you don't insist on views. Certainly a better deal than paying $3000 in rent for an old TIC that was worth $625k in 2006. 5E is pending, but I'm sure you can get a similar deal on other E units.
Posted by: jj at February 20, 2009 9:49 AM
Again - more anecdotal evidence, but the search on CL for 1br, <$2k in the city is now maxed out at 1000 records found. This up from an average of about 550 last summer.
In fact, you have to move way down the max price ladder in order to get to only 500 entries found.
Posted by: wanker at February 20, 2009 9:55 AM
you should definitely be able to refinance at a much better rate than 7.5% right now.
There are higher temporary limits on 2 units, so won't have to be a jumbo loan?
I got 4.875% for a 30 year fixed P&I.
I can recomend a great mortgage broker if you want one.
Posted by: REpornaddict at February 20, 2009 9:58 AM
There is more to the story with rentals. You also get to depreciate over 27.5 years which can enable some advantages with the taxes. Pretty interesting if you can go cash flow positve...3K in rent is much easier than trying to purhase a $800K condo. And i would bet the rental would be nicer than the condo. At current prices, condos and TICs don't work for this investment. But RE rentals will be one path to $s somewhere down the road. Especially if that inflation comes (gold at $1,000..).
Posted by: peanut gallery at February 20, 2009 10:00 AM
thanks for offering a loan broker. can you post on ss here, or do you need my email address?
Anyway, mine is a unit in a 5 unit building. Loan amount = $400K, so that recent change in loan limit probably won't help me much.
Posted by: ester at February 20, 2009 10:05 AM
Speaking of cash positive, my other 2/1 in Russian hill, purchased for $700K in 07/08, renting $3150 now.
With 6%, if I refi to 5%, I would be cash neutral today, or very close to it at least.
The next 30 yrs, someone will be paying mortgage for you, after that it would free and clear, huge cash income for perpetual.
What is wrong with you? Why do I have people shaking heads on me??
I am not even baking in any appreciation at all here.
Some people here like to point at a bad purchase as proof that any and all RE purchases are stupid. Not true.
Any any RE market, you can make or lose money.
When I put out all facts around my two purchases, bears's response have been: you are a liar, you can't have purchased these, you made up the transactions.
Posted by: ester at February 20, 2009 10:36 AM
Good you jumped on deals like that. It will soon be a great time to add more property to your portfolio, imho. Lower prices points will have to make up for the potential for lower rents, though.
Posted by: San FronziScheme at February 20, 2009 10:48 AM
I wonder how low rentals can really go.. Those that might have wanted to buy can't get the credit and are waiting it out in rentals.
Posted by: anon at February 20, 2009 10:55 AM
"$3000/mo can buy you SF Blu 5E"
Umm....no, it can't. Not yet. But getting closer.
5E is listed at $579,900. Assuming you put 20% down, you finance $463,920. With a 7% loan, your monthly P&I is around $3,100. Monthly property tax of $562 gives you PIT of $3,662. Let's say that's $2,750 after your tax deduction (simplistic 25% off assumption). Then add $623 of monthly HOA, and you're at roughly $3,300 after tax per month to buy 5E. Pretty close if you think it would rent for $3,000 per month. But that's after coming out of pocket with $120K for down and closing.
But as I've said before, let's wait until May to see what rents do.
Posted by: Dude at February 20, 2009 11:04 AM
I used Pete Elting at GMWest for both the original purchase and recent refinance of my building.
Happy with results both times (especially the refi) and can recommend.
Posted by: REpornaddict at February 20, 2009 11:08 AM
"When I put out all facts around my two purchases, bears's response have been: you are a liar, you can't have purchased these, you made up the transactions."
The posters who called you a liar are probably the same ones who lie daily themselves. If they were honest with themselves they would admit it. All you have to do is think, "What are they actually doing on here?" and you have it. What's the motive? Take Tipster, for example. He is unabashedly attempting to do his part to talk the market down. Others do the same to a lesser extent. But most are more in the following category. The real estate kibbitzers who say that they will one day time the market, but will actually never follow through with anything other than idle chatter. (They do not realize that they are a rather well known type. But they're on a blog, and immediate. That's all.) Or the third type who would call someone a "liar" is merely someone who doesn't care one way or another, and will never purchase in San Francisci, but happens to love the nonstop snark on here. Regardless, they call you a liar because deception breeds suspicion.
Posted by: anonn at February 20, 2009 11:12 AM
Dude, if you can get 5% you are actually ahead of renting. zero-down/interest-only is the only way to compare apple-to-apple, btw.
Posted by: jj at February 20, 2009 11:15 AM
Hi Ester, let me try to answer your "why rent" question from my own perspective: For what I value, there doesn’t seem to be a net benefit to buying right now. Yes, $3k is a lot to spend (whether on rent or mortgage/HOA/maintenance/etc.), but when I consider financial cost/benefit, peace of mind, and flexibility I don’t believe I could do better by buying.
Financially, I’m doing better by renting – I couldn’t buy something nearly as nice (esp. wrt views and convenience) for the money I’m spending, plus I have no risk of losing a down payment should prices continue to fall. In terms of peace of mind, since this place is rent controlled I don’t have to worry about rent hikes (nor HOA increases nor additional maintenance costs). And especially in these uncertain times, I really value the flexibility of renting, both because I don’t have to worry about getting “stuck” if I need to move but can’t find a buyer, and because I keep my down payment money.
I’m sure some people might feel constrained by not being able to renovate (I am allowed to paint, not that I want to), but the place more than meets my needs. Plus I love that I never have to deal with plumbers or contractors – having a professional maintenance department is great.
Should prices fall to the point that I could buy a place like this for a better price than I could rent it, I might buy. Should I want to live in a place where I couldn’t get something I liked as a rental, I might buy. But for now, for my needs, it makes a world of sense to rent.
Posted by: P at February 20, 2009 11:17 AM
"With 6%, if I refi to 5%, I would be cash neutral today, or very close to it at least."
If, if, if...
So basically ester, you are not cash neutral today and IF you were to somehow refi, you *still* won't be cash neutral.
That is why several people will "rent the downturn" out.
I think the response from most people isn't that your description of the transactions are lies, but rather that your math - by your own admittance - isn't penciling out.
Posted by: wanker at February 20, 2009 11:30 AM
"Dude, if you can get 5% you are actually ahead of renting."
True. But we don't know how far rents will fall, and probably won't know until the May-June time period, when the bulk of SF leases roll over. Commercial rents are down like 25%. If that were to hypothetically happen to residential rents, you'd be bleeding $700/month on 5E.
Anyway, on the topic of moving, it's really not that bad for most folks. If you have a large family in a big house, sure, it's a hassle. But 2 people in a 1 or 2-bedroom apartment can move quickly. In the example given above, the rent fell $150/month. You can have movers pack and haul a 2-bedroom apartment across town for under $500 (trust me, I've done it several times). If you save $150/month on rent, the move pays for itself in 4 months.
Posted by: Dude at February 20, 2009 11:37 AM
REpornaddict - I will give Pete a call on Monday when I am back at work.
P - I respect your decison to rent, at least for now. Thanks for sharing.
Posted by: ester at February 20, 2009 11:44 AM
OP here- just to lend further perspective on my rental: yes it went down to 2450, but it went up from 2100 to 2600 in late 2007, which is a huge incr, almost 25%! so 2450 is still a large 17% incr. for a 2 year period.
i think this is why ester invests in SF and not san jose, as the rents in SF can spike up quite quickly. if you're smart and rent to people who are probably going to buy/make a lifestyle change in 2-4 years, you can deal with rent control, and get a whopping rental increase upon a vacancy. (hang in there ester! in a few years you'll get even more rent, and when the housing market comes back, you'll make bank in appreciation:)
btw, i agree with SS that the marcus and millichap report is rather rosy...i wonder if it relies on latent, spring/summer 08 data, for soon after the leman bro's collapse even the SF market quickly realized that the train is off the tracks.
Posted by: 45yo hipster aka old school U2/war at February 20, 2009 12:07 PM
Doesnt seem like you are counting the opportunity cost of the 225k or so that you have as a down payment. Are you?
I mean, as an extreme example, if you pay all cash for your tic then you will always be cash flow positive.
Posted by: mac at February 20, 2009 12:16 PM
I don't think we can take ester's post seriously.
Basically she is saying that she doesn't understand why anyone would make a financially responsible decision. Why would anyone rather save than burn money?
Posted by: spencer at February 20, 2009 12:28 PM
It's also certain that $3000 X 12 X (however many years) is money that's never coming back. (Negative opportunity cost?)
Posted by: anonn at February 20, 2009 12:33 PM
fluj.. u never have understood opportunity cost.
Posted by: mac at February 20, 2009 12:44 PM
Is fluj really that financially ignorant or just spouting the party line?
Posted by: nonanon at February 20, 2009 12:50 PM
I understand opportunity cost. I think it's funny the way you guys flout it. That's all. Especially in these times, considering the markets of the last year and all.
Posted by: anonn at February 20, 2009 1:00 PM
Speaking of cash flow positive..
I'm going to buy number 5E in BLU tomorrow for 800k. Yes. I know its only listed at 579k. But i have 800k cash sitting idle.
And you know the kicker? Its all good cos when i rent it i will be CASH FLOW POSITIVE!!
Now. To anyone who doesnt understand the point of the above rant, its so that you will understand that saying that something is cash flow positive without counting how much you put down ... is ..well.. silly.
Posted by: mac at February 20, 2009 1:14 PM
mac is correct in both of his/her comments.
I'm going to repeat myself here: You either rent the money from the bank, or you rent the dwelling from the person renting the money from the bank. Either way, we're all renters unless we pay cash.
Knowing that you must pay some amount of monthly outlay for shelter, you need to select which option is best for you given your time horizon.
I can rent a condo for $2,600/month for the next 12 months, and leave my $300K nest egg in CDs at 2.5%. In one year I have $284K.
I can buy said condo for $600K financed at 6%, using $120K of my cash. In one year I have $151K and owe $478K on a condo worth $540K. So I have $210K.
Which would you rather have in a year, $284K or $210K?
Posted by: Dude at February 20, 2009 1:21 PM
Regarding opportunity cost, how should one measure it?
The deposit is a sizeable amount of money, so pre recession I don't think its unrealisitic to assume this would have been in equities. And the Dow Jones is what, 47% off peak?
And that is a recent, apple to apples comparison unaffected my mix.
Posted by: REpornaddict at February 20, 2009 1:32 PM
I have no argument with that frame, Dude.
But I love how it's always CDs on here. Too bad it really wasn't. Really, too bad it really wasn't. Also, always one year. It's generally 2004 to 2008 purchases and their unimproved 2008 - 2009 sales performances. Well, OK. Sure. Bad investment!
And let's say it was 300K and the bank went belly up. You're only FDIC insured for 250K, right? I understand the government has not yet allowed that margin to come into play. But it might have.
Posted by: anonn at February 20, 2009 1:34 PM
Yes. Indeed CDs are used for opportunity cost. Because they are a risk free investment. Theyre the only asset where you can, a priori, know the outcome for sure. You KNOW for sure how much putting that down payment of 225k is going to cost you.
Using an oppty cost that is not predictable is a waste of time in an investment decision. You may as well use 'buying 225k of lottery tickets' as an oppty cost and declare that you could have won the lottery with the money.
Posted by: mac at February 20, 2009 1:45 PM
Joke aside, I'd highly recommend BLU if you are renting a nondescript TIC or loft in an alley somewhere for $3000. They have to have 25% in contract by April and they are trying to meet the quota with hard-to-sell no view units priced to sell. Your comparable expense will be about $2500. I'd spring for it if someone gives me 5% loan, and put up with the AT&T building for a while with a plan to turn it into a rental.
How about it Obama? Instead of lending TALF to hedge funds at 2% with no strings, lend it to me at 5%, strings and all.
Posted by: jj at February 20, 2009 1:46 PM
Using a one year purchase value and assuming it loses 10% in that year is a waste as well.
Posted by: sparky-C at February 20, 2009 1:47 PM
Right. You also KNOW that you will never see rent money again no matter what. But hey, we also know that a lot of people who bought in 2005-2007 and sold in 2008 took a bath.
Posted by: anonn at February 20, 2009 1:48 PM
Can't comment for others, but I never really had a lot of equity exposure. Maybe I'm more risk-averse than most, or maybe I read too much Fleckenstein and got scared (he predicted 5 out of the last 2 equity corrections). In any case, I wasn't hurt badly by the equity markets at all outside of my 401K. And I hope everyone is smart enough to scatter their savings amongst several large banks that have been earmarked for survival rather than leaving them in just one institution.
In any case, the past is gone, and it ain't coming back. We're looking at it from the perspective of a potential buyer TODAY making the buy or rent decision. And renting is still the sounder path from my analysis.
Would a 5 or 10-year horizon change the analysis? Maybe. But predicting the future is increasingly difficult the farther out you go. It's pretty obvious the market ain't coming back this year, sparky. Even if you do think appreciation returns next year, you lose nothing by waiting to see if it happens. In fact, you save money by waiting.
Posted by: Dude at February 20, 2009 1:52 PM
Sure the markets not coming back this year, but when you say that you buy a condo for $600K so it's worth $540 you may as well not be bothering to evaluate your rent/buy.
Posted by: sparky-C at February 20, 2009 1:57 PM
"Take Tipster, for example. He is unabashedly attempting to do his part to talk the market down."
Good grief, I wish I had that kind of power. Unfortunately I don't. But I have said that prices would fall soon and sure enough, they did. My purpose wasn't to talk the market down, the market was going to go down on its own. It was just to provide a different viewpoint, which may have run counter to the cheerleading that goes on on other sites.
I have been correct WAY more than I have been wrong, though like anyone else predicting, I'm far from perfect. I said prices would drop and they did.
And look at the prediction I have for 3731 Fillmore (the TIC in the Marina) in the other post today. It's one of the highest on record in that thread. If I'm trying to talk the market down, I'm doing a terrible job.
Posted by: tipster at February 20, 2009 2:02 PM
Well, I firmly believe that Soma condos are going to decrease in value AT LEAST another 10% across the board in the next year or two. Likely more.
But if you or anyone else disagrees, there's plenty of inventory out there for you to buy.
Posted by: Dude at February 20, 2009 2:02 PM
Really? so even though I pulled my money out of equities to pay for my house deposit, I should use CDs to work out how much I would have had if I didn't sell the equities?
They were also UK based investments, and I converted to dollars at $1.94 or something. It's now $1.43. So I got $1.94 as opposed to $1.43*.6 (40% fall in FTSE?) = .858 if I had kept the equities and converted today. But I can't to that can I? I have to use CDs even though I didn't have any? Hmmm
I guess the Dow Jones returns should have an allowance for opportunity cost built into as well then, no? So it's what, over 50% down from peak?? Ouch.
Posted by: REpornaddict at February 20, 2009 2:03 PM
"We're looking at it from the perspective of a potential buyer TODAY making the buy or rent decision"
But you're not tho. You're using prisms based upon peak purchases compared with recent downturn sales losses. When you do project outwardly you're using loss percentages that you cannot know. Above you used one year. One year = 10 percent loss. Remember, a lot of times buyers are putting down roots. Can you really know what 10 years will bring? Ninety eight to 2008 was pretty good, this time. Eighty eight to ninety eight was also good.
Can I save you the trouble? Asset bubble gains, purely!
The city hasn't changed in the last 20 years, fluj!
Posted by: anonn at February 20, 2009 2:04 PM
"Maybe I'm more risk-averse than most, or maybe I read too much Fleckenstein and got scared (he predicted 5 out of the last 2 equity corrections)"
5 out of 2? Dayum that guy is good!
Posted by: REpornadict at February 20, 2009 2:10 PM
"Really? so even though I pulled my money out of equities to pay for my house deposit, I should use CDs to work out how much I would have had if I didn't sell the equities?"
Nope. You should use equities. Because its in the past and you know exactly what you want to compare it to.
Posted by: mac at February 20, 2009 2:17 PM
fluj and REpornaddict: poor reading comprehension. Or I should say selective interpretation. Do you know what sunk costs are?
Anyway, forget about the past. Forget about the Dow and the FTSE. Forget about '78 to whenever. It doesn't matter anymore. We're talking about someone considering a first-time purchase in February 2009.
Put yourselves in the shoes of that potential buyer TODAY. They can put down roots in a year or two as well as now.
So why the hell would they buy today when 1) renting is still currently cheaper; 2) renting is basically risk-free; and 3) both prices and rents are clearly falling? Not to mention the possibility of layoff or comp reduction.
Posted by: Dude at February 20, 2009 2:17 PM
Keep waiting. You might score a great deal. But rent is still (-)12 * X * Y.
Posted by: anonn at February 20, 2009 2:24 PM
I can rent a condo for $2,600/month for the next 12 months, and leave my $300K nest egg in CDs at 2.5%. In one year I have $284K."
$2,600 x 12 = $31,200
$300k X .025= $7,500
Net negative cash flow for cd and rent is $23,700.
Subtract from $300K would be $276,300.
Not trying to be an a pain but is my math wrong?
Posted by: peanut gallery at February 20, 2009 2:24 PM
I am just curious....how many of you had the money in CD in September 2008 and escaped the whole crash?
Posted by: John at February 20, 2009 2:34 PM
"But rent is still (-)12 * X * Y."
And so is any mortgage payment so long as prices keep falling, doubly so because of leverage. Have fun paying interest on depreciation! Oh, and as always, have fun storming the castle!
"Not trying to be an a pain but is my math wrong?"
You're right, peanut gallery. I used the actual rate on my own CDs, which is around 4%, rather than the 2.5% out there today (and no, they aren't Stanford CDs in case anyone asks. Several places recently had promotional rates at and over 4%). But the $8K delta doesn't change the outcome anyway.
Posted by: Dude at February 20, 2009 2:35 PM
Good spot peanut. Dude also said someone predicted 5 out of the last 2 equity corrections.
He may think my reading comprehension is poor. His opinion. Mine is that his math(s) skills aren't up to much.
And, yes I do know what sunk costs are.
Posted by: REpornaddict at February 20, 2009 2:42 PM
how many of you had the money in CD in September 2008 and escaped the whole crash?
I was in a mix of things all last year. I finished out the year with a modest gain to net worth (investment trading returns were about 3x living expenses for the year, so I "grew" my net worth by about 2 years' living expenses). Nothing spectacular, but I was satisfied with that. That shouldn't be too hard to believe if you had been reading my posts all last year.
This year is a tiny bit down so far, but the year is young and so far I've been happy with how itis developing.
Posted by: LMRiM at February 20, 2009 2:47 PM
How obtuse can you people be?
There's a running joke that economists have predicted 9 out of the last 5 recessions. Google that phrase or "economist jokes" and see how often it comes up.
My specific reference was to Bill Fleckenstein, a hedge fund manager out of Seattle who has been predicting a major equity correction for years. He was finally proven right. Hence the quip that he predicted 5 out of the last 2 equity corrections.
It's called wit, REpornaddict. Obviously lost on the current audience.
Posted by: Dude at February 20, 2009 2:53 PM
haha sorry Dude- I had not heard that one, despite being an econonomics graduate. As one of those, and now an actuary, I have heard enough of these jokes over the years ;-)
Posted by: REpornaddict at February 20, 2009 2:59 PM
" Keep waiting. You might score a great deal. But rent is still (-)12 * X * Y. "
Jesus, Isnt that the assumption here in every buy versus rent deal? What do u think.. that Dude forgot that part???
Posted by: mac at February 20, 2009 3:00 PM
I first heard that joke more than 15 years ago. I think its genesis is something like the "inverted yield curve has predeicted 11 of the last 9 recessions". At least that's the way I remember it. And after reading all the conceptual struggles with opportunity cost, I agree that it was wasted on the current audience.
The opportunity cost discussion has been enlightening for me. As we continue to get example posts of people losing their shirts in SF real estate, I will try to make an attempt to quantify the "change in net worth" ex post that resulted from the rex ante real estate purchase decision versus putting the downpayment money in a simplified portfolio (or even a straight 100% S&P 500 portfolio).
Posted by: LMRiM at February 20, 2009 3:00 PM
Id be interested in your prognostication for the rest of the year re assets classes. How are you playing this?
Posted by: mac at February 20, 2009 3:04 PM
From the perspective of anyone that already owns in SF: In several of my posts I made a 3 simple comment that nobody has challenged- 1. SF was one of the last places to fall 2. So far, it has fallen less than most areas (and has a long way to go to get to -50% discount). 3. SF will most likely be one of the first areas to recover (I disagree with the last to fall last to rise argument, which I elaborated on recently elsewhere.)
As for the 'why should anyone buy now' argument, I agree that buyers should be prudent. BUT, it depends on YOUR personal situation and the SPECIFIC deal you make! For f*ck's sake people someone who is ready to settle down, is burned out of not buying in the last 3 yrs and finds a good deal (examples: BLU is interesting, a cheap short sale in D10, or maybe a good price on a 2-3 unit bldg) it may male sense for them to pull the trigger now. RE is not equities, every deal & personal situation is unique.
Posted by: 45yo hipster listening2: the cars/candy-o at February 20, 2009 3:33 PM
I guess realtors don't evolve..huh.. Keep on using the phrase "rents go down the toilet", even when its not working for livelihood.
I personally put my down payment in CD's and paying rent with it.. So, its not -12*x*y, because I am living in it for free...
Agreed I could buy a bigger place with my down payment than the condo where I am living in (what people do typically when they buy, which I still think is a waste), but I don't need to right now, and I am happy with it. I am even happier when prices are coming down and one day I could buy the place with my CD money..(when everything goes for 50% off or BOGO)..
Posted by: CDinvestor at February 20, 2009 3:46 PM
I am just curious....how many of you had the money in CD in September 2008 and escaped the whole crash?
Glad you asked. Been 100% CD since june 2006. Not only my cash has grown little by little, but the same dollar amount can buy more and more RE/stocks/goods by the day!
Posted by: San FronziScheme at February 20, 2009 4:00 PM
There's your answer John - From the sample so far, almost everyone was/is in CDs (and getting special rates). Those who weren't still made trading gains. No one lost any monet at all.
Posted by: REpornaddict at February 20, 2009 4:09 PM
I was lucky, that's all I can say. Just like I was lucky with unloading 80% of my RE right before the sh!t hit the fan. I have no crystal ball but when things are too good to be true, they probably are and it's time to cash out these 200%+ gains.
I'll guess many here lost a lot of equity. But no one at this point wants to admit it / or else hopes to recover it in a few years. Good luck on that.
Posted by: San FronziScheme at February 20, 2009 4:26 PM
"I'll guess many here lost a lot of equity. But no one at this point wants to admit it / or else hopes to recover it in a few years. Good luck on that."
True. But the same goes equally for
"I'll guess many here lost a lot IN equities. But no one at this point wants to admit it / or else hopes to recover it in a few years. Good luck on that."
Posted by: REpornaddict at February 20, 2009 4:30 PM
Citi recently had a promotion where they offered 4% CDs for 6-months. ING had 4.0% for a year, GMAC 4.25%. Hardly "special rates" - this stuff was advertised everywhere and these are obviously very large and well-known financial institutions. As recently as November/December of '08, you could lock in 4.5% on FDIC-insured CDs. These are great returns considering we're in a deflationary economy.
May be tough for many of the bitter homedebtors to believe, but not all of us lost our asses in the stock market. But the funniest thing is....I'm sure several homedebtors DID put their savings into stocks/hedge funds, and lost on both the market AND their real estate. Whoops.
Posted by: Dude at February 20, 2009 4:33 PM
"We're looking at it from the perspective of a potential buyer TODAY making the buy or rent decision"
Are we really? And we're throwing out 2.5% CDs, are we?
Mac, as for your question:
"Jesus, Isnt that the assumption here in every buy versus rent deal? What do u think.. that Dude forgot that part???"
Some of these guys NEVER take that into account.
Posted by: anonn at February 20, 2009 4:34 PM
"May be tough for many of the bitter homedebtors to believe, but not all of us lost our asses in the stock market"
No, I doubt all.
But someone, somewhere, must be out there? I mean, the Dow is 50% down from its peak (taking into account opportunity costs). Many individual shares fell to zero - and lots have done far worse than 50%. Anybody?
Posted by: REpornaddict at February 20, 2009 4:39 PM
That subtelty escaped me and I meant both meanings. Yes, "of equity" and "in equities" indeed. I know many who got the double whammy. 25% RE equity loss + 50% loss in 401(k). They're sitting tight trying to wait it out. And saving like hell which I think is one reason behind the fall in discretionary spending.
I went for lunch in the FD for a Friday lunch with the guys and some joints looked very very quiet. No line spilling out the curb on 2nd around Flames like 2 months ago and today was sunny.
Posted by: San FronziScheme at February 20, 2009 4:40 PM
What rates can you get on CDs today, fluj?
Here's GMAC quoting 2.57% for 6 months:
So yes, I think 2.5% is a good quote for a CD TODAY. And my example above obviously compared the purchase to renting.
Posted by: Dude at February 20, 2009 4:43 PM
Wow, you are paying 3000/month to live in Jackson Square?
I rented my parking space out to the developer for 600/month. Must have been bubble prices. All upfront too.
That sounds like a steal.
Posted by: jessep at February 20, 2009 5:14 PM
I literally just came from a meeting with a client whose financial guy quoted him 1.5%. I believed him. GMAC you say? There's a bank on solid footing! So many people are doing it these days that there's no impetus for competition among banks.
Posted by: anonn at February 20, 2009 5:15 PM
Heres a link to 8 places that offer 2.5 and above.
Posted by: mac at February 20, 2009 5:33 PM
i had a third of my money in equities, and about 40% of it is gone, a total loss in the mid 5-figures.
it hurts a lot, because i don't make six figures like most on this board.
Posted by: condoshopper at February 20, 2009 8:20 PM
Geez, why is it a surprise that we bailed out of the stock market before it crashed. We've been telling everyone who would listen that the economy was heading down. Our detractors have said we've been predicting a crash far too early. That was the perfect recipe for us to have been long gone by the time things tanked. It should surprise you if we did NOT get out of the market.
I bailed out December 31, 2007. Bailed into treasuries, not CDs.
I think oil is being manipulated by the Arabs who are terrified of Iran and are going to flood the world with oil to cut off Iran's chief source of revenue. So that's out. The world economy is contracting so other commodities are out.
The American stock market is by and large toast for at least 6 months. Consumer spending is crashing, and we haven't seen the worst of it, so buy equities with GREAT care - they aren't for the casual investor right now.
Silicon Valley has turned sharply down in the last three days. Any business that could, was hanging on to see if Obama had some magic pixie dust that he could use to save the economy.
Then people read the stimulus bill that came out on Tuesday and concluded that, nope, Obama had nothin' and so the economy would fall further. 10%-20% of the Silicon Valley startup companies were told Wednesday or Thursday this week that they were being cut loose: they were on their own. Most of those companies were already on fumes. Some large tech companies are starting to unravel. Freescale semiconductor laid off today and more layoffs are on the way.
The mood in the Valley is now grim. A lot of people working for startups are terrified. Worse than I've seen it since Apple Computer was two guys. Much worse than the dot bomb: there is nowhere for the unemployed to go and there is no chance of starting something new because funding is now gone. The Valley threw in the towel this week when they read the bill: the feds are about as interested in saving the Valley as they were in saving New Orleans after Katrina.
And the mortgage plan was worse: 105% to get mortgage help? That was a big F*** you to California, Arizona, Nevada, Michigan and Florida. And only for conforming limit loans? F you to NYC and a second F you to California.
Buy Bay Area real estate right now? You'd have to be out of your friggin' mind.
We've all been telling you this stuff. Why *wouldn't* you expect us to have sold everything? We're telling you because we believe it. We certainly wouldn't hang on to equities if that's where our beliefs lie.
You think we're lying about selling everything, but that's because you don't see what we see. This has been obvious to all of us for a long time.
Posted by: tipster at February 20, 2009 8:46 PM
Way worse than dot bomb, eh tippedovercanoe? Ninety nine percent of the analysts anyone has ever read says you're all wet.
Posted by: anonn at February 20, 2009 9:10 PM
I am with Tipster... bailed out of our 1.5 million dollar house WAY back in 2003 and have been renting since! It took a lot longer for the crash to come than I thought and I probably could have gained another 25 to 30% on the house.. but more the price had more than doubled in less than 5 years!
Then last year in December 2007 we bailed totally out of the market into 90% treasuries and 10% gold! So, YES, there are those of us that clearly saw this coming!
And to anybody even thinking about buying now.. you have got to be out of your mind! SF real estate has at LEAST another 25% to fall in the next few years if not sooner! That is why it is better to wait on the sidelines now and rent. The name of the game now if all about capital preservation!
Posted by: Mavo at February 20, 2009 10:16 PM
Well put Tipster.
I can tell you what the tipping point was for me:
I was selling one of my places late 2005 asking 20% more than the published Euro/m2. I had one crazy offer the first day, for someone making 1700 Euros net/month saying she'd finance for 900/month in adjustable mortgage at 3.4% over 30 years. The standards used to be 33% mortgage payment over net salary period, not 55%. I was sure the loan wouldn't be approved. It was. My head started spinning that day. All rules were going down the toilet in France too.
That's when I understood that
1 - sell it all, take the money and run. This might NOT happen twice in your lifetime.
2 - we will be fu@ked one way or another when all this debt will have to be repaid or forgiven. I didn't know how or when but there no question about the "if".
Fast forward 3 years later. I am amazed at the size train wreck, but I am really not surprised.
Posted by: San FronziScheme at February 20, 2009 10:30 PM
I've always been told that one should keep their prospective downpayment in cash or CDs. I find it hard to believe that anyone seriously looking to buy a home would keep it in stocks. It makes no sense to keep money you might have to rely on in a volatile asset.
Then again, there were retired people who invested everything in a hedge fund, as the Madoff affair has shown. I wonder what book they got that from?
I guess I'm just too conventional for the SF real estate market!
Posted by: amused_in_soma at February 21, 2009 1:04 AM
Id be interested in your prognostication for the rest of the year re assets classes. How are you playing this?
Well, I'm always happy to share what I am doing, but please recognize that it might not be appropriate for everyone.
I have a very large cash-equivalent position (mostly a treasury ladder, now weighted to the front end of the curve - until late last year/early this year I was weighted towards the far end of the curve), still short commercial REITs, about 7% or so net worth in gold. A smattering of individual stock longs and shorts, but nothing particularly large or noteworthy as to theme.
I don't have too much US equity index exposure (some long term positions were sold throughout 2007, and much was overlaid with options in order to adjust directional exposure at various times - that was largely a tax driven strategy that didn't work out tremendously well because I wound up exchanging short term options gains for decreases in long term gains, oops!). However, I am gradually wading back into US equities, mostly by selling puts below the market (S&P 500), a strategy that worked very well in 2002, e.g. I don't see too much upside for US stocks, and so I would not want to go above 15-20% net worth there, but the risk/reward seems to favor trading this with a long bias right now. I typically roll short term short call positions to generate additional income and to reduce overall long exposure (on a delta equivalent basis).
I am scaling into US junk bond exposure (only indices - it's not worth it for me to try to figure out which specific companies are going to "make it"), which I consider basically US equity exposure, and so I aggregate it with the overall 15-20% limit I am currently thinking.
Asian equity (especially) and emerging market indices are starting to become attractive on a medium term view, and I am scaling into those at a rate of 0.5-0.75% net worth per month, and intend to do this for a few years.
No muni bond exposure (didn't have any last year, either), and no personal debt right now. However, we're looking to buy income real estate at the very low end (Section 8). That is going to make sense IMO in areas that have been smashed or where the cap rates are compelling. I'm looking (with family) in other states, but perhaps there are some opportunities in CA as well.
Overall, I guess I am gearing up to add risk exposure this year, but I do want to emphasize that there is a significant risk of an all out panic crash in financial markets, even from these levels. If one has survived (or even made some money) the last two years, however, I think on balance now is the time to begin to take some additional risk. We are tracking in financial markets an initial path that is every bit as severe as the one that we followed into the Great Depression (1929-1931) - in the corporate credit markets even worse!! - but it still remains that a total replay of history is not likely and shouldn't be relied on as a base case investment thesis. In other words, we are probably much closer to the end of this financial adjustment than to the beginning IMO (however, the real economy and living standards will decline significantly from where we are now IMO - but you have to believe the large bulk of this is discounted).
As for real estate, I am becoming concerned about a dislocation in the USD at some point (although I don't think it will be anytime soon), and we are likely to buy a moderately pricey SFR in Florida (east coast) later in the year, using as much leverage as possible. SF real estate valuations continue to make no sense whatsoever, and there is ZERO reason to exchange our $2800/mo rent payment for the $7-8K monthly outlay that would be required to buy the Tiburon house we live in (which would of course continue to go down in value under any circumstance I can foresee for at least a few years more).
I hope that long rambling answer helps!
Posted by: LMRiM at February 21, 2009 7:46 AM
Ok, I'll give you an honest answer to your earlier question about losing money.... We're somewhere in the middle.
Had 401k invested (about 1/3 of net worth)- down with the market. Knew the market was high, but stuck with CW and didn't mess with it. Ouch.
But, also had a nice bit of cash that we'd been saving (about 1/3 of net worth in fall '08). CW said to invest it, as it far exceeded 6 mos. living expenses. But couldn't figure out where to put it: part of that was laziness, but other part was it really seemed hard to find good value anywhere. So never pulled the trigger, and thank god for it. Currently in CD's.
And here's the thing: we're not sophisticated traders like LMRiM, or spend hours developing models/analysis of the financial markets. But I do pay some attention, and I read: news - and not just the Chron and USA Today; blogs like this one - even when some of the discussion is over my head. In fact I like that because I always learn something. And I seek out other points of view (LRMiM, Tipster, ex-sfer, etc. - thanks! And fluj too - your posts really summed up the merits of the RE bull side).
And by doing that, and tossing a little common sense in the mix (really, how were all these people affording all these things?....), I think that's part of what kept us from plowing in to equities or investment real estate.
We do own our home - no doubt that the value of our home is down from the peak. Pretty hard to say for sure because of lack of comps and the fact that we did a significant remodel several years ago. But I'd guess down at least 25% from what I think would have been the market high. If we were break-even now with 2003 purchase price + cost of remodel, I would dance in the street. Painful to the balance sheet, for sure, but this is our long-term home (as in I hope to have grandkids here for Christmas), and well within our means. But as an investment, definitely down, although we've always considered our house as much consumption as investment....
Sorry for the windy answer - definitely a flaw of mine (and part of why I rarely post!)....
Posted by: West Side Story at February 21, 2009 9:34 AM
Interesting post. Thanx LMRiM.
At what strike are you content to buy the SP500 puts? or do you just set it at a certain percentage below the present price.
How does the SFR in Fla help you in the case of a dollar collapse?
Posted by: mac at February 21, 2009 9:37 AM
Florida has a homestead exemption. If you declare bankruptcy you get to keep the house. Many high net worth individuals buy a house in florida for that reason.
Posted by: diemos at February 21, 2009 9:50 AM
How does the SFR in Fla help you in the case of a dollar collapse?
It's not the Florida location per se that hedges the dollar collapse scenario, but the leverage. Fixed rate debt is repaid in devalued dollars - that's standard for any real estate investment, though. FL specifically however is interesting for us for a number of reasons:
1) As diemos notes, the homestead exemption is a valuable attribute - even if we never use this option ourselves, it helps retain real value for the property.
2) As in CA, FL has a prop 13-type of scheme (homestead + the SOH initiative) that, while not as generous as CA's, still helps retain real value.
3) Personal reasons - we have family there who can use the proprty when we aren't
4) Owning a primary residence there helps to establish a presumption of FL residency for tax purposes (FL has no state income tax). We don't work in California.
5) Values in FL are down significantly, and are closer in value to "fair value" than many other desirable locations in the US.
6) Smaller government and a more "freewheeling" business climate should serve FL well in the event of a dollar collapse. It is a gateway to tax havens in the Carribean, and there is a brisk tailwind to economic activity in certain parts of FL relating to all the money that flows out of the US (and South America), through FL and into the Carribean and other "underground" activities. The houses we are considering are all on the IC and have docks for medium-sized boats - not sure if we could dock a boat large enough to get to BVI, though :)
At what strike are you content to buy the SP500 puts?
Sorry if I wasn't clear. I'm generally a seller of puts below the market, typically 7-10% below current prices (depending on volatility and timing, etc.), short term (1 to 2 months out). Yesterday, for instance, I had $150K worth (notional) of the 760 puts expire worthless, although I was exercised against on $80K of the 800 puts (after premium, my cost basis in those puts is roughly 780). I also had short calls at 850, 900 and 950 expire worthless (or bought back in the weeks leading up to the options expiration for basically nothing). It's just a way of moderating volatility and is appropriate IMO if you are not expecting huge moves up or down, or are willing to be a scale-in buyer on wipeouts (which I am).
I hope all that helps too!
Posted by: LMRiM at February 21, 2009 10:19 AM
So the Florida purchase isn't jumping in on the Miami condo market?
Posted by: sparky-C at February 21, 2009 10:23 AM
"Sorry if I wasn't clear. I'm generally a seller of puts below the market, typically 7-10% below "
Actually u were very clear. I wasnt clear in my wording of the question. Thanx a lot.
If you think that the dollar will collapse, and there is a lot of word that it has to given the spending we are doing, against what currencies would it collapse?
It seems that the Euro is toast, or more toasted than the $ espc given the Eastern European problems. The high yen is killing japan etc. I just read Mauldins weekly and he thinks that we'll see parity again for the $/Euro
Posted by: mac at February 21, 2009 10:56 AM
I do consulting and building inspections for major lenders for commercial properties (apartment buildings over 6 units are considered commercial in SF), and last week I did on site inspections of 8 properties owned by a major SF rental player. All of the building managers told me that they are not getting any responses at all to new units listed, versus the outlandish amount of emails and phone calls they would receive just a few months back for these same buildings. These include studios for around $1500 and 1 bedrooms for $1800+, in areas as diverse as Mission, Hayes Valley, and Nob Hill.
Posted by: iAMentitledTO3parkingSPOTS at February 21, 2009 12:32 PM
I think the pounds recent collapse (against the dollar and euro especially) has been an over correction.
When I moved here 2 years ago the rate was 2:1 or very close, with the UK behind the US in terms of the economic/housing collapse curve. Now it's hit, and the rate is $1.4 or something.
I believe its over corrected, and with the dollar still would expect it to head back to something around $1.75 in the short to medium term.
I don't watch the dollar/euro rate with as much interest, but would hunch the dollar is overvalued against the pound more than the euro.
Posted by: REpornaddict at February 21, 2009 2:20 PM
I'm in the same boat as West Side Story, except for the home-owning part. We lost quite a bit in our 401k's, but our down payment and cushion are all in CDs/savings, so that money is fine. And that is because of my laziness and lack of knowledge about investing, not due to market savvy.
We did time the sale of our house well, and that made us more money than we've lost in our retirement accounts. I still don't consider it real money, somehow, because I eventually expect to use it as a down payment on a "keeper" house.
Posted by: RenterAgain at February 21, 2009 2:22 PM
LMRiM - Good stuff as always and good luck with your FL property. Be careful with the homestead exemption. The state will be happy to have you as a resident (despite the lack of an income tax) - but the counties are now really agressive about yanking the homestead exemption for owners who are not full-time residents. For a new purchase and with property values likely to stagnate (or continue to decline), the exemption may not be worth much for a while. As with every state, the counties are desperate for cash. So the already high millage rates will probably go higher.
Posted by: FSBO at February 21, 2009 3:28 PM
I've always been told that one should keep their prospective downpayment in cash or CDs. I find it hard to believe that anyone seriously looking to buy a home would keep it in stocks. It makes no sense to keep money you might have to rely on in a volatile asset."
This is true to an extent. Although of course many people were only able to afford a downpayment for a house because they had invested heavily in stocks in the past. And, with the returns that they had received in the past, I am sure many who had not chosen yet to buy kept the money there also.
Posted by: REpornaddict at February 21, 2009 3:34 PM
REpornaddict, I will fess up to some losses.
Our retirement money is down about 1/3 from the peak, but that was money I was not expecting to use for at least 15 years, so it was invested pretty aggressively. I had stop losses on most of the financial sector stocks, so I got stopped out of them, but not on my foreign stocks, which got killed. The GLD and investment grade bonds have done well though.
The two-unit place is probably down 15-20% from the peak, hard to tell until there are more sales. It was always intended as a long term purchase, not a trading vehicle anyway. Our costs to live here are lower than what rent for the same place would be, if you include rental income.
Of course, we purchased a while ago.
The six month emergency reserve is in CDs mostly, which return a pittance, especially after taxes.
Our marginal rate is 45% and I think any serious discussion of return needs to include taxes.
The "next down payment" money is in CA Muni's and Muni bond funds, mostly VCITX. This is down a tiny bit from peak, a percent or two, after yield. The return is tax free, which makes it much better than CDs. Money that you intend to spend in the next decade or so needs to be in a low-risk investment.
Going forward, I am still maxing out my 401k and plowing it into stocks as I am sure they will come back sooner or later. This is still a balanced portfolio, weighted toward overseas markets, especially emerging markets in Asia.
My wife is not working since we have a baby due soon but we easily live on one income, since we are pretty frugal. Additional savings is going into cash at least until after I see what our tax bill is going to be like.
We won't make any big moves until after we are both employed again, though lots of investments look attractive. I won't buy real estate until it has clearly bottomed and starts back up.
Posted by: NoeValleyJim at February 21, 2009 8:17 PM
@ mac -
If you think that the dollar will collapse, and there is a lot of word that it has to given the spending we are doing, against what currencies would it collapse?
I first should say that a dollar collapse is very improbable IMO in the near term. If it were to "collapse" I bet it would take down most of the world, as so much of the world's currencies are de facto managed against the USD, which really acts as the reserve currency for the planet (that's why the Fed's unfettered shenanigans over the last two decades are causing a global "quasi" catastrophe).
If it were to collapse, though, short term, I'd bet it would collapse against gold (certainly) and the Yen (very likely). I'd also expect some of the ASEAN currencies to do relatively better - in particular highly trade dependent and fiscally sound places like Singapore (sing dollar) and Hong Kong (I bet in the event of a dollar collapse, the HKD currency board is revoked and HKD revalues up against the USD).
(About Japan and the strength of the Yen killing them, it's a mixed bag. I haven't looked at Japan's macro stats very intently since I was trading Japan in the 90s, but the thing about Japan is that it is a relatively closed economy. Trade (exports) used to be well below 10% of GDP, and even now I think is in the mid-teens - actually comparable to the US! although of course their exports exceed their imports by a few percentage points. Japan's basic problem is not the level of the yen but rather is driven by domestic consumption failure, a result of foolish government policy and demographics. They are natural resource importers, and so do get some benefits from yen appreciation. Long story short, I think the detriments of a strong yen are overstated, and Japan is not going to devalue more than the USD in any collapse secenario, and even on a trend basis as regards purchasing power IMO.)
Long term, though, no question the USD will "collapse" in purchasing power, and it will do this against real assets and commodities I would guess. That's why real estate very long term is attractive. However, this is going to take some time - probably on the order of 10 years at least, and that's why I think one needs to be super careful about buying real estate at excessive real valuations (which SF definitely falls into, primo Florida a little less so). Real value of real estate is going to fall pretty dramatically everywhere in the US over the next, say, 20 years, but of course at some point the benefit of repaying low rate fixed debt exceeds the detriment of paying above the fair "real value" of the subject property.
I hope that helps about currencies and investment positioning - I've really been singing a variations the same tunes for a long while - so again, like tipster, I'm surprised at so many incredulous comments regarding posters who claim to have largely navigated 2008. If you care, take a read of these posts that elaborate on the USD and a sensible investment plan from March and July of 2008:
http://www.socketsite.com/archives/2008/03/well_just_go_with_the_graphic_and_note_that_6_isnt_high.html (Post at March 20, 2008 5:40 AM)
http://www.socketsite.com/archives/2008/07/san_francisco_recorded_sales_activity_in_june_down_63_y.html (Post at July 18, 2008 11:15 PM)
Posted by: LMRiM at February 22, 2009 7:26 AM
Thanks for the good wishes re: Florida. We'll be there in May scouting around (again), this time with more seriousness. We can't afford a mansion, but we are looking for a largish 4/3 1960s place with at least 90-100' of deepwater canal frontage in Lighthouse Point (just west of 1A) or (perhaps) Boca Raton. Wish us luck!
(The property tax situation, as you note, is always an issue. Oh well, to be an American is to have to engage in lifetime warfare against an ever-encroaching government. I'm curious to see if the "do-gooders" in FL townships have instituted many of the same scams as those in the NYC suburban towns - lol, for the most part it's the same people!. Many towns in the NYC suburbs have granted huge - up to 30% - discounts on property tax for "elderly". So, what the younger residents do is they record a "life tenancy" in favor of an elderly parent, retaining the remainder fee interest of course. The lending banks don't seem to care (it's done after funding and purchase), and the towns accept it. I'm sure Florida has all sorts of "loopholes" like this - lifelong warfare, indeed :))
Posted by: LMRiM at February 22, 2009 7:50 AM
You're doing pretty well if you've only lost 1/3. I know a couple of people who were less than 5 years away from retirement who have lost 80%.
You can imagine what that's done to their spending on everything, and how they are going to have to thoroughly downsize when they sell their primary residence. No $1.1M Infinity condos for them like they could have done 6 months ago, they'll be moving to Sacramento,just to have enough money to live on.
Posted by: tipster at February 22, 2009 8:44 AM
From the file.
Posted by: diemos at February 22, 2009 9:27 AM
durn html tags!
It should be "From the it could be worse file"
Posted by: diemos at February 22, 2009 9:32 AM
The good news is that if you want to remodel your kitchen, you can buy completely new ones on craigslist from people who seem to be in a unusual hurry to sell:
GE Stainless Steel Kitchen Appliance Set - COMPLETE Matching Set, LIKE NEW CONDITION, MUST SEE IN PERSON!!! more than 65% off MSRP! Just over 1 year old only and was BARELY even used during that time.
-Stainless Steel GE Dishwasher
-Stainless Steel GE Ceramic/Glass top range/oven
-Stainless Steel GE "Over the range" microwave with built in vent/filter/fan
-Stainless Steel GE Refrigerator (65" tall x 30" deep x 29.5" wide)
$2000 obo cash pickup for everything! If you come and pick it up by SUNDAY afternoon, I will knock off an additional $300!
Posted by: tipster at February 22, 2009 9:49 AM
Pikers. They should be ripping the copper wire out of the walls as well.
Posted by: diemos at February 22, 2009 9:57 AM
"I know a couple of people who were less than 5 years away from retirement who have lost 80%."
I find it hard to feel sorry for people in this position. Having such a high amount of risk so close to retirement is rather like leaving your keys in the car and then being surprised when someone steals it.
Posted by: anon at February 22, 2009 10:55 AM
holy cow, more than 100 posts on a rental discussion. Leads me to believe that many of the sky is falling posts on other articles are written by bitter renters who can't come up with the 10%-20% down mandatory these days.
Posted by: Jimmy C (owner) at February 22, 2009 11:17 AM
"by bitter renters who can't come up with the 10%-20% down mandatory these days."
20% down isn't going to be very much to come up with pretty soon.
Let's see how those bitter renters become happy owners, and the current happy owners (maybe not happy, but unsettled) become bitter owners, or worse yet - bitter renters in the next year or so.
A fool and his money.....
Posted by: Treeman at February 22, 2009 11:33 AM
You're doing pretty well if you've only lost 1/3.
Thanks, though I think the mental accounting of calculating losses from peak, instead of overall investment gain, is a bad one. I just went back and added up all the 401k contributions I have made over the years and I have a very slightly positive overall gain. I would have done better in CDs. I don't think my experience is atypical.
What a sad story about your friends. I think it is becoming increasingly obvious that our experiment with self-directed retirement has been mostly a failure. Pushing investment risk to the individual has really been a crap shoot, though those companies that have managed it for their staff have not generally done much better. Who still offers pensions these days and is in good financial health?
Posted by: NoeValleyJim at February 22, 2009 11:48 AM
On the topic at hand - falling rents - Calculated Risk just put out a piece this morning:
FWIW, I think rents for SFRs in the SF Bay Area will fall back to mid- to late-90s levels (only retaining some of the "dotcom" premium that got built in from 1996-2001 or so). Looking at craigslist, asking rents out in District 4 look to me to be roughly the same apples to apples as they were when we fist got to SF in mid-2002 (perhaps 5-10% more, but even that is questionable). People in Tiburon tell me that rents on SFRs and larger condos are below where they were in 2000, on average.
I suspect there is still significant pressure on apartment rents (especially smaller places) in SF because of the distortions of rent control, but of course much of the bubbliness of the last few years should unravel as well.
These are all encouraging trends. Significantly lower housing costs (both purchases and rental rates) in the Bay Area are necessary IMO for the longer term economic viability of the area.
Posted by: LMRiM at February 22, 2009 12:10 PM
"articles are written by bitter renters who can't come up"
Ah now that takes me back to a simpler, better time. When taking out a mortgage you had no hope of paying back was the guaranteed road to endless wealth and anyone who said otherwise was a "jealous bitter renter" who "just needed the balls to swing for the fences" otherwise they would be "wannabes with their noses pressed up against the glass forever".
Posted by: diemos at February 22, 2009 12:24 PM
Did you see the recent SF Gate story "Even Bay Area's high-end home market hurting?" I am sure LMRiM will agree with the following:
"The delta between renting and purchasing a home at $1.5 million or $2 million is pretty strong," said Rick Turley, president of Coldwell Banker Residential Brokerage for San Francisco, the Peninsula and the North Bay. "If you're looking at an entry-level home in Burlingame or Marin and you're not sure about your job, you can rent a pretty nice place for half of that house payment and you're not taking the risk."
Hey LMRiM (is that what you really want us to call you???) which Asian stocks are you buying? I tend to buy the market, rather than pick individual stocks, which means that I like the Asian ETFs, like EWH and EWS. I am kind of nervous about the "Red Chip" stocks like the FXI ETF though perhaps I should just get over it. It seems like there is more nationalization risk in the US market than in China these days.
Posted by: NoeValleyJim at February 22, 2009 12:32 PM
In a deflationary environment like this, falling 1/3 in your assets is not bad at all.
Posted by: jessep at February 22, 2009 1:39 PM
I tend to buy the market, rather than pick individual stocks
Me too. At this point I am just accumulating index exposure - VERY slowly, as I expect more pain. I like the general emerging Asia ETFs, and in particular Korea, Singapore and HK. I also like India, and look at closed end funds once in a while when there are large discounts to NAV.
I don't like to recommend specific stocks or vehicles, but they are generally iShare-type vehicles. No reason to pay some fool a management fee to pick stocks - having been in the industry at a high level I can tell you with certainty that the discretionary managers at retail shops are bozos, by and large.
The only trading strategy I'd emphasize is to identify at the outset highly correlated stocks for each aspect of any index accumulation strategy. For instance, in the US context, there are numerous tracker ETFs for the S&P500 and funds that also basically mimic the extended market. These will be - just to pick a plausible number - 95%+ correlated (+0.95). By compiling lists of correlated trading vehicles, one can easily sell positions in which one has a loss and immediately reestablish a correlated equivalent position. Just harvesting tax losses, but if you do this with discipline, it makes managing tax exposure much easier, which is very important in a confiscatory regime like CA (no LT gains provisions, confiscatory income taxes on capital gains, etc.).
When you build up enough tax gains, move to Florida (or any of the other 5 or 6 no tax states) before you cash them out and laugh at CA :)
I hope that helps!
Posted by: LMRiM at February 22, 2009 6:55 PM
are HK and singapore, and even korea considered emerging markets? the modernization of HK and singapore blow away any u.s. city.
Posted by: condoshopper at February 22, 2009 7:01 PM
Agreed, condoshopper. I think of that group technically only Korea is still incuded in most of the tracker "emerging market" indices (e.g., MSCI). I still tend to think of all ASEAN as "emerging Asia" but Singapore and HK are clearly at a different stage, and so is (arguably) Korea and Taiwan.
Posted by: LMRiM at February 22, 2009 7:09 PM
Oh, got it, thanks for the clarification. You mentioned earlier HK is fiscally responsible - they had a 4 billion (usd) surplus last fiscal year/period.
Posted by: condoshopper at February 22, 2009 7:23 PM
Thanx for the comments. Wondering why no China exposure?
Posted by: mac at February 22, 2009 8:05 PM
REpornaddict- another datapoint on 'losses.' i did lose 40% in my 401k, but that thing is a joke, a relic from my last real 'job', which was 10 years ago. the total is small anyways.
all my investements are otherwise in SF RE. i buy problem properties and redevelop them to higher and best use. my debt is ~ 60% on all of them and i'm slightly cash flow positive (incl. living w/o a mortgage in a 4/2 condo in a 2 unit bldg in the mish.) i have no consumer debt (the mini convertible was brought with cash.) my wife works for a non profit, which is basically her play money, and my modest positive cash from the rentals covers travel, restaurants, etc. we don't spend alot of money on expensive consumer BS, but otherwise lead a very nice lifestyle.
even my last RE purchase in 10/05, despite all the fiascos, is still not a loss. i brought a triplex in the mish for only $650k, but it has some challenges. 1- there are 2 bldgs on the lot (my contractor brought one), and we are close to completing a lot split, so our bldgs will be separate. 2- i successfully brought tenants out (i'm good at this and know how to maneuver the legalities.) 3- got the thing entitled for a major expansion/garage and a rear yard variance- no small feat in SF!
and then mid sept 08 everything changed on the project. i was set to sink $600k to build out 3 really nice 3/2 units w/pkg, but that makes no sense now. fortunatly the exisiting floor plans (2/1's) are really quite good, so now i am self financing a more modest renovation, and reverting the basement space back to an office (no expensive garage.) of course i spent money on extra holding costs/permits/engineering, only to go back to plan "A" (renovate exisiting space), which kinda sucks.
basically i took a chance in early 06 with the expanded units, and when the mkt changed, at least i could use the exisiting space for a modest renovation project. financially it was: make $275k w/in 2 yrs, or possibly $600k in 3.5 yrs w/the expansion. so now i'm back to a latent plan A, with a very low 6 fig upside. i still think it was the right decision to make in early 06, and i was able to hedge my bets- there are plenty of developers wrapping up 'loss' projects these days. and at the end of the day, the rent on those 3 units and office will cover all expenses on the bldg (inc. the 25% downpayment borrowed from my other properties.)
i should note that i don't develop to sell. sometimes i have to sell a unit (tic) to reduce my debt on a project, but i always want to buy, rent & hold. fyi, i only own a few properties (i'm no mogul!)- 3 condos and a 3 unit bldg. but as an older and wiser RE investor once told me, it's not how many properties you own, it's how many you can hold on to when the sh*t hits the fan...and i've been dodging splatter since mid- sept 08!
Posted by: 45yo hipster listening2: charles lloyd at February 22, 2009 10:25 PM
Congrats on the soon to be addition.
It seems like (reading between the lines on your post) you are in a similar position to me - I own a Noe 2 unit and renting out 1 unit, living in the other.
I had no firm ideas about whether it would be a short, medium or long term hold, but recent events of course have forced me into a medium-long term outlook now. Being able to refinance recently at below 5% means this is more appealing than it was. (taking advantage of the new temporary limits for super conforming loans we were able to move out of our dreaded jumbo!).
How do you feel the 2 unit market is going? better or worse than SFHs? as you say, hard to say from so few sales.
Have you seen that crazy castle like structure at Castro and Elisabeth asking $1.4? Optimistic at best??
Posted by: REpornaddict at February 22, 2009 11:41 PM